Home The Washington Diplomat October 2017 Envoy Says U.S. Remains Canada’s ‘Best Friend,’ Despite Drama over NAFTA

Envoy Says U.S. Remains Canada’s ‘Best Friend,’ Despite Drama over NAFTA

Envoy Says U.S. Remains Canada’s ‘Best Friend,’ Despite Drama over NAFTA

a4.canada.macnaughton.envoy.storyCanadian Ambassador David MacNaughton calls the U.S. his country’s “best friend” and “closest ally.” But he warns that friendship is a two-way street — and should not be taken for granted.

Canadians could be forgiven for feeling a bit underappreciated these days. President Trump hasn’t exactly been friendly to some of America’s most stalwart allies, shunning countries like Germany and Australia while cozying up to Saudi Arabia and Russia. Trump built a winning campaign around an inward “America first” agenda that put many foreign governments on high alert, including Canada.

So Ottawa has launched a full-court charm offensive to remind Americans how much they need their neighbor to the north, which is bound to them by geography, values, security and trade — a lot of it.

Canada and the U.S. not only share the longest border between any two countries in the world, they are also inextricably linked by the huge volume of goods and services that flow across that border each day. In 2016, bilateral trade reached $635 billion. That amounts to a staggering $2 billion in goods and services traded each day. Canada, in fact, is America’s largest-single export market, buying more U.S. goods than China, Japan and the U.K. combined.

But closeness can breed complacency, MacNaughton said, “like when you’ve got a really good friend, or you’re in a marriage, and if you take it for granted, you don’t end up with a good friend and you don’t end up with a marriage. You actually have to work at these things. And so I think we needed to really begin the process of systematically re-engaging with all elements of U.S. society,” the ambassador told The Diplomat during a recent interview at his office in the Canadian Embassy overlooking Capitol Hill.

“So whether it was in Congress, whether it was at the state level, whether it was even at the municipal level, we needed to reinforce with the decision-makers in both the public sector and the private sector the importance of the relationship between Canada and the United States — the fact that we have $2 billion a day in trade, that there are 400,000 people a day that go back and forth across the border and, most importantly, that there are 9 million jobs in the United States that are dependent on trade and investment from Canada. We deliberately decided that we would do that and that’s what we’ve been doing ever since.”

a4.canada.automotive.storyTaking Aim at NAFTA

That decision was spurred by President Trump’s threats to erect protectionist barriers and tear down what he calls the “worst trade deal” in history: NAFTA, the landmark 1994 agreement between the U.S., Canada and Mexico that integrated the North American market, removing tariffs on a range of products from cars to corn to clothing.

Since NAFTA’s enactment, regional trade and cross-border investment among the three countries has tripled to over $1 trillion. The pact serves as a bedrock of U.S.-Canada relations and helped modernize Mexico’s economy. It created a highly interconnected supply chain that made North America a more competitive bloc globally. At the same time, it accelerated a transformation that was already taking place in the U.S. manufacturing sector, which has been buffeted by the forces of globalization and automation. While NAFTA did not precipitate the enormous American job losses that some economists feared, like any trade deal, it produced winners and losers. U.S. farmers benefited from increased market access to Canada and Mexico, but many automotive jobs shifted to cheaper factories in Mexico.

Blue-collar resentment over free trade helped propel Trump to the White House, where he promptly withdrew from the Trans-Pacific Partnership (TPP), a sweeping trade pact with 11 Pacific-Rim nations, before setting his sights on NAFTA.

Despite repeatedly vowing to withdraw from NAFTA, Trump announced in April that he would renegotiate and modernize the accord (also see “NAFTA 2.0: Prodded by Trump, U.S., Canada and Mexico Prepare to Renegotiate Trade Deal” in the August 2017 issue of The Diplomat).

Most experts agree that NAFTA could use updating. It was forged before the rise of the internet, so it doesn’t address the growing digital economy, and many provisions on labor, the environment and intellectual property rights are outdated.

Talks began in August, with a third round taking place in Ottawa last month despite Trump’s ongoing threats to terminate the deal. Many experts are skeptical that the U.S. would ultimately walk away, warning that such a move would cause massive economic disruptions, hurt American exporters and raises prices for consumers on everything from berries to trucks.

Potential areas of dispute include Washington’s demands to remove “non-tariff” barriers to U.S. agricultural exports such as price undercutting — a direct aim at Canada’s dairy industry — raise U.S.-made content in NAFTA products and scrap a dispute settlement mechanism that has often ruled in Canada’s favor.

Marathon, Not a Sprint

MacNaughton says Canada — which relies on the U.S. for 70 percent of its trade — is open to renegotiating all aspects of the deal. “Anything where there’s a good idea that’s going to benefit all parties, then we’re happy to do it,” he told us.

But he warns that talks won’t be easy and Canada won’t rush into a bad deal. He also says NAFTA is part of a much larger backlash against globalization and capitalism that will be around for the foreseeable future.

“This is not going to be a sprint; this is a marathon, because some of this protectionist, nationalist sentiment … is going to go on for some time — in part because of the remarkable transformation in our economy.”

a4.canada.flag.montreal.quebec.storyTo that end, MacNaughton said he sympathizes with the frustrations and fears that deals like NAFTA have engendered. He also readily admits that trade liberalization, technology and globalization will fundamentally reshape how we work and live.

“The reality is that every aspect of our lives is being changed by technology, and that is going to lead to people feeling uncertain. There are going to be some adjustments to people’s jobs, and it’s always easier to point the finger at someone else rather than try to figure out how you’re going to solve the problem together.”

He also said this is not a new phenomenon. A veteran political strategist, MacNaughton recalled the fierce battle over the U.S.-Canada free trade agreement, NAFTA’s predecessor, in the run-up to Canada’s 1988 election.

“And what the critics said was that we were going to lose thousands of manufacturing jobs, because the manufacturing sector in Canada was set up to serve the Canadian market behind high-tariff walls,” MacNaughton explained. “So there was a great debate. And there were places like KitchenerWaterloo [in southern Ontario] that had thousands of jobs dependent on light manufacturing, and they said those jobs were going to go. And you know what? They were right. They left. But in their place, there were manufacturing jobs that ended up being created, where people became North American competitive and then globally competitive…. And, in fact, in KitchenerWaterloo, it has one of the lowest unemployment rates in the whole country. It reinvented itself as a technology hub and high-end manufacturing.”

The ambassador noted that he grew up in Hamilton, Ontario, a hub of steel mills. “There were 17,000 jobs in the steel industry. Fewer than 1,000 are there now. So there’s no question that it has had an impact, and we have to do a better job of both dealing with those who through no fault of their own end up losing their jobs, but also in the future, when this is going to happen more and more, we have to make sure we’re investing in education and training so that our young people are resilient,” he said. “Anybody who thinks the job that they have when they get out of university is going to be the last job for the rest of their life, those days are gone.”

Canada’s ‘War Room’

It’s a tough, almost undiplomatic message, but MacNaughton is uniquely suited to convey it.

The ambassador, who presented his credentials in March 2016, has years of public affairs experience under his belt. In the 1980s, he transformed Canada’s public affairs industry by building an organization that combined government relations, public opinion research and public relations. After selling his business in 1989, he became president of Canada’s largest government and public relations firm and subsequently North American president of Hill+Knowlton Strategies, a global PR firm. His public sector experience includes serving as advisor to the minister at the Departments of Transport, Industry and Foreign Affairs, as well as principal secretary to the premier of Ontario. He also served as chairman of StrategyCorp Inc. from 2005 to his appointment in 2016.

Since coming to Washington, MacNaughton has been dispatched to meet with officials throughout the U.S., including California, Colorado, Michigan, Georgia, Florida, Massachusetts, New York, Nevada and Washington state.

a4.canada.nieto.trudeau.obama.storyMacNaughton’s PR savvy is key to Canadian Prime Minister Justin Trudeau’s larger effort to woo Americans and prevent NAFTA from collapsing. That’s because no matter how friendly relations are between Canada and the U.S., Trump’s threats to “rip up” NAFTA are fighting words. So Trudeau has assembled a “war room” of sorts, according to reports in The New York Times, Toronto Sun and elsewhere. This unit within the prime minister’s office consists of Brian Clow, a veteran political operative; Foreign Affairs Minister Chrystia Freeland, a former journalist; MacNaughton; and others.

“The Canada-U.S. unit resembles a campaign war room in several ways, though its members hate the term. It gathers data on key constituencies — for instance, it collects American politicians’ opinions on issues and plugs them into a database. It conducts outreach. It coordinates rapid response,” wrote the Canadian Press’s Alexander Panetta in the Aug. 20 article “Inside Canada’s squad to save NAFTA from being blown up by Donald Trump.”

“All the relationship-building of recent months where ministers crisscrossed the U.S. for hundreds of meetings would suddenly be deployed in the event of a crisis,” Panetta explained. “For example: Should Trump try ending NAFTA, instructions might quickly go out to Canadian minister X to call U.S. state governor Y to lobby friendly Washington official Z.”

That strategy was deployed when New York Gov. Andrew Cuomo introduced a “buy American” provision for state contracts in his budget. Officials in neighboring Ontario, which New York relies on heavily for trade, quietly warned that they would reciprocate and the measure was eventually watered down.

While MacNaughton would not call this unit a “war room,” he admits that Trudeau has launched a concerted effort to reach out to mayors, governors and other grassroots officials throughout the U.S. He recalled attending a retreat hosted by Trudeau last summer, before the U.S. election, where the prime minister decided to focus on areas where the U.S. and Canada agree, instead of “zeroing in on the areas where we didn’t.”

“You could spend a whole year talking about all the things that we agree on and not ever get to the things that we don’t,” MacNaughton said. “So we identified what were the areas where we could have common ground and deliberately began to have discussions with the newly elected government and some of the transition team.”

Today, he said Canada has “developed really good relationships with this administration,” noting that the “prime minister gets along with the president” and has met with Vice President Mike Pence. He said that Secretary of State Rex Tillerson and Commerce Secretary Wilbur Ross also get along well with Minister Freeland. “Our finance minister went to Secretary [of the Treasury Steve] Mnuchin’s wedding. Gen. [John] Kelly and our public safety minister talk frequently,” he said. “There are areas of understandable tension, but 95 percent of the relationship works really well.”

a4.canada.trudeau.trump.storyBut at the moment, the White House — besieged by Russia investigations, infighting, inexperience and an impetuous president — is not working very well.

According to Max Fisher of The New York Times, Trudeau’s “doughnut” strategy is to work around the dysfunction in the White House by going straight to America’s mayors, governors, members of Congress and the business community.

MacNaughton did not comment on whether Trudeau was avoiding the chaos consuming Trump, but he did say that he sees more getting done at the gubernatorial level, where Democrats and Republicans are working together to tackle issues such as climate change.

At the same time, “There’s always partisan tensions. That’s politics. It happens in Canada too,” MacNaughton said. “I think that with my background in terms of communications and politics, I do understand the pressures that are on politicians, and therefore if you’re going to try … to advocate for something, the most important thing you can actually do is to put yourself in their shoes.”

When dealing with clients in his former life, MacNaughton said he had three rules: “One is get to know people on a non-crisis basis so when there’s a crisis, you developed a bit of trust. Second of all, frame your advocacy in a way which responds to what their agenda is, not to what your agenda is. And third thing is find third-parties who are going to advocate on behalf of the cause that you’re representing.

“So all of our cabinet ministers have tried to get to know their [U.S.] counterparts, not in a crisis, but get to know them personally. Secondly, we tried to frame our arguments in terms of advocacy in ways that are understood by Americans, i.e. it’s in your interests, not only our interests. And thirdly, we’ve been able to engage third-party Americans to say, ‘Yes, this is important.’” MacNaughton told us.

“I’m optimistic that we will continue to have a robust trading relationship with the United States of America because I think it’s in both our interests to do so,” he added. “And that’s what we’re working toward, but a negotiation is a negotiation. A negotiation involves give and take. It doesn’t involve take, take, take.”

a4.canada.glance.storyGive and Take

MacNaughton said that any changes to NAFTA have to be mutually beneficial, hinting that the U.S. wants its cake and eat it too by prying open Canada’s market while closing its own.

For example, he cited wide gaps in government procurement between the two countries. “Something like almost 10 percent of [Canadian] government contracts go to Americans. We get [point] .15 percent of the contracts in the United States and the United States is looking at tightening those up,” he said, noting that “buy America” policies will lead Canadian provinces to ask, “Why would we allow American companies to bid on these projects when they’re discriminating against our companies?”

MacNaughton also points out that unlike Mexico, the U.S. has a negligible trade deficit with Canada (roughly $12 billion). In fact, when it comes to manufactured goods that don’t include energy, “the U.S. had a trade surplus with Canada of $34 billion. So the reality is that our trade with the United States is not only balanced,” but in some areas favors the U.S.

The White House counters that Ottawa tips the scales in other ways, arguing that Canada unfairly subsidizes its dairy industry and the sale of softwood lumber to the U.S., two longstanding irritants in the bilateral relationship that predate NAFTA. In April, Trump slapped tariffs on Canadian softwood lumber companies because forest lands tend to be government-owned and the U.S. accuses Canadian provinces of levying reduced royalty rates to cut down the trees. Likewise, the administration says that Canada’s supply-management system imposes high tariffs and quotas on dairy imports to keep domestic prices high and protect the country’s powerful farming industry.

For Canadians, Washington’s talk of subsidies is a bit like the pot calling the kettle black. MacNaughton argues that the U.S. subsidizes many of its industries (including dairy) in various ways. He said Canada is prepared to have an “honest” conversation about “what constitutes a subsidy, and then we can set up an independent body to police that.”

a4.canada.toronto.cityscape.storyBut he said U.S. industry shot down that idea. “Because that’s actually not what the issue is,” the ambassador contends. “The issue is that U.S. industry wants managed trade. They want to limit Canada’s exports to the United States to a defined market share. It doesn’t have anything to do with subsidies — never has. What we’ve said is we’re prepared to have that discussion. And we’re prepared to negotiate a market share which is lower than what our traditional market share has been, and we put that on the table.”

What Canada is pushing for, however, is the right to export more during a “hot market,” such as a housing boom, when American companies can’t keep up with increased demand.

On that note, MacNaughton lamented that recent tariffs imposed on Canadian softwood lumber haven’t necessarily resulted in more business for American companies, but rather benefited foreign countries.

“Right now, imports of lumber to the United States from Germany have increased 10-fold since the tariffs went in, and they’ve tripled from Russia, so I guess our question is, ‘Why do you actually want to reward the Russians rather than your best friend and your best ally?’”

He also noted that this is the fifth lumber dispute since 1982, and that “every time there’s been an independent investigation, it’s ruled in Canada’s favor. We have no doubt that if it happened again, it would rule in Canada’s favor.”

Yet that’s precisely what has Trump up in arms. The administration wants to get rid of NAFTA’s Chapter 19 dispute settlement mechanism, which it says erodes U.S. sovereignty. Normally, U.S. trade courts can levy anti-dumping taxes or other duties on foreign companies found to be selling products at ultra-low or subsidized prices. But NAFTA countries can appeal such decisions through the Chapter 19 mechanism, which is made up of trade experts from both disputing countries. It was a key element in NAFTA’s creation, but the fact that Canada has disproportionately emerged victorious in these cases has angered some U.S. businesses.

MacNaughton says “you need to have some kind of way to resolve disputes in trade agreements.”

“We’re happy to have the United States agree to resolve disputes in Canadian courts but the United States probably wouldn’t want that. And neither would we want all disputes resolved in U.S. courts. So we’re prepared to see the dispute resolution mechanism improve, modernize, whatever, but the notion of having a trade agreement that doesn’t have a way to resolve disputes doesn’t make any sense.”

a4.canada.berries.storyWhether the U.S. and Canada can come to some consensus on thorny issues such as tariffs and subsidies in such a short timeframe is another matter. Negotiators want to wrap up the current NAFTA talks by the end of the year to avoid clashing with 2018 elections in the U.S. and Mexico. Congress would also still need to approve any modified pact, another huge hurdle.

That comes on top of a pressing to-do list for Capitol Hill and the White House that includes a December deadline to pass a budget to keep the government funded, raise the debt ceiling and come up with a relief package to help victims of Hurricanes Harvey, Irma and Maria — not to mention Trump’s ambitious tax overhaul and potentially reviving the GOP push to repeal Obamacare.

At any point, Trump could also call it quits on NAFTA. Legally, he’s only obligated to give Canada and Mexico six months’ notice before exiting the trade agreement.

Unruffled, MacNaughton took a sanguine view of the political brawls sure to take place this fall down the road from his embassy on Pennsylvania Avenue.

“You’ll be shocked by this. There may be some drama around it [NAFTA],” he said with a wry smile. “It’s not any more complicated than health care or tax reform or debt ceilings. It’s all pretty simple stuff. So yeah, I’m sure there’s going to be some drama.”

When asked if Canada has a Plan B if the NAFTA talks fail, MacNaughton grew more pensive. “We have thought about all eventualities. It’d be irresponsible not to,” he replied. “But our focus is on achieving what the vice president of the United States said in Rhode Island in June, which is that the goal of the NAFTA modernization should create a win-win-win for all three countries. And I think he’s right and I think that’s exactly what we’re trying to do.”

Forging Its Own Path

In the meantime, Canada is grappling with other problems at home, some indirectly related to Trump’s election.

The country has seen an influx of thousands of asylum-seekers pour across its border this year, many fearing deportation under Trump’s immigration crackdown. Montreal’s Olympic stadium was even converted into a temporary shelter. Most sneak into Canada at unguarded locations to avoid official checkpoints and skirt around laws that force migrants to apply for asylum in the country where they arrived.

MacNaughton said the government is “working with the United States to try to stem the flow” of would-be asylum-seekers and discourage them from the idea that coming to Canada is some kind of “get-out-of-jail-free card.”

a4.canada.flags.storyBut the recent influx is “separate” from Canada’s longstanding tradition of accepting refugees, a policy embraced by Trudeau, who famously tweeted after Trump’s election: “To those fleeing persecution, terror & war, Canadians will welcome you, regardless of your faith. Diversity is our strength.”

In stark contrast to Trump’s travel ban on several Muslim-majority nations, Canada had resettled 40,000 Syrian refugees as of January this year.

MacNaughton said Canada’s embrace of refugees — and diversity in general — hasn’t inspired the kind of populist backlash seen in Europe. Because many Syrian refugees are sponsored by local church or community groups, they have “a vested interest and a real desire to get those people integrated into the society.”

The ambassador’s own sister was part of a church effort to sponsor a Syrian family, helping the family learn English, find work and even raising tens of thousands of dollars for rent. Such programs are part of Canada’s extensive outreach to ensure that refugees assimilate but still retain their distinct cultures. “When you have that, then the family actually feels that they’re part of society,” MacNaughton said, noting that previous waves of immigrants, such as Vietnamese taken in after the Vietnam War, are stepping up to help Syrian and other refugees “because they knew what it was like.”

Whether it’s on refugees or climate change, it’s clear that Trudeau’s Liberal Party and Trump don’t see eye to eye on many global issues.

In a June speech, Freeland, Canada’s foreign minister, hinted that as the U.S. retreats from the “mantle of global leadership,” Canada must “set our own clear and sovereign course.”

MacNaughton dismissed the notion that Canada is stepping in to fill a void left behind by the U.S. “I think it was more of an assurance to Canadians that we believe in trade, we believe in working with partners around the globe on shared values, and that we’re resisting turning inward,” he said. “I think the minister also acknowledged the United States’s leadership over the years and the fact that we continue to be your closest partner on defense and security.”

For example, he said the close contact between U.S. and Canadian law enforcement has helped thwart terrorist attacks, citing an incident last year in which authorities identified and arrested an Ontario man mere hours after the FBI tipped off the Canadian police about the suspect’s plot to blow up a train station. “And that’s testimony to the fantastic cooperation that exists between our two countries. And that’s information sharing. What you’ve seen in some of the incidents in Europe is there hasn’t been that kind of information sharing,” MacNaughton said.

Despite concerns that America is turning inward, the ambassador said he’s heartened by such day-to-day cooperation between Canadians and Americans, whether it’s between police or politicians, and also by what he’s witnessed touring the country.

“I’ve traveled extensively throughout the United States,” he said, “and this is a remarkable country of phenomenal educational institutions, great entrepreneurs, innovation and generosity, and remains so. I think if there’s anything that I would say is concerning is some of the divisions that exist within America at the present moment and the lack of consensus-building and bipartisanship that exists here in Washington. You don’t see it as much outside [the Beltway].”

He added: “I hope that people find a way to put some of the partisan differences behind them and start working more collaboratively because I’ve been here when that’s the way it worked.”

MacNaughton said he also hopes Americans continue to be mindful that problems outside their borders invariably touch them as well.

“The only thing I’d say to Americans is when you look around the world and you see all the challenges that we face, whether it’d be in North Korea or Iran or Russia or terrorism, working more closely with your friends is a good idea. And also finding a way to bring Americans together is a good idea because we’ve got enough people that want to harm us from elsewhere and we don’t need to be working at cross-purposes between our countries.”

About the Author

Anna Gawel (@diplomatnews) is managing editor of The Washington Diplomat.