Thank you very much, and thank you for the opportunity to appear before your committee.
I'm going to focus on NAFTA and the future of NAFTA. I'm not going to address all the many questions you prepared, which were answered so ably by my good friend Charles Doran.
The first point I'd make is that, in my view, the Trump administration is going to use the North American Free Trade Agreement negotiations as part of a larger strategic initiative to set the tone with U.S. trading partners where there is a real trade imbalance, namely China and Germany.
There's an old Chinese expression, “kill the chicken to scare the monkeys”, and I think that's exactly what they're trying to do. We've seen that in Korea's response to what they've seen happening in some of the statements the President has made about NAFTA.
I think it's entirely consistent with NAFTA's origins, which set both the tone and the substance of America's subsequent trade liberalization policies globally, only this time President Trump is throwing America's trade policies into reverse gear.
As we know, the pressures we're seeing now did not begin with Donald Trump. Softwood lumber is a perennial irritant. So is dairy, beef, and pork. Domestic pressures in the U.S. on trade have been building up for a very long period of time. Those of you with long memories will remember Ross Perot's candidacy for the presidency in the previous century.
At first blush, the balance of power in negotiations between Canada and the United States appears to be highly asymmetrical. They're the bigger economy by many orders of magnitude. They're also far less dependent on trade for economic growth than we are. Although trade is a two-way street and the balance, as Professor Doran pointed out, is currently in the U.S. favour, and even more so if you remove energy from the equation, and we're right to remind Americans of the facts, as we've seen, the facts are not necessarily a winner when you talk to the current administration.
As we look to the future of negotiations, the real question is this: what will be our negotiating strategy? There I would make three points. First, we have to recognize that the status quo is unsustainable. Second, we're going to have to make some concessions—the questions are over what, and when—but we also need to define comparable benefits from the U.S. In any negotiation, you don't give up something without getting something in return. Third, we're playing with a weaker hand, but if we're smart negotiators, we can level the playing field and advance our interests.
A long history of negotiating with the U.S. shows that Americans will negotiate with unannounced shifts in their position. You may remember the Nixon trade shocks of 1971. There will be an unexplained and sudden escalation of demands. That was the story in both the NAFTA and the TPP negotiations. They will violate previous understandings or promises, which was certainly the case with NAFTA dispute provisions. As well, they will use excessive pressure and threats, and will make demands that are well beyond our concession range.
Trump will negotiate no differently from his predecessors, although the big difference is that Ronald Reagan, both Bushes, and Bill Clinton were pro-trade. Trump is a nationalist mercantilist.
Our negotiating strategy should contain five key elements. First, be clear about our own interests and what we want out of the negotiations. Second, be prepared to play a strong offence-defence game. Negotiations are not about being nice. Third, don't rush into talks until U.S. and Mexican objectives are clear. They're not clear right now. Fourth, exploit real cleavages that exist within the administration and between the administration and Congress to our advantage. Fifth, use selective retaliation only as a last resort because of the dangers of escalation.
I would also say that “wait and see” is not a bad negotiating strategy at the outset. The administration is clearly divided between trade hawks such as Steve Bannon and more moderate voices, the so-called Goldman Sachs crowd, which includes Gary Cohn, the President's national economic adviser, whose star is rising.
Cohn has made it clear that he does not want a trade war with America's NAFTA partners. The administration is also not trusted by Congress, and it has yet to lay out its goals for trade talks. To get fast-track authority on trade pacts, including revisions to NAFTA, Trump will have to give Congress 90 days' notice. That includes laying out the administration's goals and undertaking consultations with both the ways and means committee and the Senate finance committee, which have jurisdiction over trade.
President Trump does not have full authority to do anything positive or negative on trade without approval from Congress. His rhetoric and that of Bernie Sanders' and Hillary Clinton's polluted attitudes in America and in Congress about trade, and that is the real problem for trade globally.
I also think that Trump is looking for a quick fix to NAFTA. As his other domestic initiatives stall, he's going to become more desperate to deliver on something. The easiest fix, quite frankly, would be to backfill NAFTA with some of the key provisions that were negotiated in the trans-Pacific partnership agreement, including improved standards for labour, environment, and e-commerce, and policies that eliminate export subsidies for agriculture.
The fact that Trump is in a hurry to make a deal, as has been said quite vocally by his commerce secretary, works to our advantage, because we can run down the clock. Furthermore, if delay or avoidance tactics on our part fail, we can also reduce the content and scope of any compromises we make as we run down the clock. That may mean conceding on some items that, quite frankly, are less important to the trade equation, such as, for example, dairy subsidies.
In the early stages of negotiation, we should avoid making explicit pledges and be sufficiently ambiguous until we have carefully reviewed and assessed both Washington's and Mexico City's proposals.
I would like to touch on something that Professor Doran mentioned. Although we are focused on trade, it's important not to lose sight of the bigger picture and where the U.S. appears to be going with its taxation and industrial policies. Our corporate tax regime has been very competitive vis-à-vis the United States. That may change. We're talking about raising our corporate taxes. Trump wants to lower theirs and has already introduced a proposal to lower taxes for individually owned businesses. The U.S. carbon policy, at least at the federal level, is doing a 180° from the policies of the Obama administration. Deregulation is the mantra of the day. Right-to-work legislation in some states has become a magnet for manufacturing and foreign investment.
The more we are out of sync with U.S. policies at both the national and state levels, the less competitive and attractive a destination Canada will be for investment, and our core competitive advantage will evaporate. Although Canada is working very hard under the current government to diversify its trade and investment ties with other countries like those in the Asia-Pacific, and the recently concluded CETA agreement, those policies of diversification will only work if they're based on a healthy core—namely, our open border and trading relationship with the United States.
Finally, we should also look to non-trade issues that we can use to advantage to underscore our broader strategic importance to the United States, especially at a time when national security is paramount to Americans. That may mean buying the F-35s and ramping up our military spending. We ignore the importance of defence and security in our bilateral relationship at our peril. I would simply like to underscore what Professor Doran has said on that point.
At all times, as we look forward to the negotiations that are soon going to start, we must also be ready to conclude that no deal is better than a bad deal.
Thank you.