OTTAWA — When President Trump announced a U.S.-Mexico trade agreement Monday, he also issued an ultimatum to Canada.
“We will have a deal with Canada,” Trump said during a news conference in the Oval Office. “It will either be a tariff on cars, or it will be a negotiated deal.”
The U.S.-Mexico agreement comes after more than a year of talks over the North American Free Trade Agreement, or NAFTA, and is centered largely on manufacturing. But it leaves many key issues unresolved. Chief among them: Canada.
Trump’s tariff threats were widely seen as a tactic to push Prime Minister Justin Trudeau’s administration to sign on to the terms of the new agreement. But major obstacles remain in talks with Canada, and the specter of tariffs on the auto industry prompted warnings from Canadian trade experts that U.S. consumers would be among the hardest hit if tariffs are imposed.
Three-way talks were expected to resume Tuesday, when Canadian Foreign Minister Chrystia Freeland will arrive in Washington after cutting short a trip to Europe. Freeland and the rest of the Canadian delegation had been excluded from the talks since July, after Trump and Trudeau traded verbal barbs during the G-7 summit.
In an emailed statement, Freeland’s spokesman said Monday that she welcomed the U.S.-Mexico agreement, but added that Canada would “only sign a new NAFTA that is good for Canada and good for the middle class. Canada’s signature is required.”
Canadian trade and automotive experts weren’t impressed by Trump’s threat against Canada’s automotive industry, which employs 125,000 workers and accounts for $19 billion Canadian ($13.1 billion U.S.) of Canada’s gross domestic product.
“It’s a cold, hard bluff,” said Gordon Ritchie, who was one of Canada’s principal negotiators of the original Canada-U.S. Free Trade Agreement in the 1980s. “It’s the kind of thing that might work in low-level real estate development, but I don’t think Freeland and Trudeau will be buffaloed by this.”
Ritchie said imposing a tariff on Canadian auto exports would hit U.S. consumers with much higher prices and hurt the profitability of the Big Three U.S. auto producers, all of which have substantial assembly operations in Canada.
In addition to General Motors, Ford and Chrysler, Toyota and Honda have assembly plants in Canada, all located in Ontario. Canada produced 2.2 million vehicles last year, and more than 85 percent of the total output was shipped to the United States.
The market is so integrated that some models for the whole North American market are made exclusively in Canada. For example, U.S. car buyers who opt for the Toyota RAV4 get vehicles assembled in Woodstock, Ontario, while all Chrysler Pacifica minivans for the continent are made in Windsor, Ontario.
“Canadian production would be severely damaged” if tariffs were imposed, said Kristin Dziczek, vice president at Center for Automotive Research in Ann Arbor, Mich. “It would be devastating to Canada.”
But Dziczek noted that the many high-value components of vehicles built in Canada, such as engines and transmissions, are imported from the United States, so lower Canadian output would also negatively affect American workers.
The auto industry could also suffer if NAFTA is dissolved and replaced with a series of bilateral deals, as Trump has suggested.
Ending the trilateral trade pact would face strong opposition, said Andrei Sulzenko, a one-time trade negotiator and fellow at the University of Calgary.
“Auto company executives absolutely need a three-way agreement, because the supply chain is set up three ways,” he said.
Sticking points in the talks between the United States and Canada include agriculture, specifically the highly protected Canadian dairy market.
Observers note that Canada had been willing to partially open up its dairy market in negotiations for the proposed Trans Pacific Partnership agreement, before those talks failed.
In past rounds of negotiations, Canada had also been opposed to a clause, proposed by the United States, that would put a five-year expiration date on the pact unless the three partners explicitly renewed it.
Under language in the deal announced Monday in Washington, the agreement would remain in force for an initial period of 16 years, with an option to reconsider some issues after six years and to extend for another 16 years.
Also still up for negotiations are provisions on procurement, intellectual property and dispute settlement.