Lets Make a (New) Deal!
September 12, 2005  (By Jim Stanford - CAW Economist)
The U.S. decision to ignore another NAFTA panel ruling on softwood lumber, and pocket $5 billion of ill-gotten Canadian money, has
ignited a populist firestorm in Canada.  Letters to the editor are overflowing with anti-American anger, and a goodly chunk of the
Canadian political establishment seems to have suddenly signed up with the Council of Canadians.

Industry Minister David Emerson says it's time to "take their number."  The Globe's Jeffrey Simpson says Canada has "no serious option
but trade retaliation."  Lloyd Axworthy decries the Americans' "exercise of raw power."  Even many of the deal's architects now denounce
the work they wrought.
This is all well and good.  Just a year ago, Ottawa geared up its official propaganda machine to praise NAFTA's 15-year record at
stimulating trade and boosting efficiency (seemingly oblivious to the almost-weekly headlines bemoaning Canada's poor productivity
performance).  Now, quickly, most Canadians (even in official circles) acknowledge the painful truth: this trade deal is a dud.

The question for Canadians, however, is: Now what?  We're in the same boat as Americans who now realize they invaded Iraq on false
pretences.  After a requisite period of self-righteous anger, the tougher question is: How do we get the troops home?  Canadians face
the same challenge: The presumed foundation for signing the 1988 deal - secure market access and binding dispute settlement - has
proven as surreal as Saddam's weapons of mass destruction.  But now we're in, how do we get out?

All fluff about "mutual efficiency gains" aside, the original FTA rested on a central, cynical trade-off: the Americans wanted guaranteed
access to our energy, and we wanted guaranteed access to their market.  The mutual elimination of already-low tariffs (a process fully
described in just 17 of the original document's 315 pages) was almost beside the point.

We've delivered on our half of that devilish bargain, big-time.  Under free trade, Canadian crude oil production has grown 64 percent.  But
our oil exports to America are up by four times as much. Canadian oilfields actually pump less crude for Canadians than two decades
ago, despite growing production.

Natural gas developments are even more dramatic: our net production doubled, while exports quadrupled.  For both fuels, about
one-third of production was exported to the U.S. in 1985 (when negotiators first dreamed up the infamous "proportional sharing" clause
that requires us to supply the U.S., even in an emergency).  Today, exports consume two-thirds of production. In other words, if that
emergency clause were enacted, Americans would get twice as much of our own petroleum as we would.

On the other hand, everyone now knows that the American market access promise - their half of the original bargain - wasn't worth the
paper it's printed on.  Positioning themselves for the coming election, the Liberals are happy for the time being to tilt from the left on the
softwood issue.  Their concrete actions, however, will never match their rhetoric: they've walked out of further softwood talks, and
threatened to "explore" tit-for-tat retaliation on specified U.S. imports (from California wine to Harley Davidson choppers).  That's the
diplomatic equivalent of a hissy fit: all show, no real action.

Here's how we could really start to fix the mess.  First, give the required six-month notice of our intention to withdraw from NAFTA
(including the energy-sharing provisions that only Canada - not Mexico - was silly enough to accept).  Second, impose a ceiling on energy
exports to the U.S. They will be frozen at current levels pending a (long and leisurely) review by the National Energy Board of Canada's
long-run energy supply-demand balance.

Once we've got their attention, we'd open real negotiations with the Americans over what will replace NAFTA.  Preserving the zero-tariff
structure would be a no-brainer (given the magnitude and mutual benefit of two-way trade flows).  If out of spite the Americans refused,
then tariffs would snap back to (low) WTO levels; compared to the 30 percent run-up of our dollar since 2003, exporters would hardly
notice. (Indeed, any costs to exporters would likely be more than offset by a post-NAFTA correction in our loonie.)

We should abandon the pipedream of winning special exemption from U.S. trade law (Uncle Sam don't play that game, in any subject
area - especially not since 9-11).  And in turn we'd win back some of our sovereignty, in areas like energy and investor rights (abolishing
NAFTA's unconstitutional Chapter 11, for example).  We could even negotiate targeted sectoral deals where they made sense - like a
new North American Auto Pact, for example (since the U.S. and Mexican auto industries are crumbling even faster than Canada's in the
face of burgeoning, one-way imports from Asia).

This strategy would represent a serious, honest re-thinking by two partners with an immense mutual stake in getting along.  Our goal
would be a more genuine and productive deal than the current free-trade sham.  It will spark serious outrage in Alberta - whose energy
giants have been the major Canadian winners under the existing deal.  They might build one or two less oil sands plants (that would be
a good thing, actually), but they'll still profit massively from existing exports.

As for the rest of Canada, we'd be much better off with a new trade arrangement that actually does what it says.

Source:  CAW NewsNow
A version of this commentary was originally published in the Globe and Mail
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