Continual emphasis on the severity of Canadian politics is needed to understand the latest developments in the U.S-Canada trade negotiations.

The Trump administration set a deadline of today for Canada to join the U.S-Mexico trade agreement and make the NAFTA replacement agreement a three-way pact. The concessions needed by Justin Trudeau and Chrystia Freeland to join the agreement were politically devastating.

In order for Canada to accept or join, via a NAFTA 2202 modification, they would need to agree to the U.S-Mexico modification terms. For Canada they would have to:

open their telecommunications and banking sector (eliminate non tariff barriers).

eliminate soft-wood (lumber) and aeronautics subsidies.

begin a process of lowering their assembly use of Chinese/Asian goods.

accept the rules of origin for North American manufacturing.

eliminate protectionist tariffs on dairy and farm products.

accept the U.S-Mexico terms for arbitration and dispute resolution.

President Trump and U.S. Lighthizer are holding all the cards. As we previously highlighted they don’t care if Canada doesn’t join; the U.S. would likely prefer to send congress a NAFTA 2205 withdrawal notification removing the U.S. from the original 1993 NAFTA construct in combination with a simultaneous 2202 modification notification for the U.S-Mexico side of the agreement.

This would allow the U.S. to go into a one-on-one trade negotiation where six months and a day from the 2205 notice. The U.S. would then apply 25% auto tariffs on Canadian made vehicles while negotiating a bilateral deal. Canada is in a very weak negotiating position; politics are paramount for the Canadian team; their exit needs political cover. Media need to help the optics for the Canadian team.

Bloomberg Editor-in-Chief John Micklethwait and Jennifer Jacobs interview President Trump in the Oval Office

Earlier this morning The Toronto Star reported on leaked ‘off-the-record’ comments from a Bloomberg interview with President Trump. In essence, a brutally honest President Trump said there was no need for the U.S. to compromise, all concessions were likely to come from the Canadian position. However, knowing the political prism for Justin Trudeau and Chrystia Freeland, President Trump did not want to embarrass Trudeau politically with public comments toward that end.

…”Here’s the problem. If I say no — the answer’s no. If I say no, then you’re going to put that, and it’s going to be so insulting they’re not going to be able to make a deal … I can’t kill these people.”…

This was a genuinely honest and factual summary of the current status.

Wow, I made OFF THE RECORD COMMENTS to Bloomberg concerning Canada, and this powerful understanding was BLATANTLY VIOLATED. Oh well, just more dishonest reporting. I am used to it. At least Canada knows where I stand! — Donald J. Trump (@realDonaldTrump) August 31, 2018

Prime Minister Trudeau and Canadian Foreign Minister Freeland simply cannot accept the terms outlined within the U.S-Mexico trade agreement. Left-leaning sympathetic media needed a way to assist the Canadian team and attempt to remove the responsibility for any failure in negotiation from the northern liberals. Hence the Toronto Star leak.

There are simply too many carved-out and protected liberal constituents (trade sectors), within Canadian economic policy to allow for any trade agreement based on open markets and free/fair trade. The dairy segment is one well known and protected agricultural sector; there are many others.

WASHINGTON (Reuters) – Canada has made no agriculture concessions to the United States in bilateral trade talks aimed at reaching deal in principle to modernize the North American Free Trade Agreement, a spokeswoman for the United States Trade Representative’s office said. “The negotiations between the United States and Canada are ongoing. There have been no concessions by Canada on agriculture,” the spokeswoman said in a brief emailed statement. (link)

The U.S. and Mexico have agreed to manufacturing origination terms; wage and labor improvements; elimination of AG subsidies and non tariff barriers; and removal of all protectionist tariffs – so long as the structural terms of commerce are upheld.

There’s almost no-way, given the politicization of the Canadian plan, for Justin and Chrystia to agree to those terms and keep their fragmented political support base appeased.

Therefore, absent total acquiescence, it is likely U.S.T.R. will file a 2205 notification dissolving the U.S and Canada trade agreement while simultaneously filing a 2202 notification to modify the U.S. and Mexico agreement to the new terms.

Under dissolution Canada will keep their soft-wood lumber and aeronautics subsidies; keep their protectionist Dairy tariffs; keep their banking and telecommunication rules blocking U.S. access; and six months from now face a 25% duty on U.S. auto imports – effectively destroying their auto manufacturing sector. Car companies (ex. Toyota) will simply leave Canada and return to building/assembling in the U.S.

This looks like the most reasonable scenario at this moment.