PMO held talks with Trump team to avert trade war

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Prime Minister Justin Trudeau's most trusted lieutenants have held talks with top advisers to U.S. president-elect Donald Trump in an attempt to avert a costly trade war between the neighbouring nations.

Mr. Trudeau's principal secretary Gerald Butts, chief of staff Katie Telford and Canada's ambassador to the United States, David MacNaughton, have met several times in Washington, in what have been described as bridge-building talks with Jared Kushner, Mr. Trump's son-in-law, and Stephen Bannon, chief strategist and senior counsellor to the incoming Republican president.

Also involved in some discussions was strident China critic Peter Navarro, who will lead a White House office overseeing U.S. industrial policy as Mr. Trump moves to reshape trade relations with a protectionist bent.

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"This is big stuff we are trying to navigate here," a senior Canadian government insider said. "We can't lose sight of the fact that the country has faced difficult times with the Americans in the past and we have dealt with it."

The talks are part of a charm offensive at the senior-most levels in Ottawa to shield Canada's economy from the impact of protectionist policies espoused by Mr. Trump against China and Mexico, including his pledge to renegotiate or pull out of the 1994 North American free-trade agreement (NAFTA).

Many economists have warned that could backfire by forcing U.S. consumers to pay higher prices without repatriating many manufacturing jobs.

The Prime Minister has enlisted former Progressive Conservative prime minister Brian Mulroney and Derek Burney, Canada's past ambassador to Washington who played a key role in the 1989 Canada-U.S. free-trade agreement, to open doors in D.C. for the Liberal government.

Mr. Mulroney last month publicly praised Mr. Trump and stated his belief that the billionaire president-elect – a neighbour in Palm Beach – "views Canada with favour." Mr. Mulroney further stated "no one … is looking to pick a fight" and that "it would be to [the United States's] advantage to celebrate this important bilateral relationship."

The Canadian strategy includes outreach efforts to U.S. senators and congressional representatives in the 35 northern states. In addition, Mr. Trudeau and Mr. MacNaughton appeared in a video message to the U.S. Congress last week stressing the strong economic relationship between the two countries, including the fact Canada is the largest foreign market for U.S.-made goods and services.

"This is going to be a very tightly run game with the Prime Minister's Office, our ambassador and the Trade Minister [Chrystia Freeland] as central players," said Gordon Ritchie, Canada's former ambassador for trade negotiations.

But several trade experts believe it's inevitable the sometimes chippy U.S.-Canada trade relationship will worsen. "I would expect that the level of trade friction will increase," said Gus Van Harten, a professor at Osgoode Hall Law School specializing in international investment law. The Canadian government, he said, should "prepare for termination of NAFTA and have additional plans in the event threats are made about the [1989] Canada-U.S. free-trade agreement and U.S. participation in the World Trade Organization."

Mr. Ritchie said: "Reopening NAFTA would not result in some modest tinkering but instead would result in a full-bore assault. I think we have to keep our heads down and be prepared frankly to give Trump some publicity wins … That's the way you have to deal with this guy."

Mr. Trump has publicly badgered U.S. companies who set up operations abroad to make goods sold into the United States. Last week, he threatened on Twitter to impose a border tax on vehicles that General Motors Co. ships to the United States from Mexico; Ford Motor Co. immediately announced it was cancelling plans to build a $1.6-billion (U.S.) assembly plant south of the border.

U.S. firms have thus far escaped Mr. Trump's public wrath for their Canadian operations. But the Trump team's "zero-sum" approach to trade focused on moving jobs back to the United States could "sideswipe Canada badly," Mr. Ritchie said, as past protectionist moves have done.

Mr. Trump's views on trade "will cause some tough conversations [with the Canadian government]," said Maryscott Greenwood, head of the Canadian American Business Council, which represents about 100 companies with business in both countries. "In trade policy, for every action there is a reaction. If Canada feels it is being treated unfairly, it will stand up for itself."

Washington watchers say it's likely a "border adjustment" tax will be passed into law that would tax goods made by U.S. companies abroad and sold into their home market. That has made auto makers with operations in Canada nervous. But there are likely to be exceptions, and Cowen & Co. analyst Chris Krueger said in a recent note that whole countries including Canada could be exempted.

Ms. Greenwood argued "there needs to be a Canadian exemption" if a border tax is enacted. "Campbell Soup Co. cares a lot about how the border functions because they have ingredients and finished products going back and forth" between Canada and the United States. "When it becomes clear [to Mr. Trump] that iconic American companies … like Campbell care a lot about how we treat Canada, that's an eye-opener. Does Donald Trump want to do something that costs Campbell Soup its economic competitiveness? No way."

Some observers say the end of NAFTA – which didn't spell the end of trade disputes and introduced unpopular investor protection provisions – by a bilateral Canada-U.S. deal could happen. But rolling back to the earlier 1989 U.S.-Canada free-trade deal would "not be the quick fix some people seem to think it is" as Congress would have to reinstate the original legislation while some sectors, such as autos, have long since revamped operations and supply chains under NAFTA, Mr. Ritchie said.

The Trudeau team believe they have established a decent working relationship with Mr. Trump's key players so they can readily call them, but a Canadian official acknowledged they face challenging times because the Trump administration "does not believe in free trade."

An official aware of the scope of the talks said Mr. Trudeau's advisers were impressed by Mr. Kushner and Mr. Bannon, describing them as "very smart" and saying they gave the Canadians strong insight into the actions that will be undertaken once Mr. Trump becomes president on Jan. 20.

"They think we [Liberals and Republicans] both got elected" to help the middle class, but "their idea of how to fix the problem is a lot different than ours," one insider said. "They think the basic problem in the world is that China has stolen a bunch of American manufacturing jobs that they are hell-bent on getting back."

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