Good morning, everyone, and thank you for the invitation.
I wish I were there in person, because I understand you might actually be getting some spring in Ottawa. That's great news. My son and grandchild live in Ottawa, so it's always very close to my heart.
As mentioned, I am the director of the Canada Institute at the Woodrow Wilson Center in Washington, D.C. The center is supported by a modest congressional appropriation as well as private sector contributions. Because of the bipartisan nature of the Wilson Center, and also my respect as a Canadian living and working in Washington, D.C., my remarks this morning, first of all, are my opinions and not those of my employer, and also they indicate my great respect for the U.S. democratic process.
I have spent the past 25 years working on international trade issues, primarily bilateral trade—Canada, U.S., and Mexico—so those are the two issues I want to address here today. As a former university professor, it's hard to say anything in eight minutes, so I'm going to try to be disciplined. If there's more that you want to work with in the question-and-answer session, I'd be happy to delve deeper into these issues.
On the issue of Canada-U.S. commercial relations, the campaign promises about ripping up the NAFTA have been very worrisome for Canadians. With around 7% of Canadian exports going to the United States, ripping up the NAFTA could seriously destabilize the Canadian economy and the integrated supply chains, investments, and joint ventures we've come to rely on to sustain the Canadian economy.
We are each other's largest trading partner—everybody knows that—but Canada is much more vulnerable in the relationship. The asymmetry is not just a matter of size; it's also because, even though we are the largest buyer of each other's exports, some 20% of Canadian GDP comes from exports to the United States while less than 2% of U.S. GDP comes from their sales to Canada. Frankly, Canada does not matter as much to the United States.
For this reason, Canada is often overlooked in U.S. foreign policy and commercial policy considerations. Canada is not going anywhere. Canada is not a problem. So sometimes there is some complacency. Canada gets caught in the crosshairs of punitive actions that were not intended to hit Canada in the first place. We're hearing about targeted trade actions towards Mexico and China, and those may very well have a negative effect on Canada as well.
The Government of Canada has been really successful at managing this relationship through the turbulent early days of the Donald Trump administration. A lot of credit goes to Canadian Ambassador David MacNaughton, who has been a skilful quarterback, managing the multiple dimensions of the relationship. We hear about elder statesmen Conservatives meeting with members of Trump's inner circle. We hear about young Liberals meeting with Ivanka Trump and Jared Kushner.
They are hitting all the right notes and meeting at all the right levels. In particular here in Washington, it's terrific to see Liberal, Conservative, MPs from all parties, doing joint meetings together with U.S. partners. We also see provincial premiers and federal representatives. There's very much a united front and common messaging here. I think Canada is doing the right things so far in managing this relationship.
However, Canada needs to move from rapid response mode to a more targeted strategy that focuses on sectors where Canada can benefit from upgraded provisions in the trilateral space. I think we focus too much on defensive...and on what happens if this and what happens if that. This is an opportunity to open up a 20-year-old trade agreement, and it is an opportunity for Canada to take the long view and figure out what it needs to be more competitive on a North American scale in the coming decades. I would suggest an initial focus on the auto sector, on aerospace, agrifoods, energy, and services.
A couple of weeks ago, a draft notification from the Office of the U.S. Trade Representative was available for public viewing. This is the notification that will have to precede congressional approval for the U.S. to start new NAFTA negotiations. In some ways, the draft text was very reassuring for Canada, because what we saw in that text was not ripping up the deal or ripping up the rules of the road. It conformed to some fairly traditional, fairly predictable trade rule conventions and orthodoxies and patterns. Canadian negotiators are very skilful, and they're very used to working within that WTO language and framework, so for Canada there's some comfort in that draft notification.
At the same time, it's clear that the United States wants to go after certain protected sectors. It's likely they're going to go after Canadian dairy. It also seems likely they're going to import some of the measures that they liked from the trans-Pacific partnership, like state-owned enterprise controls and increased protection for intellectual property.
I would say the NAFTA is reason to be vigilant; it is reason to be focusing on our defensive interests but also on a forward-leaning agenda.
More disruptive for Canada than a NAFTA renegotiation is the border adjustment tax. We keep hearing that Donald Trump doesn't love it, but it is such an appealing fundraising tool to enable the U.S. administration to raise funds for the initiatives that they want to undertake, that they can't seem to shake it. That border adjustment tax would have serious implications for Canada across all sectors.
I would be happy to discuss my opinions on that tax during the Q & A, but what I'd like to move on to now is Mexico. In Canada, it is tempting, perhaps, to just get out of the way and let Mexico and the United States fight it out. It's not a fight that Canada started. Also, Canada and the U.S. do have an existing priority commercial relationship through the Canada-U.S. Free Trade Agreement, so there are some who are saying just let Mexico go its own way.
In my opinion, that is a short-sighted view. Mexico is a young, growing consumer economy, with a population four times that of Canada. Our commercial policies are already closely linked through more than 20 years of the NAFTA, and most of the effective trade barriers have been eliminated. Companies like Scotiabank, Linamar, Bombardier, and Grupo Bimbo remind us of the important opportunities that relationship creates and will continue to create.
Also, many Canadians don't realize the important retaliatory power that Mexico has against the United States. Even though Canada is the largest buyer of U.S. products across the board, Mexico's purchases are more focused in key commodities. Mexico buys all of U.S. exported corn, so if Mexico turns around and puts a more than 100% tariff on that corn, that's going to be very punitive against the United States. Leaving trade aside, Mexico has been a very important partner on southern border control. If they stop being so co-operative and just open up the gates for Central American migrants right up to the United States, that will have a very destabilizing effect on the U.S.
Meanwhile, Mexicans feel insulted by the rhetoric that they heard during the presidential campaign. As a result, Mexico's leading candidate in the upcoming election is running on an anti-Trump campaign and a promise to restore Mexican dignity, so Mexico is going to take some very hard negotiating positions in the upcoming NAFTA. The U.S. has already carved out hard negotiating positions, so it seems to me Canada has an important role to play as a flexible negotiator, as a mediator, and as a consensus-builder, so that the NAFTA issue can be resolved in a way that's productive for everybody.
The most significant threat for Canada is not embedded in any one action. It's not the NAFTA. It's not Mexico. It's not the border adjustment tax. It is the aggregated effects of policies that disrupt efficient supply chains and generate unnecessary volatility in exchange rates and border taxes, as well as any other factors that make it difficult for businesses to engage in long-term planning and investment in North America.
While I didn't have time to address the security dimension of the trilateral relationship, I would be happy to take that up in the question and answer period.
Thank you very much for your invitation this morning and your attention.