Supply Management Is a Hurdle in Canada’s Trade Talks with US

Last week, the United States and Mexico reached an agreement in principle on a new free trade arrangement, and President Donald Trump said he will terminate the North American Free Trade Agreement (NAFTA). Mexican and US officials have invited Canada to rejoin the talks, and Mexican and Canadian authorities act as though Canada will rejoin negotiations as a “third partner,” but make no mistake—Canada will be negotiating with the United States and, in light of the president’s complaints about Canadian dairy tariffs, the highest hurdle will be Canada’s supply management programs.

While much remains uncertain about the details of what Trump calls the “US-Mexico Free Trade Agreement”—which may not receive congressional approval if the Democrats reclaim the House in November—some things are relatively clear. Canada now faces a serious threat of trade and investment diversion over time if Mexican producers have tariff-free access to the United States while Canadian producers do not.

Post-NAFTA, Canadians may dream they can rely on the Canada-US Free Trade Agreement, established in 1987, but Trump has demonstrated his disdain for trade commitments. Canadian negotiators therefore have less leverage in bargaining with US negotiators than they did before the US-Mexico deal.

For example, Canada is worried about US insistence on a sunset clause that would force Canada to recommit every five years to the trade pact or watch it automatically end. In bilateral talks with the United States, Mexico successfully sidestepped the sunset clause, although their agreement includes a “review” every six years, with the specter of termination if problems can’t be resolved.

But in reality, the Trump administration will invoke new tariffs whenever it suits its political purposes. A six-year review period rather than a sunset clause will likely not convince investors that a stable long-run trade regime will exist between the United States and Mexico. In this circumstance, Canadian negotiators have no strategic reason to object to the same six-year review.

Another non-negotiable for Canada was eliminating the trade dispute resolution process. As the full text has yet to be revealed, it’s not clear whether, or in what form, the US-Mexico agreement preserves the process. However, like the sunset clause, a NAFTA dispute resolution process is only meaningful to Mexico (or Canada) if the United States is a good-faith participant. The willingness of the Trump administration to take unilateral trade actions, while anticipating retaliatory actions from trade partners, essentially proves that the dispute resolution process has lost much of its relevance. Mexican trade negotiators have likely accepted this reality. In bilateral talks with the United States, Canadian negotiators can perhaps keep a ghost of the original dispute resolution process “on the books” to avoid a complete surrender.

Finally, the higher domestic content rule, which requires that 75 percent (up from 62.5 percent) of the parts in any car sold in North America be produced in the United States or Mexico, presents no real problem for Canada to adopt in a similar agreement with the United States. Nor does the requirement that 40 percent to 45 percent of auto parts in cars sold be made by workers earning at least US$16 per hour.

But Mexico’s apparent commitment to increase imports of US agricultural products brings front and center the main challenge facing the Trudeau government. Again, maintaining supply management is likely a deal breaker, from Washington’s perspective. It’s the one outstanding issue the Trump administration can’t resolve unilaterally.

While the Trudeau government has rejected Trump administration criticisms of Canada’s high tariffs on dairy products, it has not explicitly stated that supply management—now a hot-button issue on Canada’s political scene—is non-negotiable. The time is coming when Trudeau and his cabinet will need to be explicit about whether Canada will walk away from a bilateral agreement with the United States to protect domestic dairy farmers.