The Trump administration raised tariffs on Canadian steel and aluminum last year in the name of national security. Last week, President Trump ended the tariffs as a new trade agreement, the USMCA, moves forward. Bruce Heyman, a former US ambassador to Canada, and the Council’s Phil Levy join our Deep Dish podcast to discuss what happened and where the relationship goes now.
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Brian Hanson: This is Deep Dish on Global Affairs, going beyond the headlines on critical global issues. I'm Brian Hanson, and today we're talking about the US-Canadian relationship. The US and Canada share the longest non-militarized border in the entire world. And for years, we've had a history of partnership and cooperation. Yet, during the last couple of years in the Trump administration, there has been conflict and tension over many issues, and even personal spats between leaders. Yet recently, it looks like there are some new and important developments in the relationship. In order to understand what's going on and where this is all headed, I have two guests Ambassador Bruce Heyman, who served as the US Ambassador to Canada from 2014 to 2017. And before that, he spent 33 years at Goldman Sachs, where he served as a partner and managing directing in the Chicago office. He has a wonderful new book, co-authored with his wife, Vicki, called The Art of Diplomacy Strengthening the Canada-US Relationship in Times of Uncertainty. Welcome to Deep Dish, it's great to have you on, Bruce.
Bruce Heyman: Good to be here. Thank you.
Brian Hanson: Also with us is Phil Levy, who is a senior fellow on the global economy at the Chicago Council on Global Affairs. He also teaches at Northwestern University's Kellogg School, and he's previously served as a senior economist for trade for President George W. Bush's Council of Economic Advisors. Phil also has a new book out called Rebuilding a Bipartisan Consensus on Trade Policy. Welcome back to Deep Dish, Phil.
Phil Levy: Good to be here.
Brian Hanson: So Bruce, I want to start with you, and just ask for you to paint a baseline understanding of why is the relationship between US and Canada so important? In many ways, it's a relatively small population, country on our border, but why is it so important?
Bruce Heyman: So think about the world in the post-World War II order of things, where the US was out promoting liberal, small-L, democracy, small-D, in the world. And we were doing that essentially in a multilateral approach. Didn't matter whether we had Republican or Democrats, although we had slightly different philosophies, the philosophy was still promoting this liberal democracy throughout the world. And we had Canada, who was really there, not only as our best friend and ally, but they're with us, at our side, doing this around the world with similar viewpoints, and values, and ideals. Taking that a step further though, not only were we doing that together, but a friend, for like anybody who's listening to this podcast, a friend in need is a friend indeed, and when the US has been in need, Canada's always been there. They were there for us in Iran, when Ambassador Ken Taylor, who I got to know while I was ambassador, help bring out US diplomats at the time of the fall of the Shah and the Ayatollah took over. They were for us in 9/11, in so many ways, not only for the diversion of planes that came over from the US that couldn't land in our airspace into Gander, Newfoundland, which now is a great Broadway musical, Come from Away. But they were there for us in Afghanistan, fighting shoulder-to-shoulder, and having higher fatality rate per officer than the US did. We protect North America together in this thing called NORAD. So the Canadians have been there, they've been there when we have fires, and hurricanes, and all kinds of things, who's the first to show up? It's the Canadians. We share these Great Lakes in Chicago and throughout the Midwest, 20 percent of the freshwater of the planet Earth, we share those together and protect them. And we do so much together. They're our best trading partner in the world, no longer the largest in terms of total dollars, but in terms of balanced trade, this is a balanced trading relationship, whether it's slightly surplus or deficit, it's about equal. And we make things together and do things together. And so this is our best friend in the world at every level, and it's important to protect that relationship. And you're right, over the last couple years, it's been under stress.
Brian Hanson: So I want to pick up on that, and particularly the trade piece because one of the areas where we've had the strongest tension and conflict in our relationship in the last couple years has been over trade. Phil, what are some of the most important issues that have animated that conflict?
Phil Levy: The US and Canada have had fairly open trade, even before you had NAFTA, you had a US-Canada Free Trade Agreement, and it's been very cooperative, very open. Each side has a bit of protection left that has aggravated the other. The US has its protectionist sectors, Canada has things like dairy, for example. There has been an eagerness to address some of these and to find a vehicle for addressing them. We've found a vehicle for doing that, that was the Trans-Pacific Partnership. When the US walked away from that, that left a need to address some of these things, but it's been a very cooperative relationship. And one of the things we've seen has been very tight integration of key sectors, automobiles being the most prominent, where it has gotten to the point where it's not just automobiles, we've gotten to the point where when the US applies protection, you even have US unions saying, "You can't do this because we're working with the Canadians, and we're integrated so closely that we're essentially, hitting ourselves."
Brian Hanson: And one of the things that striking about that, the narrative that both of you tell about the relationship, is that one of the areas in which the Trump administration has been active has been imposing tariffs on steel and aluminum from Canada on national security grounds. What's that all about?
Phil Levy: So this was an awkwardness that President Trump really wanted to impose tariffs. Unfortunately, the Constitution didn't seem to allow that. It said, under Article One Section Eight, it was congress that was supposed to decide on tariffs. Congress had put in some loopholes in its infinite wisdom over the years. One of these, dating back to 1962, said, the president could actually impose tariffs on national security grounds, and this is necessary to address national security. That's what the president did in March of 2018, initially exempting both Canada and Mexico, but he imposed these tariffs, said Canada and Mexico were exempt. They had been exempt when we had done steel protection early in the Bush Administration, and then switched as of June of that year, linked it to we need to get Mexico and Canada to cooperate on trade negotiations, which they had been pretty forthcoming about negotiating with the US anyways. It led to a fundamental awkwardness, which actually came up in a senate hearing a year or so ago, which is, do we really consider Canada to be a national security threat? And Ambassador Lighthizer answered, yes, we do. And it was on the grounds that their premise is economic security is national security, so anyone who provides a threat, by which I think they mean competition to a US industry, they are defining as a national security threat. The reason it was important for them if you wanted protection to deal with the Canadians was that the Canadians were the number one supplier of both aluminum and of steel among US import sources. So if you exempted them, you weren't getting all the protection you'd want.
Brian Hanson: So Bruce, I can imagine given the portrait you painted about the closeness of the relationship, this probably didn't go down very well in Canada. What was the response of the Canadian government to having this protection imposed on them as some sort of security threat?
Bruce Heyman: It was deeply offensive and hurtful. I think that you sit there and you have your best friend, and you have this working relationship, to go ahead and just impose these tariffs and you use the guise of national security. The Canadian steel and aluminum have been included in our defense considerations for our country for a very long time, including the fact that much of that has been used to make a lot of our military equipment. And we have a shared defense agreement, that works not only in NORAD, but NATO, and we make and build things together, and we even train each other's forces, at times, and we hold command for each other's forces. So to say in some even stretch of the imagination, that they were a national security threat, they found completely offensive and hurtful. And so the Canadians responded and they retaliated. And they went right at our farm products and other products, where they thought they could have the greatest economic and political impact that they could, matching pari passu dollar amounts. But at the end of the day, we find Canadian views of the United States today in polls over this last year, rank the US, in terms of its leadership in the world in the 30s, 36, 37 percent, which is the lowest in the history of our two countries. And the president's personal approval rating is running at around 10 percent, which is I would say it's about as bad as you get. 10 percent, you can find 10 percent of the people liking just about anything. So we're in a jam and a difficult spot, but this too shall pass, and we have a lot of repair that we're going to need to do.
Brian Hanson: So one of the things that has unfolded during the course of time when the steel and aluminum dispute has been happening, has been the renegotiating of NAFTA and the creation of the United States-Mexican-Canada Agreement, which I still can't say very smoothly. NAFTA, I can handle very well. Phil, could you catch us up on what was the substance of change? What is that agreement important?
Phil Levy: It is important only in a political sense, where it might potentially bring some trade peace. It could also bring some modernization in certain sectors, which would have been available in the TPP, but-
Brian Hanson: The Trans-Pacific Partnership that you referred to.
Phil Levy: Yes, it would have been available in the Trans-Pacific Partnership, the TPP, but we didn't get that. So this is a way of delivering that. The headline of all the innovating things that the Trump administration had claimed it was going to do was a reworking of the auto sector. That it was going to put in higher rules of origin, which is effectively, how do you decide what kind of goods qualify for special treatment? What is a North American good? And they were going to tighten up the standards, so that you would allow even fewer parts from outside North America. Of the studies that are coming out, most are calculating that that's going to be largely ignored, and the predicted effects of the agreement come off as minimal. One study from IMF, when I say minimal, they were estimating it at 0.00% change in GDP. So it's kind of hard to get below that in absolute value. And yet, the Trump administration, for them, this is the one success that they have to show. The one thing where they can claim that this bold new approach to trade agreements actually does anything.
Brian Hanson: If that's the reality for the United States in this agreement, Bruce, how did the Canadians view this agreement? And how do they view it now? Is this a positive step forward?
Bruce Heyman: So the Canadians want to be in agreement with the United States. There was this constant threat by the president that not only was he, if they didn't give in to certain aspects of this new agreement, that he was going to attack them, specifically the auto sector, on auto tariffs. But he was going to tear the darn thing up, and that way would be without a working agreement. This is, when you have 75 percent of your exports go to one country, you would like to have a set of rules that codify this working relationship, in a way that it gives you legal recourse if things don't go well, and it gives you a pathway. NAFTA, in and of itself, as Phil mentioned, was due for an update. But the way the Obama administration looked at is, we'll update it. We're going to do that with TPP, and we're going to include Mexico, and Canada, and a group of other nations, and that would be, not only an update to NAFTA, bucket one, but bucket two, a counterbalance to China, and an effective counterbalance. But the president threw that out. And so much of TPP is this new NAFTA, right. So you've got this new agreement that looks like a little bit of the old agreement, a lot of this new TPP that was thrown away, and I'd call a sprinkling or so of auto rules that are coming in with wage agreement on certain percentage, 40 percent of auto manufacturing in Mexico needs to be at least $16, that kind of thing. The fact of the matter is, there are a number of loopholes to that. And at the end of the day, Canada wants a deal, and this deal actually is a pretty good deal for Canada because it is substantially, all the things that they had worked on in negotiating prior deals, and coming and codifying it together. And so I think that right now, that they will probably work hard to try to pass that within their parliamentary session before what they call proroguing, or leaving parliament to go into campaign mode for the fall. And so the prime minister, getting rid of steel and aluminum tariffs, codifying and passing this USMCA, which by the way, they don't call it USMCA in Canada because it's against the law. And so that gives you an idea of how this president has made these decisions, and how this all works, that the reason it was called NAFTA before is everybody could agree on a term. But it's called something different in Mexico and Canada because each country put its own country's name first. And so the joke up in Canada is, USMCA is US Made Canada Accept. And so, but the reality is, that Mexico and Canada have their own terms for this agreement, and so let's just call it New NAFTA.
Brian Hanson: So let me follow-up on that, and exactly the piece you mentioned, parliamentary consideration because it can be easier to negotiate trade deals than to get them through parliament.
Bruce Heyman: Right.
Brian Hanson: Because it can have real costs to society.
Bruce Heyman: Right.
Brian Hanson: What is the likelihood that this gets through in Canada?
Bruce Heyman: So right now, Justin Trudeau has a majority government, and so the reality is, that he can get this through. The question is, does he have enough time to get it through? And by some folks, it looks to be three to four weeks to actually do a piece of an agreement like this to get it through the whole parliamentary process. And I think they righted about four weeks left in parliament before leaving. And so could he extend parliament? I think maybe, but for the most part, I think this is going to be a scramble mode up in Canada right now to get this thing passed.
Brian Hanson: One of the things that's just recently happened, is there was an announcement that the US has reached a deal with Canada to remove the aluminum and steel tariffs that we've just been talking about. How significant is this? And what is its implication, Phil, in terms of your sense of how likely it is to get this deal through? Because not only does it have to go through in Canada, but it has to go through in the US, and it's been very controversial here with a lot of pushback, particularly by Democrats.
Phil Levy: Yeah, that's right. Well, I think it is quite significant. It was offensive, and bad economic policy, bad relations with Canada for all the reasons we talked about, and so getting that cleared away is important. It's important economically, there was retaliation that was in place that was very painful for certain parts of the United States. So it is simply good policy, good politics, everything to get this out of the way. It was ill-conceived and good riddance. It also served as one of multiple barriers to getting this deal passed in the United States. So I think had this not been cleared out of the way, there was no chance that you were getting the USMCA through Congress. With this gone, multiple challenges remain. The thing that was striking was how much bipartisan agreement you had on Capitol Hill that this was the thing that had to be addressed before anything moved forward on this. You were hearing this from people like Senate Finance Committee Chairman Grassley, Republican, you were hearing it from Democratic leaders. So they spoke, and evidently, after a period of months, the administration heard them, and responded. It seems, we still are learning some of the details of the deal, and that will be important. So what remains is, as an obstacle for getting this through, I think Democrats, in particular, are going to have some difficulties with this. And that comes at several levels. There are parts of the deal that they have publicly said they don't like. Some of the stuff dealing with pharmaceutical companies, biologics, for example.
Brian Hanson: And what’s the issue there?
Phil Levy: So these are new drug-like creations that pharmaceutical companies are putting forward, and it is the classic issue of the more protection you provide, in terms of how many years is it before someone could do a generic, for example-
Brian Hanson: So you get a patent protection, so that you have a monopoly for that period of time.
Phil Levy: You have a monopoly, so the longer that period is, the greater the returns to the drug companies, which they would argue, gives them additional incentive to pursue this costly research and development, which doesn't always work. But it also means, a longer period, presumably, with higher drug prices. And that is something that really concerns people, given the broader problems of healthcare costs. So that's still out there, I think the Democrats have talked about being a thing that needs to be addressed. Also, they have important issues with enforcement and with labor. They have called for a renegotiation of the agreement, the administration has to date said, that's off the table" And my understanding is that Canada and Mexico have also ... Canada and Mexico have also said we will not renegotiate. Putting this in the broader political context, I think there are two real difficulties for the Democrats in approving this. One is, they have been fairly vocally opposed to NAFTA for a couple of decades now, and have blamed it for a lot of social ills in the United States. I don't think that's correct in their analysis, but that's been behind a lot of criticism, also of important groups like organized labor. If you take an agreement that is very difficult to differentiate from NAFTA, and you support the passage of that, it's unlikely that it's going to actually change many of the things, but you no longer have it as an issue, and that's a problem. Of course, the other thing is, it would then, at least appear to have triumphed President Trump, which is something of an awkward thing to do as you try to unseat him in an election.
Brian Hanson: So Bruce, how do you see the US politics of this playing out? Similar to Phil, or do you see some differences?
Bruce Heyman: I think we're pretty close in seeing this agreement in the path ahead. I will tell you, let me just say a few things on the steel and aluminum tariffs. This was a tactical move, not well thought out, strategically flawed, and at the end of the day, this is a failure by the Trump administration, it's a white flag that they're waving. This is a retreat from these tariffs, they achieved nothing in the process that was good, and what was bad, we had retaliation on American farmers. Small businesses paid the price, consumers paid the price, and here we are now, agreeing to this cease fire, which I call it. And we just damaged the relationship quite a bit, but we have opened up these paths now to easing some of the concerns over the passage of USMCA. And those members of Congress in the senate that were opposed to even voting on this as long as the US was attacking Canada, in particular, but Canada and Mexico on steel and aluminum, that's freed up. It's also freed it up for the prime minister because the prime minister could no way pass this through his government as long as the steel and aluminum tariffs were in place. Politically, that would have been suicide for him, and he continued to send that message along the way. So I would say the other thing is, and we've seen a lot happen recently with China. I think the administration was fighting trade battles all around the world, and they started these fights with our allies. The real fight that should be taking place and the real issues that we really, really have as a country, is with China, who steal our intellectual property, who don't give us fair access to markets, who force our companies to co-partner with local partners, who change the rules of the game, as they see fit, and who we have a huge trade deficit with. That's where we needed to focus our time. The problem is, he was doing it by himself, alone, and he had already disenfranchised so many of our allies, who weren't going to come to the table, and he was finding it was costing a lot of political capital. So he retreats from auto tariffs for a bit, he's retreating from the steel and aluminum tariffs, he's trying to get USMCA passed to get some allies here in this larger, broader fight. And I think that that's a positive, I think though, getting this passed with the House still has both the political and real challenges. A last point, last point. Had USTR focused on looking at the calendar, and really been sophisticated in this, they could have passed this deal with Mexico and Canada in late 2017, early 2018. Speaker Ryan was begging for it publicly, they could have passed this deal. It would have gone through a Republican house and senate, it would not had an issue in Mexico or Canada, he would have had a major victory on a trade deal on his hands. He would not have gotten into any battles or fights over other trade aspects, like steel and aluminum with Canada and Mexico. And he would have been really muscled up to take on, I think, China in a more robust way. Right now, they're trying to cobble this together and get this sold. And look, I understand conversations went well recently with Democratic leadership, but still work to do, and he could have had this as a victory and lost that opportunity.
Phil Levy: I agree completely with Bruce on the lost opportunity. That that was, if you looked at the negotiations, from the time the US in the fall of 2017, put forward a raft of very controversial proposals, until mid to late summer of 2018, there was a lot of staring at each other. It was not sort of steadily working. It was, when will you come around to our radical approach? At which the US ultimately backed away from, for the most part. So that was wasted time and it may prove very costly. Bruce spoke earlier about the timing challenges in Canada, how they have parliamentary elections, there are de facto timing challenges here in the United States, that there seems to be a bit of a political consensus that if you don't get this deal passed by the summer, more or less, you are getting into tricky territory. It's not impossible, what we saw with the TPP, what's the difficulty if you let this slip into, say a general election campaign. And it takes a while to do this, too. You need to get this through a House committee, House floor, Senate committee, Senate floor, it's not done overnight. Congress, even under the legislation trade promotion authority, they have 90 legislative days to do this. Well, that only counts when you're in session. They often adjourn for a good part of the summer. So time is running very short, and they are up against it. The other point that I wanted to make was to come back to something that Bruce had said earlier about how the Canadians are always on our side, with which I agree. And what was notable was, even in the midst of all this fighting, we talk about sort of the challenge for dealing with China, it was the Canadians who were right at the front of this battle. One of the most sensitive part of this is how the US is dealing with the Chinese telecoms company Huawei, it was at the US request that the Canadians arrested the Chinese chief financial officer of that company, and it was the Canadians who paid a price for it, in terms of retaliation from China. So even in this midst of this fight, Canada's been maintaining that role as a friend.
Bruce Heyman: And the prime minister called the president this last week and said to him, we're taking incoming for you. Effectively, to use the term, we're taking a bullet for you, Mr. President, and we need your back. We need our back. We need you to cover our back. And the president, I think, team have kind of let the guard down a little bit, and let other nations take pokes at China -- I'd say pokes at Canada when they shouldn't. And so I think these are important messages, and maybe they're getting digested in the White House now.
Brian Hanson: And I just want to unpack that because some of the things I understand have happened is, Canadian businessmen in China have been arrested, presumably in retaliation. So this is creating a great deal of tension and challenge, I would think, for a leader.
Bruce Heyman: Oh, they're arresting Canadians, they're charging them with pretty egregious potential crimes and penalties. And as people have told me that if you get charged by the government in China, they've a 99.9 percent success rate in conviction, because guess what? They control the whole darn thing, and that means, these Canadians are on a pretty bad path right now, and the Chinese are quite upset. They've now focused on canola, they're focusing now potentially on pork, and other things, which are big, big suppliers of product to China, and could affect the prime minister, politically, and effect the country, economically.
Brian Hanson: So what would be the play for the United States to support Canada, at a time like this, facing those kinds of challenges? What would the US, what could the US do that would be helpful?
Phil Levy: Well, for a start, you could have stuck to the original position, which is, that this was a judicial matter and not a matter of politics, but the US stepped away from that, thanks to President Trump, pretty quickly, which left the Canadians even more exposed. Do you have other ideas about how you get out of this one?
Bruce Heyman: No, your point is spot on. When I was the ambassador, we had a parallel situation, where there was a Chinese national, which the United States had asked Canada to arrest and extradite. His name was Su Bin. He was stealing military secrets, and while the Chinese desperately wanted Su Bin back in China, there was no way that they were going to start taking the fight to the Canadians, and start poking at them economically, in the way they're doing today. I think this is a larger issue, maybe a separate podcast, but it is when the president acts on this unilateral approach, as opposed to this multilateral approach, and he basically took the fight to Canada over the last two years. He sent an implied message to a lot of other countries around the world of you can take a shot at Canada, too. So when Canada and the Canadians stepped forward on those values that we used to stand on the stage together, and stood up for women's rights against Saudi Arabia, and the Saudi Arabian government came back and started doing retribution to Canada, the US was like, hey, this is all your fight. Like that never would have happened. So now we have Saudi Arabia, now we have China, and we have this message. I think that the message has to be stronger from the President of the United States, and it has to basically say, Canada is our ally. It's our best friend. Don't anybody touch Canada or do anything to them, or you're going to suffer the consequences from the United States of America. And you have to say it and believe it, and walk the talk and do it, which is what's happened historically, whether it was our NATO allies, or whether it's our nextdoor neighbors, here in the North American hemisphere. But by stepping away and being an isolationist, we've left our allies, in general, exposed to these kinds of treatments. Canada, in particular, especially under this China situation. So it's much more complicated than just is everything okay, taking steel and aluminum tariffs off? For whatever reason, the administration is finding these platforms to go against our allies. At a council recently, Secretary of State Pompeo stands up in the Arctic Council and basically goes at Canada and says the Northwest Passage is international waters. And that was not the place for it historically, that was the place of collaboration. One place in the world, where even we were working with Russia during the last administration, even when things were tough, and we were sitting here trying to find pathways to working together, and it kind of politicized even the Arctic Council now, at Canada's expense.
Brian Hanson: So as we close, I want to take us from the big discussion we've been having about the overall relationship, and bring it back to the immediate issue of the USMCA, the renegotiated trade agreement between the US, Canada, and Mexico. You've both talked about potential challenges in getting it passed in either Canada or the United States. My question is simply, what happens if it doesn't get passed?
Phil Levy: I think there's two scenarios. If it doesn't get passed and we go along with the status quo in the original NAFTA, and we start acting, once again, like the Canadians are our allies, and we're going to work cooperatively, then we're fine. It really doesn't make that big a deal, it doesn't make that big a difference. If, on the other hand, the president carries out the threats that he's been issuing pretty much since he took office and says, well, if I don't get my new USMCA, then I'm killing NAFTA, then we got a real problem. And in fact, I'll go one further, even if you do get the USMCA, and the president continues to follow his protectionist impulses, however, and says, well, I want to slap some protection on because this will supersede USMCA, he didn't make that threat against Canada. He did against Mexico on some things, then we'll still have problems. So it's really how the administration chooses to conduct itself, and do they recognize Canada as the alley and partner that Canada really is.
Bruce Heyman: I think you hit it spot on. The basis, though, of a relationship is based on trust. And if you break the trust, you have to work really hard to get it back. And trust is built over a very long period of time, but can be lost quickly. And whether it's in a personal relationship, a business relationship, or between two countries, and I think the trust has been broken here between the US and Canada, and we're going to have to now start thinking about repair mode. And I'm hopeful, we do it quickly and start focusing on it. But if the president feels like he can get in agreements and then step on his agreements and say, yeah, I know that was an agreement, but that was yesterday. And I'm creating some new overriding set of circumstances, I think that would put us into even new low territory with our relationship with all of our allies, and Canada in particular.
Brian Hanson: So I want to thank both of you for really a fascinating conversation. Former US Ambassador to Canada Bruce Heyman and author of the new book The Art of Diplomacy Strengthening the US-Canada Relationship in Times of Uncertainty. Thanks so much for being on Deep Dish.
Bruce Heyman: Pleasure.
Brian Hanson: And Phil Levy of the Chicago Council on Global Affairs, and the author of the new book Rebuilding a Bipartisan Consensus on Trade Policy, thank you for being here, too.
Phil Levy: Thank you.
Brian Hanson: And thank you for tuning into this episode of Deep Dish. If you liked the show, do me a favor and tap the subscribe button on your podcast app, so that you can get each and every new episode as it comes out. You can find our show under Deep Dish on Global Affairs wherever you listen to podcasts, and if you think you know someone who would enjoy today's episode, please take a moment to tap the share button, and send it to them, as well. I'd like to invite you to join our Facebook Group, Deep Dish on Global Affairs, where you can ask our guests follow-up questions about anything you heard today, or submit questions for an upcoming show. That's Deep Dish on Global Affairs on Facebook. As a reminder, the opinions you heard today belong to the people who expressed them, and not the Chicago Council of Global Affairs. Our Audio Engineer for today's episode is Andy Czarnecki. I'm Brian Hanson and we'll be back soon with another slice of Deep Dish.