Mexico, Canada Diverge in Tariff Relief Hopes After Trade Deal

(Bloomberg) -- Fresh off signing their trade deal with the U.S., the governments of Canada and Mexico are diverging on the continent’s other trade fight over metals tariffs -- with Mexico setting hopes for a deal sooner than Canada.

The three countries signed their new deal Friday in Buenos Aires to replace the North American Free Trade Agreement despite U.S. tariffs on steel and aluminum imports remaining in place, along with counter-tariffs from Canada and Mexico. U.S. Trade Representative Robert Lighthizer said talks would continue this week and be split into two tracks: one with Canada, which sells much more of both metals to the U.S., and another with Mexico.

Jesus Seade, the Nafta negotiator for Mexico’s new president, has said he hopes for a deal by the end of the year, but Canada isn’t setting any timelines. Instead, it’s holding out for a victory in legal challenges against the tariffs and signaling there may be no quick fix.

“All parties are looking at how we can move forward, but negotiations take some time,” Canadian Finance Minister Bill Morneau told Bloomberg Television in an interview in Buenos Aires on Friday. “We’ll have to be sitting at the table to figure out how we get to the best answer. Our view is that these tariffs shouldn’t be there.”

Deal Not ‘Complete’

The tariffs of 25 percent on steel, and 10 percent on aluminum, were imposed earlier this year on national security grounds -- a justification Canada in particular has scoffed at. But there are reasons for the two countries to see different paths forward. Mexico, the smaller supplier, may be willing to accept quotas such as those applied on South Korea, in exchange for lifting the tariffs. Canada thinks both it and the U.S. should simply drop their duties.

Reaction to the three countries’ trade deal -- which still needs ratification to take effect -- has been dampened by the fact that steel and aluminum tariffs remain in place.

“To achieve the full potential of the trade agreement and to ensure ratification, the elimination of tariffs on steel and aluminum will be critical,” Ford Motor Co. said in a written statement. The trade deal is not “complete until the administration eliminates all steel and aluminum tariffs,” The Beer Institute, representing U.S. brewers, said in a statement.

Brett House, vice president and deputy chief economist at Scotiabank, said the tariffs are not “compatible” with the auto manufacturing rules contained in the new trade deal, and that should be reason enough to lift them. However, there are also “multiple grounds for the removal of these tariffs, including their illegality and the costly inefficiencies they impose on North American manufacturing,” House said in a research note Friday.

Continuing Talks

The U.S. will continue talks with Canada and Mexico in search of a resolution, Lighthizer said. He declined to say whether he’s insisting on a quota, but he defended the tariffs and said they’re working in the U.S.

“We don’t want to do anything that’s going to thwart that,” he said. “It’s something we’re turning our attention to.”

Mexico’s plan of action on tariffs will be up to the government of Andres Manuel Lopez Obrador, who took office Saturday. The steel tariffs “cannot be there for an extended period,” Seade, who is set to become undersecretary for North America in Lopez Obrador’s Foreign Ministry, told Bloomberg television on Nov. 29. Elimination of the duties within “the calendar year would be very natural because it’s fully discussed. That’s my hope,” he said.

Canada’s a different story. It’s the top U.S. source of both steel and aluminum imports. Canada announced retaliatory tariffs targeting about $12 billion of U.S. exports to Canada -- both steel and aluminum, but also things such as ketchup and motorboats. But it has avoided linking them with the talks to replace Nafta.

Legal Challenge

“We do not accept the legality of these tariffs,” Foreign Minister Chrystia Freeland told reporters on Friday, noting that Canada is challenging the tariffs under the existing Nafta deal and at the World Trade Organization. “And frankly we are very confident we’re going to win those legal challenges,” she said.

Asked whether public statements by the U.S. that linked the steel and aluminum tariffs with trade talks will help her legal case, Freeland replied: “I think that is a really interesting point.” She didn’t elaborate.

Canada still does not accept “that this was a legitimate area for us to include in this negotiation,” Freeland said. Nonetheless, she said the signing represents a “real renewal and re-endorsement of the importance and the value of our trading relationship by this administration, so now’s a great time to resolve this outstanding irritant.”

President Donald Trump said he would soon tell Congress of plans to terminate the existing pact, a move that would give lawmakers a six-month window to ratify a new deal.

©2018 Bloomberg L.P.