CANADIAN PERSPECTIVES ON NAFTA: KEEP, KILL OR FIX?

UNCLAS SECTION 01 OF 04 OTTAWA 000378



SIPDIS



SENSITIVE



SIPDIS



STATE FOR WHA/CAN and EEB/IFD/OIA and EEB/DCT



STATE PASS USTR FOR MELLE AND SULLIVAN



USDOC FOR 4320/OFFICE OF NAFTA/GWORD/TFOX;

3134/OIO/WESTERN HEMISPHERE



PARIS FOR USOECD



E.O. 12958: N/A

TAGS: ECON, ETRD, EIND, EINV, PREL, CA

SUBJ: CANADIAN PERSPECTIVES ON NAFTA: KEEP, KILL OR FIX?



SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY





SUMMARY/INTRODUCTION

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1. (U) The current debate over the North American Free Trade

Agreement (NAFTA) in the U.S. Presidential primaries has sparked

widespread commentary in Canada. This cable examines Canadian

perspectives toward NAFTA, including what Canada might seek if a

future U.S. Administration sought to re-open or abrogate NAFTA.





2. (U) Canada is a G7 economy and a major trading nation. Its

decisions to implement the Free Trade Agreement (FTA) with the

United States in 1989 and to extend that agreement to Mexico in 1994

were important turning points in Canadian economic policy. The

transition to free trade hurt some Canadian workers and industries,

and public opinion was deeply divided over the FTA and NAFTA. While

these divisions have been largely healed by subsequent economic

prosperity, a small but vocal minority of Canadians continues to

seek NAFTA's abrogation. (If NAFTA were abrogated, the U.S. and

Canadian implementing laws would require a return to the 1989

bilateral FTA, which the same critics would also want to abrogate).



3. (SBU) While many Canadians believe that U.S. campaign trail

references to abrogating or renegotiating NAFTA are unlikely to be

followed through, U.S. criticism of NAFTA taps into Canadian

anxieties about possible U.S. protectionism, alleged "thickening" of

the border, and (in trade policy circles) lack of progress in the

Doha Round. Reactions by Canadian policy leaders have emphasized

the need to defend, preserve, and where possible, extend trade

liberalization. Comments often cite Canada's status as the United

States' largest supplier of energy and the world's second largest

holder of oil reserves, albeit without explaining how this would

play into a NAFTA abrogation/renegotiation. Some also mention

(indeed they overplay) Canada's ability to choose to diversify its

export markets toward China, Europe, and elsewhere.



4. (SBU) Where it exists, Canadian discontent with NAFTA (and

earlier, the FTA) focuses on the continued use of trade remedy

(anti-dumping and countervailing duty) laws, a related lack of

effectiveness in dispute settlement reflected in over-use of the

"extraordinary challenge" procedures (notably in pork, swine and

lumber),and a clause (NAFTA Article 605) that prevents parties from

voluntarily restricting their exports of energy. Any return by the

United States to the NAFTA negotiating table would likely see Canada

present a well-prepared agenda aimed at making progress in these

areas, which are well understood and discussed in Canadian trade

policy circles. END SUMMARY/INTRODUCTION



CANADA'S POST-NAFTA PROSPERITY

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5. (U) Canada has prospered since it concluded the FTA and NAFTA.

Bilateral trade with the United States has more than doubled since

NAFTA and more than tripled since the FTA. Subsidies and

protectionist measures have dwindled and globally competitive

sectors have grown. The Canadian energy sector has expanded due to

higher prices, technical advances, and infrastructure investment in

both natural gas and the oil sands. (Sixty percent of Canada's 2007

trade surplus with the United States consisted of U.S. net imports

of energy). Government budgets are in surplus, inflation and

Qof energy). Government budgets are in surplus, inflation and

interest rates are low, and employment is very healthy. Strong

commodity prices are driving growth in non-energy resource-based

sectors (agriculture, mining) and are spurring exports to markets

other than the United States. While trade liberalization was only

one component of a set of policies and circumstances that led to

this prosperity, it is difficult for NAFTA's critics to argue that

the agreement has been bad for the economy.





REACTIONS TO U.S. ANTI-NAFTA RHETORIC

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6. (U) In an environment of increasing anxiety in Canada about

allegedly growing U.S. protectionism and "thickening" of the border,

Canadian business, media, and political leaders have reacted to

criticism of NAFTA in the U.S. presidential campaign -- notably to

statements made in Ohio on February 26 by Senators Clinton and



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Obama.

7. (U) On February 27, the Canadian Council of Chief Executives (the

leading big-business lobby) issued a statement claiming that

"Protectionists in many cases are attacking the fundamentals of

liberal economics. . . . In fact, it is now more important than ever

for North Americans to work together in taking on the challenges of

global competition. No Canadian needs to be reminded of the vital

importance of the Canada-United States economic relationship. Trade

and investment liberalization between our two countries has produced

huge benefits on both sides of the border. But now this remarkable

progress is endangered by a combination of forces pressing for

higher security walls and economic barriers."

8. (U) Also on February 27, Finance Minister Jim Flaherty and

International Trade Minister David Emerson separately made comments

emphasizing the benefits of NAFTA to Canada, Mexico, and the United

States. Going further, Emerson opined that current U.S. economic

concerns stem less from NAFTA than from the housing and mortgage

crises.

9. (U) The trade minister then reportedly stated that he is

concerned with the growing stridency of protectionist forces in the

U.S. Congress. As for abrogating NAFTA, Emerson was quoted saying

that the short-term impact would be modest, except for the

disappearance of NAFTA's dispute resolution features. "It's not so

much more fights as a less neutral, well-defined way of resolving

them," he said. "The dispute resolution mechanism, Chapter 19, has

been generally speaking a real benefit for Canadian industry with

the possible exception of softwood lumber."

10. (U) Emerson also commented that "There's no doubt if NAFTA were

to be reopened we would want to have our list of priorities....

Knowledgeable observers would have to take note of the fact that we

are the largest supplier of energy to the U.S. and NAFTA has been

the foundation for integrating the North American energy market.

When people get below the rhetoric and pick away at the details,

they are going to find it's not such a slam dunk proposition."





ENERGY, AND EXPORT DIVERSIFICATION, OVER-PLAYED

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11. (U) The Canadian media highlighted Emerson's allusion to energy

trade. The next day's top headline in a national newspaper read

"Ottawa plays oil card in NAFTA spat," and subsequent commentators

have picked up that theme. An early March poll said that 61 percent

of respondents would favor using oil as a lever in future

negotiations with the United States. A few commentators went

further and suggested that Canada might choose to divert its energy

exports to China or other third markets, if NAFTA were abrogated.

12. (U) Diverting significant amounts of Canadian oil and gas to

overseas markets, however, would likely be a nonstarter. Canada's

oil and gas exports rely on large, complex transcontinental pipeline

networks. Exporting oil and gas overseas by tanker would be much

less economic and (in the short run) physically impossible, as

little of the infrastructure needed for such shipments currently

exists.

13. (SBU) Talk of diversifying export markets away from the United

States is constant in Canadian trade policy discourse. Since the

1960s, Canadian officials have regularly vowed to implement trade

Q1960s, Canadian officials have regularly vowed to implement trade

diversification policies, and have spent heavily on trade promotion

in third markets, with little apparent result. The proportion of

Canada's merchandise exports sold to the United States climbed

steadily from about two-thirds in the late 1960s to nearly 86

percent in 2003. (It receded to 79 percent in 2007, but this likely

resulted less from policy than from changing commodity prices and

currency values, as well as growth in overseas markets).



OPPOSITION HAS WANED

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14. (SBU) A nationwide coalition of forces opposed Canada's

negotiation of free trade with the United States in the late 1980s

and of NAFTA in the early 1990s. This alliance was concentrated

mainly in the manufacturing sector of Ontario (the most populous

province),in public service unions, in the union-based New

Democratic Party (NDP),and in the left-nationalist wing of the

Liberal Party. All of these constituencies have declined in

political influence since that time. The current generation of the

anti-trade lobby expresses itself in two main forms: an

anti-globalization and anti-corporate movement that claims

"solidarity" with groups in developing countries; and a relatively

small number of lobbies for specific domestic industrial interests

(e.g., Canadian Auto Workers, dairy farmers, shipyards).



OTTAWA 00000378 003 OF 004





15. (SBU) The ideology expressed by Canada's hard core of

anti-free-trade campaigners contains a strain of 1970s-era natural

resource nationalism. This is reflected in their persistent claims,

which have little evidentiary basis, that the FTA and NAFTA "sold

out" Canadians' national patrimony of energy and water resources to

allegedly insatiable U.S. consumers. Anti-free-trade campaigners

ignore the fact that virtually no commercial interest has been shown

in exporting bulk water, and that water in its natural form is not

covered by either agreement (which the three NAFTA countries

clarified in a December 1993 statement).

16. (SBU) As for energy, NAFTA's Canadian critics have always

attacked Article 605, which prohibits a party from restricting

exports of an energy or basic petrochemical good below the level (as

a proportion of total supply) prevailing in the most recent

three-year period. While this article has no practical effect as

long as Canadians are willing to pay world market prices for these

goods, it would prevent a future Canadian government from (1)

responding to a supply disruption by reducing exports or (2)

maintaining a lower domestic price at the expense of domestic

producers. Critics cite Article 605 as proof that Canada

"surrendered control of its energy policy" by signing NAFTA.





FREE TRADE NOT FREE ENOUGH

--------------

17. (U) Beyond these relatively narrow groups, Canadian public

attitudes toward open markets and trade liberalization are broadly

positive, and the constituencies for liberalizing trade are likely

as strong or stronger than they were twenty years ago. Canadian

poll respondents' support for NAFTA climbed steadily from about 30

percent in 1992 to about 70 percent by 1998, and remained near that

level until at least 2002. A poll released on March 7, 2008, after

years of deep job losses in manufacturing, found that nearly half of

respondents still thought NAFTA had been "good" or "very good" for

Canada's economy, compared to 27 percent who thought NAFTA's impact

had been negative. Ontario Premier Dalton McGuinty, whose

manufacturing-intensive province has been hurt the most by those job

losses, nevertheless argued in a March 13 op-ed piece that "NAFTA

has helped preserve competitiveness by pooling [Ontario's and

neighboring U.S. States'] shared strengths and resources" across an

"integrated Great Lakes economy."

18. (SBU) After fourteen years of NAFTA and the five preceding

years of the bilateral FTA, the overall balance of Canadian opinion

on these agreements is not that they "gave too much away" in terms

of access to Canada's market. Rather, the mainstream view is that

the agreements did not fully deliver on the FTA's leading promise:

access to the United States market that would withstand

protectionist politics.

19. (SBU) The "poster child" for this view has always been the

long-running softwood lumber dispute, which affects a sector of

major economic and political importance in Canada. In that dispute,

the Canadian side believes that it "won" repeated dispute settlement

panel decisions, but nevertheless "lost" to endless procedural

protectionism, because trade remedy procedures were never eliminated

or restricted among the FTA and NAFTA partners. The elimination of

such remedies within the free trade area had been urged by

Qsuch remedies within the free trade area had been urged by

economists, demanded by Canada, and alluded to in FTA Article 1906

(which anticipated "the development of a substitute system of rules"

within five years). (Comment: Softwood lumber aside, Canadian

access to the U.S. market is virtually total, while Canada retains a

range of restrictions on U.S. goods and investment, e.g. in

"cultural industries." End comment)

20. (SBU) Another area where Canadians express discontent with free

trade is the perception that the United States is "thickening" its

side of the U.S.-Canada border. Canadians use the "thickening of

the border" phrase to describe allegedly increasing complexity of

procedures, longer waiting times, and higher compliance costs for

moving goods - and people - into the United States. The evidence

for "thickening" is mostly anecdotal, and there is no convincing

sign that it has reduced bilateral trade. Even if "thickening" does

exist, it cannot be blamed on NAFTA and its effects are likely far

smaller than those of other phenomena, such as exchange rate

variability. Nevertheless, the widespread perception (and frequent

assertions by Canadian Ministers) that "thickening" is occurring

constitutes an additional area of Canadian dissatisfaction with free

trade.



THE CANADIAN AGENDA

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OTTAWA 00000378 004 OF 004





21. (SBU) Whatever the U.S. campaign rhetoric might be,

knowledgeable Canadian observers discount the possibility that a

future U.S. Administration would abrogate NAFTA or seek to

renegotiate substantial portions of it. Still, trade policy in

general is more important to Canada than to many other major

economies due to its relative openness and the prominence of trade

as an engine of economic growth. Canadian policymakers are

sensitive to perceived negative trends in the United States that

impact trade (protectionist sentiment in Congress, complexity or

"thickening" at the border, and the alleged ascendance of security

over other concerns since 9/11).

22. (SBU) As a result, Canadian trade policy circles have moved

quickly into relatively advanced discussion of key issues around a

possible NAFTA renegotiation. The following are a few major points

that have already been made publicly:

-- The Canadian and U.S. laws that implemented NAFTA at the end of

1993 did not terminate the bilateral FTA, but only suspended it (see

U.S. Public Law 103-182, Section 107). If NAFTA were abrogated for

any reason, the two countries would automatically revert to the FTA.

This provides a "fallback" arrangement for Canada if NAFTA's

abrogation were driven wholly or primarily by U.S.-Mexico issues.

Since the FTA was essentially the template for NAFTA, and both

agreements provided for nearly complete elimination of tariffs

between the two parties, if this occurred Canada's market access to

the United States would be relatively little changed.

-- While the political climate in the United States might be less

favorable to a bilateral trade negotiation in coming years than

during the Reagan Administration when the FTA was concluded, Canada

is in a far stronger economic position, with good terms of trade

thanks to high energy and commodity prices. Moreover, Canada is now

the United States' largest supplier of imported energy, and holds

the world's second largest oil reserves after Saudi Arabia.

-- In light of these circumstances, Canada (many commentators say)

should be accelerating its push for bilateral and regional trade

agreements in Europe, Asia, and elsewhere. (Canada has negotiated

FTAs with the European Free Trade Area, Chile, Costa Rica, and

Israel. It has FTAs pending with Korea, Singapore, the Dominican

Republic and a number of countries in Central and South America, and

recently announced the launch of free trade negotiations with

Jordan). One former Liberal Minister of International Trade last

week stated that Canada should accelerate efforts to reach an FTA

with the European Union in order to counterbalance a possible

weakening of trade ties with the United States if NAFTA were

renegotiated or scrapped.

-- No significant part of the NAFTA can be renegotiated without

reopening the agreement in its entirety. In that event, Canada

would have a negotiating agenda of its own. Key features of the

Canadian agenda would be to seek new rules constraining the use of

countervail and anti-dumping laws between/among the parties; to

strengthen dispute settlement mechanisms in ways that would enforce

more lasting U.S. compliance; to possibly eliminate the

investor-state dispute mechanism (NAFTA Chapter 11); and to possibly

eliminate the article constraining export restrictions on energy

Qeliminate the article constraining export restrictions on energy

products.

23. (SBU) Indeed, Canada could pursue major improvements to the

bilateral trade regime, even if NAFTA remains in place. One eminent

Canadian trade policy expert and veteran negotiator has proposed

that Canada do just that. He is currently advocating that Canada

spend the remainder of 2008 developing a "constructive agenda" to be

pitched to the next U.S. Administration. That proposed

"constructive agenda" would feature a major effort to address the

security and regulatory dimensions of the bilateral trade

relationship.

WILKINS