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  March 26th, 2018 | Written by

Steel Tariffs: An Unlikely NAFTA Trump Card

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  • The NAFTA negotiations are stalled.
  • Steel and aluminum tariffs could hasten the conclusion of the NAFTA talks.
  • Steel and aluminum national-security rationale was to avoid the outright ignoring of WTO rules.

It’s fair to say there was a collective sigh of relief emanating from Ottawa and Mexico City on March 8 when US President Donald Trump announced that Canada and Mexico would be exempt from steel and aluminum tariffs of 25 percent and 10 percent respectively.

The circumstances around the exemption are slightly vague. According to media reports, Canadian Prime Minister Justin Trudeau hosted a telephone call with President Trump during which he impressed upon the president that placing tariffs on Canadian steel exports would be detrimental to US interests given America’s reliance on northern steel. Furthermore, the Prime Minister emphasized that Canada was a stalwart ally of the United States and Washington needn’t worry about the national security implications of Canadian steel exports.

The latter point was in direct response to the purported rationale for the tariffs – to protect the US from over-reliance on foreign steel lest it be left (potentially by military adversaries) without sufficient material to develop military resources. Of course, the national-security argument was more a loophole to avoid the appearance of outright ignoring WTO rules on tariffs.

But if there was any relief north and south of America’s borders due to the announced tariff exemptions, it was likely short lived. As quickly as Washington tossed Ottawa and Mexico City a lifeline, it seemingly withdrew it by making the exemptions contingent on a favorable outcome to the ongoing NAFTA negotiations.

Said President Trump at the tariff announcement: “If we don’t make the deal on NAFTA, and if we terminate NAFTA because they’re unable to make a deal that’s fair for our workers and fair for our farmers …”

It’s quite possible the president didn’t finish his sentence because it is often his style not to do so, but it’s more likely he realized he was about to put forward an inherent contradiction. After all, if the tariffs are in place to ensure America’s national security and if Canada and Mexico are considered allies in America’s protection of its borders, then the outcome of negotiations over a free trade deal shouldn’t have any connection to the tariffs.

Critics were quick to point out that the president had simply used the tariff exemptions as a means of pressuring America’s NAFTA partners into concessions at the next round of NAFTA negotiations, which have been stalled by various impasses over core issues. Both the president and his trade czar Robert Lighthizer would prefer the negotiations wrap up as quickly as possible. Their haste is tied to the upcoming Mexican presidential election in July and the November mid-term elections in the US, either of which could shift the balance of power and make a renegotiated NAFTA challenging to ratify.

Yet if the incomplete sentence was indeed a veiled threat, it’s difficult to see how Washington could effectively follow through with it. If Canada and Mexico don’t offer concessions at the next round of NAFTA negotiations and the president subsequently removes the tariff exemptions on Canadian and Mexican steel, it will be clear to all that the tariffs never had anything to do with national security and everything to do with forcing other countries to offer the US trade concessions.

The confirmation of that premise could become a political liability to leaders in some of America’s key trading-partner countries who would then be forced to retaliate with counter-tariffs. In addition, it could further stall the NAFTA negotiations, putting the entire process in jeopardy and could raise the ire of the WTO with which the US is only now beginning to reconcile its differences.

The more likely explanation is that the comment was simply the kind of opportunistic posturing we have come to expect from the president in reference to the NAFTA negotiations and a means of warding off some of the anticipated resentment from the many nations – including key allies, such as the EU – that weren’t exempt from the tariffs.

From the perspective of Washington, there’s little to lose in this game. The NAFTA negotiations are already stalled and such comments could have the effect of hastening their conclusion. If they don’t, the US is no worse off.

Of course, only time will tell which card Washington intends to play. In the interim, it’s fair to assume US negotiators will maintain a uniform poker face on the matter while their Canadian and Mexican counterparts ponder whether or not to call the president’s bluff.

Candace Sider is Vice President, Government and Regulatory Affairs, North America, at trade services firm Livingston International.