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AED in Canada — Tariff spat resolved, paving the way for potential end to NAFTA 2.0 dilemma

Late on a Friday afternoon in May, Prime Minister Trudeau and his most senior cabinet colleagues stood in a Hamilton lunchroom waiting to tell a roomful of steelworkers the best news they would hear in 2019. After a week of false starts, Canada and the U.S. had returned to the table to put the polish on an agreement to resolve a tariff dispute that started nearly a year before. The steel producers and affected industries, including construction equipment dealers, made it known that the lifting of Section 232 tariffs by the U.S. and retaliatory tariffs by Canada would have a positive effect on businesses across North America. Mexico would also benefit from the lifting of steel and aluminum tariffs.

Pressure to ratify the NAFTA 2.0 deal is a constant fact of life for decision makers in Ottawa, Washington, D.C., and Mexico City. Last fall, an early announcement by the “New Dem” caucus in the U.S. House of Representatives put diplomats and other branches of government on notice. They control the House and would not accept a deal unless Mexico improved its labor laws. In a corresponding move, the Republican-controlled Senate sent a strong message to President Trump that the only way the deal could progress was if the tariffs between Canada and the U.S. were removed.

With President Trump looking for another economic victory and Prime Minister Trudeau desperate to solidify pro-business credentials ahead of the fall election, both leaders are putting as much muscle as possible into getting a deal. We anticipate that with the New Dems having carved out their position, Canadian and American diplomats will be working hard in Mexico City to encourage the labor changes necessary to give them what they want. If that shoe drops, the pressure will be on them to ratify the deal or risk being offside with working class Americans. That should not be a risk they’re willing to take as the Democratic primary race heats up.

Canadian lawmakers have been clear since the agreement last fall that ratification would not proceed here until tariffs were lifted. The mood in Ottawa has been that unless the U.S. made clear steps toward ratification, the House of Commons would not proceed with its own ratification bill. The government has only a few weeks left to get things done before the long summer campaign season begins. While a handful of legislative commitments can be marketed to Canadian voters, the sentiment that they haven’t done much to support business still plagues the Trudeau camp. A win on NAFTA 2.0 would seriously benefit their flagging chances of reelection, and a rapid resolution has to be a key part of their strategy.
You may ask what it would take to get a deal done.

With limited legislative runway and members of the Canadian Senate making it increasingly difficult to get bills passed, there would have to be weeks of legislative sitting and committee meetings added to the calendar. A likely condition of Mexico also benefiting from the elimination of tariffs would be its willingness to quickly change labor laws in a way that satisfies U.S. Congressional Democrats. If that happens in the near future, it is likely that we will see both Canada and the U.S. race to ratify the deal, with a much higher political cost for the Liberals in Canada if a deal is not reached.

The floodgates may not be all the way open, but plans are shaping up and parties are testing messages for why MPs and senators will stay in Ottawa into July. The question now is whether stars will align quickly enough for the Liberals to take any additional trade momentum into the election. Opposition parties will have to make the calculus of whether it is more advantageous to keep Justin Trudeau locked up in debates in Ottawa or have him out on the campaign trail where he is highly effective. The Senate of Canada remains an independent variable that operates entirely differently than it did four years ago, let alone the last time the first NAFTA deal was signed.

With steel and aluminum tariffs lifted, OEMs and dealers will no doubt benefit from an improved ability to deliver goods to their customers at a better price. While the NAFTA 2.0 agreement may seem secondary to that development, a finalized agreement would create economic tailwinds due to increased certainty. That may prove to be even more important for businesses in Canada and the U.S., especially as they seek to make historic investments in infrastructure.

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