CANADA ECONOMICS

NAFTA

The Globe and Mail. 2 Jan 2018. Mexico steels itself for NAFTA outcome. Businesses worry the U.S. will pull out of the deal, but hope Canadian ties will flourish, while the elite’s goal is to enlist Ottawa to hold the line on Washington. NAFTA: Ottawa keeps option of bilateral U.S. deal open
ADRIAN MORROW, CHIHUAHUA, MEXICO

Everything from clips that are super tiny to stringers, skeins, parts that go on the cockpit. Just imagine it’s a big Lego. You have a lot of little parts that get assembled together.

RENE ESPINOSA, PLANT MANAGER AT METAL FINISHING

There’s nothing potentially threatening the business relationships between these two great countries, Canada and Mexico.

 RENE FRIESEN, HEAD OF IZA DESIGN AND MANUFACTURING, WHICH HAS PLANTS IN MEXICO, THE UNITED STATES AND CANADA

Inside Metal Finishing Co. Inc.’s cavernous cinderblock plant, aluminum airplane components are dipped in vats of chemicals, covered with primer and painted. The coatings will protect them from corrosion and reduce electrical conductivity.

The company is headquartered in Kansas, and opened this outpost – in an industrial park amid the scrubland of northern Mexico – in 2011 to service parts suppliers south of the border. More than half of the 2,500 parts treated here every day are destined for use on Bombardier airplanes.

“Everything from clips that are super tiny to stringers, skeins, parts that go on the cockpit,” says Rene Espinosa, the slim, bearded plant manager, as he stands on the factory floor. “Just imagine it’s a big Lego. You have a lot of little parts that get assembled together.”

This is the North American free-trade agreement in action: A U.S. company with a plant in Mexico that finishes parts for a Canadian aerospace firm. Over the last 24 years, the pact has transformed Chihuahua, a sprawling city of 900,000 set in an arid valley between low-lying brown mountains, from a place best known for mining and cattle ranching to an industrial powerhouse.

And it’s emblematic of the relationship between NAFTA’s junior partners. At first, the deal was a marriage of convenience for Canada and Mexico, designed to provide better access to the colossal economy sandwiched between them. But the pact has created a trading relationship, worth an estimated $42-billion annually, that was all but non-existent before.

Now, the two countries find themselves allied in the battle to preserve a continental freetrade zone from U.S. President Donald Trump’s protectionist attack. Mexico’s business class evinces an anxiety about the U.S. pulling out of the deal, along with a hope that the country’s ties to Canada can flourish – and even become stronger. Mexico’s political elites, meanwhile, combine hope that the two countries will successfully hold the line on Washington at the NAFTA bargaining table with fear that Ottawa will throw them under the bus to save its own relationship with its largest trading partner.

Canada and Mexico have been in close contact behind the scenes as the negotiations unfold. Foreign Minister Chrystia Freeland speaks weekly with Mexican Economy Minister Ildefonso Guajardo, said sources familiar with the back-channel discussions, and she is also in regular touch with Foreign Minister Luis Videgaray. Mr. Videgaray’s chief of staff, Narciso Campos, meanwhile, speaks with his counterpart in Ms. Freeland’s office, Jeremy Broadhurst, and Brian Clow, the head of the NAFTA unit in the Prime Minister’s office.

Mr. Campos and Mr. Clow hunkered down over coffee at the hotel bar during the most recent Mexico City round of talks in November.

The relationship, however, is not all roses. While Mexico wants the two countries to work together no matter what, Canada has been careful to leave open the option of a bilateral deal with the United States, should the Trump administration decide it must punish Mexico, which it blames for luring manufacturing jobs away from the United States. During visits to Washington and Mexico City this fall, Prime Minister Justin Trudeau made no public commitment to stick with Mexico to the end.

“It was a missed opportunity and I was disappointed … That would have been the ideal opportunity for him to say that Canada is committed to this trilateral deal,” said Andres Rozental, a former Mexican deputy foreign minister, who paraphrases Mr. Trudeau’s father in arguing the two countries need to get closer “to get around the elephant that lies between us.”

Luz Maria de la Mora, a Mexico City-based business consultant who was on the original NAFTA negotiating team in the 1990s, said having a three-way deal allowed Canada and Mexico to integrate their economies rather than competing to do business with the United States.

“If we’d had two bilateral deals, the U.S. would be the hub and we would be the spokes and we would be losing investment and trade opportunities, competing for the U.S. market,” said Ms. de la Mora, sipping an Americano in a hip café two blocks from the Camino Real Polanco hotel, where trade negotiators were working on the NAFTA overhaul. “The way I see it, we created a trade relationship and an investment relationship where there was none.”

That relationship has certainly borne fruit in Chihuahua. Among the Canadian companies here are Bombardier, which manufactures airplane components in Mexico before shipping them to Mirabel, Que. for final assembly and Arnprior Aerospace, which makes black boxes for Boeing jets. A short drive from the low-slung city centre, industrial parks stretch in all directions, ringed by new big-box developments that would not look out of place in Mississauga.

From his office, in a tower on a hillside overlooking the city, Luis

Lara said the relationship between Mexico and Canada is even more important in the face of Trumpian nationalism. The

72-year-old entrepreneur has made his career running American Industries, a company that helps foreign businesses set up shop in Mexico. Canadian companies have often used his services, but he generally treated them as being functionally the same as their U.S. counterparts. When Mr. Trump rode into office, Mr. Lara realized all of that could change.

“For the first time in my life, I was knocking on the door of the Canadian embassy,” says Mr. Lara, a compact, bespectacled man with thinning grey hair and a mustache, sitting at the head of a heavy wooden boardroom table. “I said, ‘They really are two countries – the United States and Canada are different countries.’ ”

Beyond his dislike of Mr. Trump, Mr. Lara also expresses a certain disappointment: He always looked to the United States to guide the opening up of trade. Now, the President wants to start dismantling the system of international commerce his country worked so hard to build. If Washington won’t lead, Mexico City and Ottawa must, he says: His latest project involves assembling Mexican investors to put capital into industrial operations in Canada.

Mariana Ceniceros, who runs American Industries’ Toronto office, says she has no problem selling Canadian companies on investing in Mexico, but many are holding back because of uncertainty over NAFTA’s future. She contends that Mr. Trump is hurting North America by trying to divvy it up rather than fuse it into a cohesive trading block ready to take on the world.

“Most of them already are convinced, I don’t have to go and sell them on Mexico. They know they have to come here. Now, the thing is, how do we do this partnership with this new political scenario?” she says. “We should redefine the competitiveness of each region and then, together, work to compete with the European Union or China. But instead of trying to unite, the policy is to divide.”

Rene Friesen, who runs a Mexican company that builds containers to transport auto parts to assembly plants, says his firm was on edge when Mr. Trump first became U.S. President. But now, it is trying to carry on while it waits for NAFTA talks to play out.

And, as his company shows, the Mexico-Canada relationship need not be a one-way street, with Canadian firms setting up shop in NAFTA’s southernmost partner. IZA Design and Manufacturing, started in a small town near Chihuahua, has already flipped that script by expanding to plants in Ontario and Tennessee.

“We’re going back to Canada and we’re saying, ‘How can we partner up?’ There’s nothing potentially threatening the business relationships between these two great countries, Canada and Mexico,” Mr. Friesen says. “Part of the NAFTA concern, in one sense, has brought us together closer.”

THE GLOBE AND MAIL. DECEMBER 29, 2017. OPINION. A ‘big fog’ to descend on Canada-U.S. trade if Trump withdraws from NAFTA
JOHN IBBITSON, OTTAWA

We have reached the end of a tumultuous year in Canada-U.S. relations. Next year is likely to be much worse.

Trade experts are increasingly convinced that, as early as January, President Donald Trump will announce that the United States is withdrawing from the North American free-trade agreement with Canada and Mexico, launching a period of unprecedented instability.

"I am extremely worried," said Edward Alden, a senior fellow at the Washington-based Council on Foreign Relations. The loss of NAFTA would be "a real deterioration of the status quo for Canada," he believes. "This is not some future gain forgone. This is big, current losses."

The cost in unemployment and economic stagnation could be severe. If the NAFTA talks fail, "the prevailing view is that we're going to go into a big fog, what some call a zombie state, and I think there's a very real chance of that happening," says Frank McKenna, former Canadian ambassador to the United States. "We'll be in a no-man's land."

But this could be exactly what Mr. Trump wants. "One of the intentions of the administration is to create this kind of investment risk for Canada and Mexico in order to direct investment to the United States," Roland Paris believes. The political scientist was Prime Minister Justin Trudeau's foreign policy adviser before returning to the University of Ottawa in 2016.

Mr. Trump, in other words, might cancel NAFTA – not despite the chaos it would create, but because of it.

Not that long ago, the picture was much rosier. Immediately after Mr. Trump's surprising presidential victory in November, 2016, Mr. Trudeau's team launched an all-fronts charm offensive, aimed at cultivating a strong personal relationship between the Prime Minister and incoming President and at impressing on Mr. Trump that NAFTA was good, not just for Canada, but for the United States as well.

"The hope was that … it would be possible to establish a relationship with him quickly, and work with him as soon as he came into office, and the initial indications were pretty positive," Prof. Paris recalls.

But the charm offensive didn't stop at the White House. Cabinet ministers courted their American counterparts. Mr. Trudeau didn't hesitate to visit Capitol Hill in search of allies in Congress. Premiers were asked to visit state governors; everyone and anyone was available to meet with agricultural and industrial firms and associations.

Things seemed to go well when Mr. Trudeau visited Mr. Trump in Washington in February. "We'll be tweaking it," Mr. Trump said of NAFTA during a press conference with Mr. Trudeau. "We'll be doing certain things that will benefit both of our countries."

But there were already ominous undercurrents. Because the Liberals failed to resolve the softwood lumber dispute with the Obama administration, it became an irritant in the NAFTA talks. And Boeing persuaded Washington to impose punitive import duties on the Bombarider C Series passenger jet, with Ottawa vowing to boycott purchases of Boeing fighter jets in retaliation.

And then the black hats stepped forward.

Both U.S. Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer believe that unfair trade agreements have hurt the U.S. economy. "Deals that have been made historically have resulted in the great loss of manufacturing jobs, a great amount of closed manufacturing businesses," Mr. Ross told said in an interview with CNBC in March. "We don't want that to continue."

During the NAFTA negotiations, the Americans introduced enough poison pills to fell a horse. Any new agreement would have to be renegotiated after five years. The dispute-resolution mechanism would be gutted. U.S. content in auto parts had to go up, way up. Access to U.S. government contracts by Canadian and Mexican firms had to go down, way down.

"We're asking two countries to give up some privileges that they have enjoyed for 22 years," Mr. Ross told CNBC in October. "And we're not in a position to offer anything else in return. So that's a tough sell."

When Mr. Trudeau returned to Washington to meet with the President in October, the mood was grim.

"I've been opposed to NAFTA for a long time," Mr.Trump said, as Mr. Trudeau looked on. "… And I think Justin understands this: If we can't make a deal, it'll be terminated and that will be fine."

"We have to be ready for anything," Mr. Trudeau told reporters later that day. The trip highlighted the fact that, however well the two men get along personally, Mr. Trudeau's feminist, environmentalist, pro-labour, pro-globalization world view is antithetical to Mr. Trump's values.

"There's a fundamental political incompatibility between the two of them that's become more obvious with each passing day," Mr. Alden observes.

By late December, the NAFTA talks appeared at high risk of failure. "Every indication seems to me to be that the administration is going to terminate NAFTA, then indicate that they have six months before it actually expires to get a deal," Kansas Senator Jerry Moran said in a radio interview. Another senator, unnamed, told the journal Inside U.S. Trade that Mr. Trump would set the six-month clock ticking at the end of January.

Despite his early reassurances, "I don't think Trump's position has really changed," Mr. Alden says. "He says a lot of things, and contradicts himself frequently, but his hostility toward NAFTA has been a constant."

Stephen Harper believes the Trudeau government should try to negotiate the best available deal, whatever that deal might be. "It does not matter whether current American proposals are worse than what we have right now," the former prime minister wrote in October in a leaked memorandum to clients of his consulting firm. "What matters in evaluating them is whether it is worth having a trade agreement with the Americans or not."

Prof. Paris believes this is bad advice. "I don't think that Stephen Harper would be following the advice as prime minister that he's giving as ex-prime minister."

After all, things could be as different a year from now as they were a year ago. The U.S. mid-term elections will be in November, and the future of NAFTA could be a major issue in those elections.

The U.S. tax-cut legislation is unpopular, and special counsel Robert Mueller continues to investigate possible links between the Trump team and Russia during the 2016 election campaign. By the end of 2018, Mr. Trump might be a much-weakened president.

"The political circumstance in the United States may shift to Canada's advantage over time," Prof. Paris says. "It cuts both ways."

Mr. McKenna, the former ambassador, predicts that, eventually, things will settle down. "Ultimately, there will be a relationship between Canada and the U.S., whether it's multilateral or bilateral, but it's going to be very messy getting there."

How messy? That's what 2018 will reveal. Buckle up.

EMBRAER / BOEING

REUTERS. JANUARY 2, 2018. Boeing-Embraer talks have not settled question of control: sources

SAO PAULO (Reuters) - Tie-up talks between Boeing Co BA.N and Embraer SA EMBR3.SA have not settled key questions such as control of the Brazilian planemaker or the possibility of a more narrow joint venture, two people familiar with the negotiations told Reuters, pushing back against a newspaper report on Tuesday.

Brazilian newspaper Valor Economico had reported that the talks have focused on joint ventures and joint business agreements to share costs and revenue or develop new products without changing control of Embraer.

Such an arrangement could ease approval from the Brazilian government, which holds a ‘golden share’ giving it veto rights over strategic decisions at Embraer and has expressed reservations about a foreign company taking control.

However, a joint venture may not be an effective way to combine engineering resources, explore new business opportunities and satisfy Boeing’s interest in Embraer’s portfolio of regional passenger jets, defense programs and business aircraft, said one of the sources, who requested anonymity due to the sensitivity of talks.

Boeing has worked around concerns in foreign markets before, structuring defense subsidiaries in Australia and Britain to satisfy sovereignty demands, and those cases may serve as a reference in Brazil, the sources said.

Neither Boeing nor Embraer responded to requests for comment.

On Dec. 21, the two planemakers said they were discussing a “potential combination,” in a move that could consolidate a global passenger jet duopoly.

The talks are widely seen as a way for Boeing to strengthen its position in the regional jetliner market, in which Embraer is strong, thanks largely to its 70- to 130-seat E-Jets.

Less than three months ago, Boeing’s European arch-rival Airbus SE AIR.PA agreed to buy a majority stake in Bombardier Inc’s BBDb.TO 100- to 130-seat CSeries jet, putting pressure on the U.S. planemaker to seek a similar partnership.

The Boeing-Embraer talks involve Embraer’s defense business, as well as its passenger business, sources have said.

In the Tuesday report, Valor said Boeing was confident it could convince Brazil’s government that it could safely operate in Brazil’s defense sector, partially by pointing to defense deals the U.S. planemaker has made in countries such as Australia.

Reporting by Gram Slattery; Additional reporting by Brad Haynes; Editing by Mark Potter and Nick Zieminski

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