The North American Free Trade Agreement (NAFTA) signed in 1994 is not just a trade agreement. It is an agreement embedded in the post war US security architecture where “American allies are net exporters of security: they are the strongest, wealthiest, and most capable countries in the world (after the United States).” (Brands, Feaver, Inboden, Miller, 2017, p. 13)
American allies are expected to contribute fairly to the defense of the US led world order, and in turn, benefit from access to markets of prosperous allies through free trade: A virtuous cycle that depend on sovereign states aligned on a common, shared purpose and voluntarily assuming a fair share of the burden of defending the liberal international order.
NAFTA began as a bilateral trade agreement between two close allies that fought two world wars together and shared a common perception of threats and goals in promoting a US led rules based international order.
When the Canada-US Free Trade Agreement (1988) and its predecessor the Auto Pact (1965) that were signed, Canada was unquestionably a US ally that reliably met defense and security commitments to the US under NORAD, NATO (Canadian Military Spending: p. 8) and contributions to international peace and security through participation in the UN and other agencies. In every sense of the term, up to the end of the cold war, Canada was a close, reliable, and reputable ally of the United States that in turn, benefitted greatly from both US and allied protection, and in turn, prospered with free trade that gave unparalleled access to wealthy markets of US and allies.
Canada, in turn, became prosperous second only to the US.
NAFTA negotiations began with optimistic assumptions that prosperity will spread to Mexico, strengthening and expanding ties with another democratic US ally by repeating the process that worked so successfully for Japan, Germany, South Korea, Taiwan, etc. Instead, since 1994, the impact on Mexico have been termed uneven: rapid growth, improved wages and lower emigration have not materialized to the extent promised by free trade advocates.
Significantly, Mexico’s per capita income rose at 1.2% annually between 1993 to 2013 – not enough to close the US-Mexico wage gap. Canada, on the other hand, roughly broke even with neither the worst fears of losing manufacturing to the US realized nor rapid improvements in closing the US-Canada productivity gap. (McBride & Aly Sergie, CFR, Jan 24, 2017) But underneath these economic and trade issues are substantial changes – particularly with Canada – that goes to the core security assumptions behind NAFTA.
President Trump’s National Security Advisor General McMaster and National Economic Council Director Gary Cohn, succinctly summarized America’s foreign policy goals during his visit to Poland and Germany. Promoting American prosperity, safeguard American interests, and exercise American leadership. This is achieved by strengthening alliances by both stressing American commitments to them as well as to remind all allies “share responsibilities and burdens for that defense”.
America has shared values with allies for “liberty and the rule of law”.
Behind this is a consensus on common threats which is operationalized (e.g.) in “a common approach to Russia” and by insulation, a fairly shared defense burden against threats.
What about trade?
Unlike what is taught in international economics textbooks, trade is not an absolute good, especially between great power or peer competitors and enemies. Gaining benefits from freer trade is a goal that is subject, or subservient to geopolitical goals.
The Trump Administration, in a break from the past, openly advoacted that trade and economic practices that are unfair cannot be tolerated from allies, let alone great power competitors like Russia or China.
Where does NAFTA with Canada and Mexico stand from this perspective?
The historically close relationship Canada, and to a lesser degree, Mexico have with the US have come under increasing strain in the 21st Century.
Canada no longer shares a common perception of threat with the US.
For example, Canada under the Harper government and the Trudeau regime have gone out of their way to disregard exhortations by the GW Bush, Obama, and now Trump Administration to raise defense spending to a level expected of a close ally like UK, Australia, or France.
The Trudeau regime, rather than continue the Harper policy of freeriding, actively went out of their way to defraud all NATO allies including the Trump Administration with “creative accounting” that magically transformed Canada’s defense spending from 1% to 1.3% GDP within 90 days.
In the March 2017 NATO report, Canada reported 1.02% GDP for 2016(estimated), .98%(2015), 1.01%(2014), .99%(2013). Miraculously, in the June 2017 NATO report, Canada reported 1.31%GDP(2017e), 1.19%(2016), 1.20%(2015) and then back to 1.01%(2014).
In other words, Canada revised their NATO defense spending GDP numbers back to 2015 to raise spending by about 20% purely by accounting gimmicks.
The ramification of Canada impressing on NATO their creative accounting goes far beyond Canada, but it ultimately will result in every other NATO ally except the US similarly inflating their numbers with Trudeau regime style accounting fraud.
The net result of this is that Canada have undermined a key foreign policy objective of not just the Trump Administration, but every US Administration and Congress since GW Bush including future Administrations.
Confronting the US with fraudulent accounting gimmicks on a major US foreign and defense policy initiative is a fundamental break from the past by any government of Canada.
To add insult to injury, the Trudeau regime published a “Defense Policy Review” (June, 2017) that promised a defense spending “increase” that primarily occur after 2019, after the next Canadian Federal Election, and likely after the US Presidential election in 2020.
In other words, there will be no bona fide defense spending commitments (with contractual penalties) that will be made by the Trudeau regime between now and after the election of 2019 or later.
The Liberals are betting on President Trump will be gone by 2020 if the present Trudeau regime is not themselves gone by 2019.
Whereas a defense free rider is a passive thief, Canada under the Trudeau regime have become an active saboteur of a core American foreign policy goal to raise allied defense spending that directly undermines the US security architecture.
The Trudeau regime may be able to deceive the Canadian public or naïve US state and local politicians about such perfidious acts unbecoming of a close US ally, but will the Trump Administration and Congress stay deceived for long?
What are the financial ramifications of this for NAFTA?
Canada spending less than half of what the US expects in defense represent a substantial export subsidy. If Canada spent the minimum of 2% GDP on defense, that require an additional CAD$20 billion or more in spending particularly when most Canadian military equipment is worn and/or obsolete.
Expressed in terms of an unfair trade subsidy, the CAD $20 billion (USD $16 billion) annual shortfall in Canadian defense spending is equivalent of a 30% subsidy on the USD $50 billion (2015) Canada exported in crude oil to the US. Or a 36% export subsidy on USD $45 billion of Canadian auto exports.
Or a 5.6% export subsidy on USD $288 billion of exports to USA.
The staggering benefits that Canada gets from not spending on defense is perhaps the No. 1 unspoken issue for NAFTA renegotiations.
Canada’s exploitation of the US goes beyond this.
While Canada have historically forged a separate path on many foreign policy issues particularly in terms of relations with the PRC, under the Trudeau regime, this divergence have been largely benign until the 21st Century because the PRC’s threat to the US and allies have been modest and limited. However, beginning around 2005, the PRC’s military and paramilitary buildup have crossed the line from being defensive to clearly take on the posture of an offensive force backed by a regime with imperial aspirations.
Canada, rather than adjust their defense policy and posture against the threat from PRC, went the opposite direction.
The Trudeau regime have made it their foreign policy priority to secure a “free trade” agreement with PRC with the intent to diversify trade from the US. The Trudeau regime, however, have gone far beyond seeking freer trade.
The Foreign Policy Speech by that regime loyalist Chrysta Freeland states:
“… the rapid emergence of the global South and Asia—most prominently, China—and the need to integrate these countries into the world’s economic and political system in a way that is additive, that preserves the best of the old order that preceded their rise..” (Freeland, June 7, 2017)
In other words, the Canadian Liberal regime’s goal is to integrate the People’s Republic of China with instruments like a free trade agreement that turn a blind eye to their military and economic threat to the US and allies including Canada.
China is viewed by the Trudeau regime as similar or a lesser threat than India.
Destabilizing moves as the PRC’s “sea grab” in the South China Sea, their widespread commercial and military espionage, subversion of democracies, etc. is apparently not a challenge to the Liberal regime’s version of the rules based international order.
The Trudeau regime complain much about the “land grab” by Russia, but see no problem with the territory unlawfully seized by the PRC that is many times the size of the Russian occupied Ukrainian territory.
Evidently that ethnic Ukrainian-Canadian activist have different (perhaps racially based) standards of lawful and/or good conduct by Communist Chinese vs. Russians.
Liberal regime loyalist Freeland’s use of the phrase “preserves the best of the old order”, in this context, can be taken to mean the Trudeau regime supports the preservation of the monopoly on political power by the Communist Party of China, and implicitly, acquiesce to the expansion of CCP power into Canada like it has done in Australia.
Certainly there is no hint in the Liberal foreign policy speech otherwise: Freeland’s allegation that “our [Canadian] values include an unshakeable commitment to pluralism, human rights and the rule of law” apparently do not apply to China and the Chinese.
Perhaps the Liberal regime accomplished this by not regard Chinese as “human”.
While North Korea is mentioned as a dictatorship by the Freeland speech, which is mostly a domestic problem for Koreans, there is no mention of the existential threat posed by DPRK’s thermonuclear and ballistic missile programs to Canada, or the substantial role played by the PRC in supporting North Korea.
To the Liberal regime, climate change is an existential threat, but thermonuclear strikes on Canadian cities is, apparently not.
What about Canadian Defense Policy unveiled by regime loyalist Sajjan?
The Canadian Defense Policy Review (DPR) unveiled on June, 2017 mentioned China twice, once in connection with the PRC’s sea grab, “Activities in the South China Sea highlight the need for all states in the region to peacefully manage and resolve disputes in accordance with international law, and avoid coercion and other actions that could escalate tension.”
But Sajjan expressed no concern for the PRC’s militarization of the artificial islands they created or the fact that UNCLOS – a treaty PRC signed and ratified – was willfully violated by the PRC.
Curiously, the DPR called for Canadian Forces to “develop stronger relationships with other countries in the region, particularly China.” It is not clear what the purpose of such “stronger” relationships will be when Canada do not regard the PRC as a great power rival and Canada’s defense posture essentially ignore threats from the PRC and DPRK.
With respect to North Korea, both the Foreign and Defense policy documents do not regard their thermonuclear and ballistic missile programs as an imminent (2-3 year) existential threat to Canada or allies.
Canada is not planning to defend against DPRK threats either now or in the next decade.
These overt acts by the Trudeau regime: Undermining NATO, adopting a neutral stance toward PRC and acquiescence to DPRK’s nuclear threat, illustrate how far Canada have gone from being a close US ally.
The Liberal regime of Canada no longer share a common perception of threats with the US across the board.
Put this together with a two decade long policy of neglecting Canada’s defense obligations and most recently, an activist foreign policy by the Trudeau regime with the goal of frustrating longstanding US foreign policy goals like raising NATO defense spending, Canada have moved from the category of a good natured, harmless free rider into a foreign policy problem for the United States.
From this perspective, the proposed Canada-PRC free trade agreement is a major concern for the US on NAFTA.
Australia and New Zealand, both US allies, have successfully concluded “free trade” agreements with the PRC, so on the surface, there is no obvious reasons to be concerned with Canada signing onto a similar agreement.
Australia is a robust defense partner of the US that have credibly met their obligations to spend 2% GDP on defense. New Zealand, likewise, is turning the corner on improving defense spending with spending steadily rising since 2013.
What does the PRC want?
The PRC’s geopolitical goals is to decouple Canada from the political and economic alliance with the US, and to secure Canada’s acquiescence to the PRC’s seizure of the South China Sea in violation of UNCLOS — a goal they have achieved.
PRC is seeking from Canada recognition of PRC as a market economy, access for PRC services and industries including markets for communications and other security related sectors, freeing up the process of securing export licenses from Canada for sensitive technologies, elimination of restrictions on PRC state enterprise ownership of Canadian assets and a ban on national security exceptions by Canada on their activities and freedom to import Chinese nationals into Canada.
If the Trudeau regime were to concede on any of the major demands by the PRC for a free trade deal with Canada, it will immediately call into question why the US should grant Canada preferential access to the US market under NAFTA, Canada-US Free Trade Agreement, and the Auto Pact.
Canada’s foreign policy under the Trudeau regime has systematically, and deliberately undermined the geopolitical basis for a fair trade agreement with the US. Canada under Trudeau is no longer a close, or trusted ally of the United States.
The USTR released their negotiating objectives for NAFTA on July 17th, 2017.
China was not mentioned as a major issue, nor is Canada’s present foreign policy. Yet both issues will figure prominently in the priority and weight on many items enumerated in the NAFTA renegotiation objectives.
In a subsequent article, the USTR’s NAFTA renegotiation document will be examined in detail from this perspective.