Low prospects for a niftier NAFTA

After an eventful 12-day tour of Asia, Donald Trump is back in Washington. Though the period saw little news come out about the North American Free Trade Agreement, which the US president wants to rewrite, the trip sent an ominous signal to America’s negotiating partners on that side of the Atlantic. Hammered last week in front of bemused South-East Asian leaders, his “America First” slogan left no doubt about his administration’s hardball stance as NAFTA negotiations resume today.

Canadian exporters are not reassured. “Everybody’s on pins and needles for sure,” Kenton Rein, who heads the agribusiness practice of Cassels Brock, a Canadian law firm, told us last week. Nor are their financial backers more sanguine. “These are very topical issues. Investors are asking a lot of questions,” Rein says. In part, this owes to the Trump administration’s diplomatic style: the US trade representative is cracking jokes with his Canadian counterpart one day and denouncing a “bad deal” the next.

But it is also about substance. Generally speaking, NAFTA has been kind to Canadian agri. A comprehensive new deal, however, is likely to see winners and losers. So far, the focus has largely been on manufacturing: the US has tabled a proposal to stiffen rules of origin, increasing North American content requirements from 62.5 percent to 80 percent, with 50 percent of that content originating in America. Some observers think that may herald the death knell of Canadian industry.

But agriculture has a lot to lose, too. Grain and pulses, of which Canada produces much, have yet to come into negotiators’ crosshairs. But there have been rumblings that hefty US tariffs could be imposed on Canadian dairy, for instance. While this hasn’t happened yet, there’s no reason why it couldn’t. Earlier this month, unafraid of increasing tensions with its northern neighbor, Washington again raised tariffs on Canadian softwood.

Most worrying for agri producers, it’s not even clear a comprehensive deal is what the Trump administration wants. So far, decisions have been taken piecemeal, with no indication that coercive measures will be scaled back later on. The wood episode is a good example. “Everybody was hoping that lumber was going to be part of the broader conversation, as NAFTA gets ironed out. But last week the US came out with new tariffs,” Rein notes. The consequences are heightened uncertainty – and no guarantee that, overall, profit and losses will balance out on the Canadian side.

Investors have given up hoping for swift progress. Instead, they are pondering a more profound question: is the closing down of trade borders cyclical, or does it signal systemic change? Bungled NAFTA negotiations are bound to impact not just bilateral US-Canada trade, but also commerce all around the world, as economic powers take inspiration from America to protect their domestic market. A recent case in point is India, which has so far failed to renew a fumigation exemption on incoming Canadian pulses that expired on September 30, penalizing exporters.

Should such a dispute take a turn for the worse, food security could be a major victim. By some estimates, the world will need more food between now and 2060 than in the last 10,000 years. Creeping protectionism may also turn out to be cyclical, and a crisis averted. In the meantime, agri investors exposed to international markets would be wise to steel themselves against tit-for-tat, piecemeal ways of doing business.

Write to the editor at matthieu.f@peimedia.com