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### Viewing cable 08OTTAWA378,

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08OTTAWA378 | 2008-03-14 15:40 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | 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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