U.S. Trade Representative Robert Lighthizer has submitted a regulatory 90-day notification to congress outlining the intent to modify the U.S. trade deal with Mexico according to mutually agreed terms.

However, the Canadian trade priorities; including retention of protectionist tariffs (dairy) and non-regulatory barriers (telecom/banking); in combination with subsidies (lumber/aeronautics), make Canada joining the deal almost impossible.

Canada is scheduled to meet with Lighthizer again on Wednesday, but it seems very doubtful the political needs for Justin Trudeau would allow any three-way agreement.

If you take the U.S-Mexico deal out of the U.S-Canadian discussion and just look at the fundamental baselines for the Canadian position it becomes easier to see the problem.

On the issues at the heart of the Canadian trade priorities any movement away from the current trade relationship with the U.S. is a loss.

In general terms the U.S. wants: the elimination of tariffs, the elimination of subsidies and the elimination of non-tariff barriers to trade. The Trump/Lighthizer position is to create an actual trade bloc (Canada joins), or a bilateral agreement based on the same principles that would apply to a trade bloc.

President Trump could offer to eliminate the current Steel and Aluminum tariffs so long as Canada agrees to limits on imported Steel/Aluminum from China. However, it doesn’t look like Canada is willing to agree to terms around ‘rules of origin’ because Canada no longer has a heavy industrial base as part of their economic foundation.

Mexico, via President-elect Lopez-Obrador, wants to establish heavy industry to expand the Mexican economy and create a real manufacturing industrial base.

AMLO sees energy resource development as financial collateral toward achieving more actual heavy manufacturing investment in Mexico. Guess what? He’s right.

Conversely, and showcasing an entirely different set of economic priorities, Canada has slowly removed its heavy industry at the behest of liberal environmental policy and shows no signs of wanting to reestablish that sector.

Without a heavy manufacturing industrial base, Canada needs to retain their import of component parts (made from heavy manufacturing) and simply assemble those parts in Canada. The U.S. and China are their main suppliers for Canadian component goods. A limited industrial base precludes Canada from agreeing to any rules of origin that could essentially limit their economy.

To form a trade relationship with the U.S., based on the same manufacturing priorities applied to the U.S-Mexico deal, Canada would have to fundamentally reverse decades of trade and internal economic/regulatory policy; -OR- Canada would have to limit their Asian purchases and use the U.S. and/or Mexico as the source of their component part origination. This is basic industrial economics.

Again, if you take the U.S-Mexico agreement away from any review of a U.S-Canada agreement, what you discover is that in a bilateral discussion of trade between the U.S. and Canada; the hungry Canadian already eats 2/3rds of the pizza (current terms).

Any move to make the pizza (trade relationship) more equitable in a bilateral deal (50/50) means Canada will have to give up some pie. Canada doesn’t have any current internal economic policy they are willing to give up.

Canada wants to retain their lumber and aeronautics subsidies; they want to retain their protectionist dairy tariffs; they want to retain their barriers keeping their banking and telecommunications sectors protected from external competition; and they want to keep the current manufacturing and assembly processes for durable goods without the pesky industrial/environmental challenges from creating the components of those goods.

This is what Justin Trudeau and Chrystia Freeland call “protecting Canadian workers, and protecting Canadian values”.

That’s why President Trump simply looks at the challenge and says it is far easier to accept the Canadian position and make an independent move that will remove 1/4 of the pizza. That move would be to place a 20 to 25% tariff on Canadian manufactured automobiles which will essentially mean those auto companies will relocate back into the U.S.

Beyond automobiles President Trump and Robert Lighthizer will then, inside the bilateral agreement or separately if no agreement possible, establish a duty on any imported durable good that exceeds an established percentage of North American content. This shuts down the third-party exploitation loophole.

This is where I somewhat disagree with those who say President Trump has been setting up this auto-tariff scenario all along. It’s not that Trump’s motive/strategy has been to remove the auto-manufacturing per se’, but rather that President Trump has long-accepted the ‘Canadian priorities’ as they exist. Trump understands the problem at its root and basic cause, and he see’s this approach as the most simple and logical solution.

Tax Canadian automobiles at 25% and one-quarter of the pie will revert back to the U.S.

Done.

Canada gets to keep its priorities intact; and Justin/Chrystia get to tell their constituents they maintained the values of the Canadian people.

See how that works?