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Cablegate: Embassy Ottawa

VZCZCXRO5404
RR RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHOT #0378/01 0741540
ZNR UUUUU ZZH
R 141540Z MAR 08
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 7521
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
RUEHME/AMEMBASSY MEXICO 1801
RUEHFR/AMEMBASSY PARIS 0991
RUCPDOC/USDOC WASHDC

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

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

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

OTTAWA 00000378 002 OF 004


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

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

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