TALKS BETWEEN the United States and Canada continued over the past week, with the fate of North American trade at stake. President Trump and Mexico have cut a deal in which Mexico essentially conceded more market share in the automotive industry to the United States, so now it is up to negotiators for Mr. Trump and Prime Minister Justin Trudeau to come to an agreement that brings Canada into the bargain, so as to assure that the whole thing makes the most economic sense and Congress approves it. How can everyone get to yes?
It would have been easier without Mr. Trump’s gratuitous slaps at Canada and its prime minister. Mr. Trump alluded recently to “decades of abuse” by Canada in trade, which is ridiculous. The merchandise trade balance, Mr. Trump’s favorite (if misleading) indicator of “fair” trade, showed a $17.1 billion deficit with Canada in 2017, almost a rounding error in the context of a total $581.6 billion cross-border flow, and considerably lower than the all time-high 2008 deficit, which was $78.3 billion. When you account for services, the United States enjoyed a small surplus. There are certainly kinks to be worked out in the trade relationship, but the deficits are hardly evidence of “abuse” by Canada.
The main kink is Canada’s highly protectionist system in the dairy market, which favors a special interest located in vote-rich Quebec and Ontario. Mr. Trump is right to complain about it, and Canadians as a whole would be better off without it, just as American consumers would benefit from ending our dairy subsidies. In fact, however, dairy is a non-factor in the bilateral trade deficit because U.S. dairy exports to Canada exceed imports. Mr. Trump is essentially holding the U.S.-Canada relationship hostage over a demand to increase an existing U.S. advantage.
Even so, Mr. Trudeau would be wise to offer the United States an increased market share, as his predecessor Stephen Harper agreed to do under the Trans-Pacific Partnership (TPP). That is admittedly harder to do, now that Canada already gave some of that access to other countries in the U.S.-less version of the TPP it signed after Mr. Trump canceled U.S. participation. It would be worth Mr. Trudeau’s while to go that extra mile, though, in return for the United States continuing some version of the North American Free Trade Agreement’s alternative dispute settlement system, a resolution mechanism that Canadian prime ministers of both parties have insisted on going back to the Reagan administration. The system helps Canada protect its softwood lumber exporters from American charges of “dumping,” which have been an irritant between the two countries for decades.
Dairy for dispute resolution: Mr. Trump should be more than willing to take that deal, which would let him tout substantive gains (more dairy sales) in return for a procedural concession. It also happens to be a pretty fair trade on the merits, since Canada’s dairy policy is indeed protectionist, whereas its dispute resolution claims amount to a reasonable request for a neutral forum. Mr. Trump never should have started this clash, of course; if he really wants to end it, though, this is a way to do it.