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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