MONTREAL — The election of Donald Trump has plunged the Canadian government into a state of high anxiety as it measures the looming possibility of getting caught up in an unwanted trade war with the United States, Canada’s biggest economic partner.
Prime Minister Justin Trudeau was quick to reassure the president-elect of his willingness to renegotiate the North American Free Trade Agreement (NAFTA). But what Canada wants from a renegotiation is much different from Trump’s vision.
For both strategic and economic reasons, Trudeau seeks to strengthen NAFTA, not weaken or destroy it.
“A stronger North America, if you are worried about China, is a much better bulwark than a divided, weak, economically compromised North America,” said Fen Hampson, a professor of international affairs at Carleton University in Ottawa.
“There’s a lot at stake,” said Thomas Bernes of the Center for International Governance Innovation in Waterloo, Ontario, a nonpartisan think tank. “It’s going to be rough waters for a while.”
According to Canadian government figures, 60 percent of the country’s gross domestic product derives from international trade, and 1 in 5 jobs depends on it. At the moment, 75 percent of those exports go to the United States.
Still, Canada may have to make some concessions, given Trump’s need to placate his base.
“Clearly, having made Mexico such an issue, [Trump] has to do something,” Bernes said. “What that something is … remains to be seen.”
Canadians say they are caught in U.S.-Mexico crossfire over Mexico’s extremely low-cost labor market. This dispute does not apply to Canada, where labor costs tend to be higher than in the United States. What’s more, the U.S.-Canada trade balance often has favored the United States, and growth in trade between the two countries has benefited both.
Hampson said the irony of Trump’s protectionist ideas is that Canada is in the top four export markets for every one of the 30 states that voted for him. It is No. 1 in 23 of them. The value of those exports to Canada in 2015 was $140 billion.
“So [Trump] may well have a political problem on his hands, particularly if Canada is able to mobilize its friends in those states,” Bernes said.
But Canada can’t sit back and cut Mexico loose. Since NAFTA was signed in 1994, Canada’s trade with Mexico has increased sixfold. About 3,000 Canadian companies have Mexican affiliates producing goods primarily for the U.S. market.
“What hurts them is going to hurt us, too,” Hampson said, adding: “We are Siamese triplets, and we are all joined at the hip.”
Hampson and Bernes both said that job losses in the United States have less to do with NAFTA than with automation, which will only increase as robots and artificial intelligence grow more sophisticated.
What’s more, Hampson said, there is little evidence that jobs will return if free trade is scrapped.
“Once they are gone, they are gone,” he said. “You can’t reverse the tide of history there. The real challenge is how do you deal with technological disruption.”
Meanwhile, Canada is stepping up efforts to expand its free-trade agreements worldwide as a hedge against U.S. protectionism. It recently signed an agreement with the European Union and continues to negotiate with Asia-Pacific, South American and Middle East countries.
It also plans to build pipelines to its western and eastern coasts for oil and gas shipments to Asia and Europe.
Under NAFTA, Canada guarantees oil and gas shipments to the United States at average peak export levels. It’s a key element of U.S. energy security. Scrapping NAFTA would release Canada from that commitment.
According to Hampson, it is very much in Canada’s interest to diversify. “It’s not good for any country to be hostage to and dependent on one market,” he said.