20-05-2025
Behold, Donald Trump's failed American trade gambit
Andrei Sulzenko was a principal negotiator of the Canada-U.S. Free Trade Agreement.
The United States has for many years preferred bilateral trade agreements to those involving multiple partners. The main reason is that, as the dominant economic player, the U.S. has greater leverage one-on-one than in a larger group such as the almost 200 countries involved in the agreements under the World Trade Organization.
Another reason for this approach is that a set of U.S.-centric bilateral agreements provides the country with preferential access to its trading partners without granting them better access to each other. The ensuing hub-and-spoke system also serves to make the U.S. the investment location of choice to serve all those markets. These kinds of considerations weighed heavily in Canada's decision in the early 1990s to seek to enlarge the then-proposed U.S.-Mexico trade negotiations.
The Trump administration has inadvertently turned the traditional approach to bilateralism on its head and, in doing so, revealed a fatal flaw.
With the injection of new 'reciprocal' tariffs into the process, the system will not favour the U.S. On the contrary, if bilateral negotiating partners maintain relatively open access to each other's markets, the U.S. will face worse access to those markets than it does now compared with its competitors. For example, American-made cars would be subject to a substantial tariff when entering the European Union, while British-made cars would potentially have duty-free access under a new trade agreement.
So far, the Trump administration's 'deals' with Britain and China seem to have a common element: a 10-per-cent baseline tariff. If that is the template for other bilateral negotiations, as suggested recently by the U.S. ambassador to Canada, the potential outcome would be an international trading system in which the U.S. and its bilateral partners charge each other a 10-per-cent reciprocal tariff, while those same countries could maintain lower tariffs vis-à-vis each other.
Trumpian bilateralism would severely undermine the putative objective of reducing the U.S. trade deficit by damaging export competitiveness. A 10-per-cent tariff would also fail to support another stated American objective of inducing manufacturing investment in the U.S. In any given year, exchange rates fluctuate that percentage or more as economies adjust to changing macroeconomic conditions, and businesses are not likely to make multimillion-dollar investments in response to a tariff regime that may not outlast the Trump presidency.
For the balance of Mr. Trump's term, then, there is the prospect of two parallel trading systems: the U.S.'s series of protectionist bilateral deals, and the rest of the world's continuation of more open bilateral and multilateral arrangements. This would mean American abrogation of its pledge for tariffs 'bound' at current low rates under the WTO and its subsequent isolation from the rules-based trading system. Meanwhile, everyone else, including China, would continue with the WTO, potentially reforming it after years of American obstructionism.
The implications of this scenario for Canada are significant. There are two distinctly different possibilities.
The first is a modestly renegotiated Canada-U.S.-Mexico Agreement anchored by tariff-free trade. This outcome would give Canada and Mexico preferential access to the U.S. market relative to other countries facing a 10-per-cent tariff through their bilateral agreements. At the same time, both Canada and Mexico would maintain free trade agreements with other countries, thereby undercutting U.S. preferential access to Canadian and Mexican markets.
The second is the opposite: a break-up of CUSMA and reversion to bilateralism, potentially facing a 10-per-cent reciprocal baseline tariff from the U.S. This outcome would put a stop to any pretense of a special relationship, as Canada would be treated like every other trading partner, facing equally impaired access to the U.S. market. The somewhat mitigating offset, of course, would be better access to the rest of the world compared with the U.S. and an impetus to promote trade diversification more than 50 years after former prime minister Pierre Trudeau's foreign affairs minister, Mitchell Sharp, mused about the 'third option.'
At this time it is difficult to assess which scenario is more likely, since the Trump administration is engaged in stand-up comedy rather than strategic multidimensional chess. Canada should be preparing to engage on either track, informed by how the U.S.'s bilateral priorities with other countries play out.
