The U.S.-Canada Trade Meltdown with Dennis Darby

I'm Scott. >> I'm [music] Bill. And we're the Trade Guys. >> You're listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I'm Alex [music] Kistling and I'm here with Scott Miller and Bill Rich, the CSIS Trade Guys. >> Thanks for listening to the Trade Guys. This is Trade Guy Scott. This week, Bill and I have a special guest, [music] Dennis Darby, the president and chief executive officer of the Canadian manufacturers and exporters. Dennis will join the Trade Guys to talk about all things related to the US Canada negotiations, where it stands at the moment, and what might happen next. All this and more [music] on the Trade Guys. Welcome back to the Trade Guys. This is Scott introducing this week's program. And our first topic to no one's surprise is US Canada trade talks. And recently broken down, we've added another expert to our cohort today. And I'd like to introduce Dennis Darby. Dennis Darby is the president and chief executive officer of the Canadian Manufacturers and Exporters Major Trade Association. He's based in Toronto. Dennis took his current job in 2017, which it means he has the experience of moving from NAFTA, the worst trade agreement ever, to USMCA, the best ever, according to President Trump at the time, and has been around for round two here. So, we're delighted with that. He had previously worked for the Ontario Pharmacists Association. And before that, Dennis and I were work colleagues. We both worked together at Proctor and Gamble in the early 1990s. And so, Dennis, welcome. It's great to see you. We're glad to have you on the program. >> Well, lovely to see you and lovely to connect again during these crazy times. >> Maybe you could start off by setting the stage of where we actually are at the moment for our listeners. We recorded a week ago today. Today's the 27th. We recorded on the 20th on the section 338 tariffs were supposed to kick in on August 19th. Talks were proceeding very well. The president extended the timetable for 3 days and most including Bill and I thought that we were on our way to what looked like a reasonably decent agreement just a couple days to clean it up. Well, things broke down very quickly after that. Basically, as soon as we stopped recording, the deal fell apart. It took a little longer than that, but basically it's been a lot of withdrawals. At least Canadian team has stopped negotiating, withdrew and paused the negotiations. Been lots of recriminations since then. And I would say lots of noise and not much signal. So Dennis from your birch north of the border. What's going on and what do you think is going to happen from here? >> Well, that is the million-doll or $500 billion question. And when you think about our trade between Canada and the US, in fact, probably the only Canadian wearing a Canadian US pin today because the end of it all, this relationship, whether or not, you know, this current bruhaha continues or how it resolves, you know, it is probably the most important trade relationship in the world and certainly from a manufacturing point of view is the most important trade relationship that we have and by and large for the US as well. But let me uh sort of go back to where you were a week ago. A week ago today, I thought we were very very close to a trade agreement. In fact, I'm part of an advisory committee to the prime minister on Canada US economic relations and we've been kept apprised through all the negotiations. Now, let's go back a step. These current round of negotiations were predicated because the US president decided he was going to apply a whole new set of tariffs on Canada. They're under under section 338. What's unique about that is up till now in the tariff terror in the US, most of the tariffs apply to everybody. And this was the first time it was going to apply just to Canada. 28 billion dollars worth of Canadian goods going into the US every year. So of course that caused both sides maybe it's time to have a discussion, get back to the table that had been sort of suspended for months. And it looked like we were getting towards a deal. In fact, Thursday last week when we were briefed, they said, "Yeah, we're close. There are a few niggly things here and there, but the trade negotiators were hard at it." And Scott, you and I have involved in this kind of stuff in the past. And we kind had a lot of confidence because the kind of questions we were getting as a sector association were what you and I call really detailed stuff on certain sectors and certain mace codes. So we saw okay they must be really close. Mhm. >> And then Friday happened and then Friday late late in the evening it seemed very clear that things were going off the rails and as you saw subsequently the Canadian prime minister decided to call the team home from Washington and then what happened subsequently at that US did apply the section 338 tariff. So they're in place today. Canada within a day or so apply it has now announced intention on September 8th. always leave yourself some time to apply reciprocal tariffs of about the same value of US goods coming into Canada. Announced a whole series of remission programs for Canadian companies affected by the tariffs. And then while all this was going on, two things. The president then mused m that he would apply 50% tariffs on automobiles and automotive parts starting in January. Now that of course is a complete non-starter. would be devastating certainly not just to Canadian manufacturers but certainly to the Detroit 3 if that were to come about and something nobody wants and the way it was explained to us that the US at the you know I'll use my words the 11th hour the US negotiators had added things to the agreement that Canada just couldn't accept and that's kind of where and and that's where we are today lots of political discussions if I could and this is to be somewhat light-hearted Canadians did notice earlier today that the president has changed the name of Lake Ontario to Lake America. He announced that with the presidential order today, Scott, because I know you lived in Canada for our friends south of the border. The interesting thing is Lake Ontario was named long before there was even a Canada. And in fact, where I live in Toronto was called Upper Canada. You might remember that from being here. And it was only after Confederation that they named the province after the lake. So I live in the province of Ontario. now. And so therefore, we decided earlier today that since president has changed the name of Lake Ontario to Lake America, Doug Ford is now the premier of America. >> Justly so, Bill, what's on your mind? You've been thinking about this all weekend. >> Yeah, I think more information is coming out in little dribbles. Ambassador Greer had an interview yesterday, I think, on CBC, the Canadian Broadcasting Corporation, where he let dropped a few more pieces of information. And as is typical in these cases, each side has blamed the other for the problem. The US view is Canada came to the table with lastminute demands whereas the Canadian view is exactly the opposite that it was the US coming to the table. I think Greer's comment was that the Canadians wanted clarification on the status of truck tariffs, particularly the trucks that are made by Ford and GM in Canada and that I think from the Canadian view they were supposed to be included in the tariff reduction and they wanted clarification on that point and Greer's view was that that was never on the table. Those the truck tariffs are covered via a separate statute and that the Canadians must have known that. So, who knows? My experience has been that you know both sides probably played this game moving the goalpost but here we are. I guess the question I have is kind of relates to how this is going to play out in Canada and it's a sort of a two-part question. My impression is that Canadian public opinion is strongly behind what the prime minister did and so maybe you can tell me if I'm wrong about that. Uh but then the more important question, this came up yesterday when I was doing a TV interview actually on this was what happens, you know, some months down the road if there's no resolution. Canadian public opinion right now might be in support of the prime minister, but at some point the tariffs kick in, stockpiles run out, prices go up, products that used to be on the shelves are not there anymore, Canadian exporters have discovered a big chunk of their business has gone away. Do you see the support for what the Canadian government has done eroding at that point and that the prime minister is going to lose the support that he apparently has now? >> I was going to say the opposite. I was hoping the American president would lose support when the same thing happened going in the other direction. >> It could that could happen too. That could happen. >> I don't mean to make light of it. First of all, this prime minister was elected completely on the premise or on the promise that he and only he could stand up to President Trump and get a better deal for us. the Canadian public has given him a lot of grace in that effort and of course so his popularity is as high as any Canadian prime minister in my lifetime even more than prime minister Morudi who was the the original architect along with Ronald Reagan of the original free trade agreement. So that being said, also think about just for a second under USMCA, which is the >> we say you smack a >> Mexicans call it TMX. The majority of goods do try, you know, do move tariff-free and of course and the one that everyone knows in Canada where the ones are oil, gas, potachsh, and uranium. None of those are tariff and those are flowing to the US daily without any tariff whatsoever. It's manufactured goods that are being tariffed heavily. In fact, all the tariffs in both directions are on manufactured goods. very little on any commodities at all. In fact, unless you consider aluminum and steel commodities and we don't, they're obviously processed materials, you know. So, in the short run, people are behind them. Regrettably, and I can say this, and this is why Mike Kennedy was Canadians like Americans. Canadians work with Americans, the issue is not anger with America. It's angry with the administration. I think that to be the fairest thing. And so, and the prime minister said this might cause inflation. Yeah, there might be businesses that are going to suffer in the in period and and yesterday or day before yesterday the scale is all different, but they announced an extra 7.5 billion dollars in support for companies affected by the US tariffs. That actually has been in place since Mr. Trump applied the first tariffs back in 2018 on steel and aluminum. So I think the population is pretty galvanized in knowing that this may hurt a bit. There's a huge by Canada effort going on. That's of course I can tell you as someone representing manufacturers, Canada doesn't make a lot of finished products anymore. And I think that's probably why it's not as clear as if this was a trade war with South Korea or Germany. And I I'll explain why. South Korea and Germany sell to the US finished goods, whether it's cars, appliances, TVs, whatever you name it. Canada doesn't. We sell you parts, ingredients, and components. 75% of what we sell to the US goes into the US manufacturing ecosystem. And of course, that's what makes Canadians get so upset is because we're not competing with Americans. In fact, we help you be successful as manufacturers. We are a supplier. We aren't a competitor. And so, they think the way it's been threatened or the way it's been portrayed in the US bill that Canada has somehow ripping off Americans or taking jobs away just patently false. Over the last 20 years, we've seen just as many jobs in manufacturing slip away to either Mexico or Asia as the US have. I mean, on a proportional basis. So, I think despite the potential pain, Canadians are puzzled and quite disturbed that it appears that the US administration doesn't get it. So, they're trying their darnest, our trade people are trying their darnest say, but wait a sec. This is you got you guys have this all wrong. Well, for what it's worth, the one thing I found I did listen very carefully to Ambassador Greer in his interview with CBC. So, I thought was well done and quite revealing on both sides >> and he did it in both languages. He's fluent in French. He nailed it in French. >> Yes, I'm glad to hear that. He said one of his children was born in Paris. So, in any case, he's very articulate guy, but he kept using the phrase fortress North America. And my sense is that there's a lot of neuralgia about circumvention and prevention of Chinese parts and equipment being part of supply chains in North America. But the Fortress North America idea is I think what's animating negotiators in Washington. And in fact, one of the things I think Ambassador G said in that interview is that he heard that first from the Canadians and then they lost the edge. they kind of lost the plot and started worrying about whether they could negotiate other trade agreements which as you and I both know was part of the of USMCA in chapter 32 as the whole non-market economy negotiations. So there's some things that carry over that suddenly became controversial but that notion of fortress North America is maybe in congruent with where Canada's going. Is that a possible block? I don't know. >> I don't know. So again we're and he said she said in this particular case so the way it was portrayed to us by the minister and by the prime minister very articulately here was that it went beyond so all all Canadians who are in the business that we're in understand chapter 32 which says for the three countries you know if they are to undertake a comprehensive trade agreement with the non-market economy the other two have veto rights or can actually kick them out of the club if that's the case if they if you decide to go ahead and of course by no means does Canada have any intention of signing a comprehensive trade agreement with a non-market economy that's just antithetical that we're you know capitalist society just like you we maybe have a softer edge but we're the same but the issue of fortress North America is interesting because those words were not used at least in the our explanation but it is what we as CME and and when we work with our counterparts in say the NAM national association of manufacturers talk about all the time fortress North America we've been saying for 10 years we build things together so maybe it's just how because most Canadians who are in manufacturing would say of Of course, it's Fortress North America. We bring something to the table. The Mexicans bring something to the table. The US is the big dog and they bring a lot to the table. So, it seems odd to me that when I heard Ambassador Ger say it and I listened to both languages to make sure I had it right. And so, that's an odd one because of course now the devil is in the details. What does that mean? If it's a restriction on Canada's, we use the word sovereignty an awful lot. That's a word whether it's sovereignty between the provinces or within the federation. the ability to be the self-determinant in terms of what you do and and Mr. Carney has I think after Mr. Trump's original tariffs has been very vocal and also very pulled a lot of frequent flyer miles going around the world talking about with other countries about we better look for other options. If there is truly a case to not be fortress North America that if if the intention of the US is to not bring its partners close together then we better look for other trade agreements that might work in our favor whether it's with the Europeans or elsewhere. So, it's an odd one because that isn't the language that the Canadian negotiators used. And I think if I read the news here, you know, a lot of people are So, today's big story is what is the reality? I I want to go back to Bill's point on medium duty vehicles. We have a saying in Canada, don't play silly bugger. I mean, at the end of the day, whether it's a Ford F-150 or 250 or GMC 1500 or 2500, I mean, we know what we mean by automobiles. The Detroit 3 mostly all they make now is trucks. They make very few anything else. So suggested, well no, you we didn't mean the plants that are being retoled in Canada over the last year announced publicly a bunch bunch of time. Oh, we didn't mean those. We meant the RAV 4s and CRVS made by Honda and Toyota because that's the only other things made here. I mean other than trucks. We make trucks for GM and soon to be Ford. A few minivans for Stalantis and lots of RAV 4s and CRVS from Honda and Toyota. That's what we make in Canada. So that's an interesting one. But it seemed that to be a to your I think it is a fair and valid point. Canada would and I'm part of the advisory group. We never had a discussion saying well let's see if we can lower the tariffs on passenger vehicles and trucks under a certain tonnage but oh no it's okay for trucks over a certain tonnage they can be taxed. That just seems silly. on the sovereignty question. I mean, I think this is a case where what you just said that the details matter and it would be nice to have a look at the actual language that they were kicking around if many people have asked but both sides are saying no. >> Yeah. Because I think one of the allegations was that what the US really wanted to do among other things was to have the right of approval over Canadian tariff changes even in cases where Canada was involved in participating in other trade agreements that it had already signed. That's a step well beyond what's in USMCA. On the other hand, that may not be what was on the table. And if it were that and that's why I think Canadians have been by and large the way it was explained to us it was something along that line that would restrict our ability in our current agreements or other agreements. I know the US was the US administration was peaked a bit when Canada allowed a small number of Chinese EVs as a part of an agreement to get out from underneath some crippling tariffs on commodities earlier last year. uh you know and I think industry was been very very consistent saying you know this is in no way none of us are in favor of allowing EVs and in fact as I remind my friends in the US when the US assigned the 100% EV tax few years ago we signed on immediately but this was a a carve out in order to as one would do and as I'm sure the US has done in some occasions one would do in some cases with China in order to to prevent a catastrophic disaster to some of our pork and other related products going into China. So, but that end itself that isn't a trade agreement. It's a one-off. So, yeah, I hope that that isn't it because we have way too much at stake when you think about it. There's very little light. That's why I think it's the other reason Canadians are frustrated. Bill, there's very little light between us in terms of how we do things, how we manufacture. Our labor laws are the same, if not a little bit more generous to labor. Our environmental laws are similar, at least as good and better in most cases. Canadians don't dump goods into the US. We never have. We're not a lowcost producer. We are a high-tech. We have a good workforce. We have a high-tech workforce and we do have we are able to process resources and we've historically thank because of the grace of nature we have, you know, access to an awful lot of hydroelectric power and that's helped and then we've built a lot of nuclear power and that helps as well. Yeah. That's why the frustration that we hear from Canadians. So, I'm hopeful that somehow these two sides because they don't after listening to your ambassador group, it doesn't sound that far off. Well, this is the one I think you're exactly right about what we have in common and certainly it's more than just a trade agreement. We make things together and sell them to each other in the world. The production is integrated on both sides of the border. So, we we we've got to somehow get back to that basic understanding. But to my mind, what I worry about most is the Cuba effect. Basically, John Kennedy's administration put an embargo on Cuba and every economic problem after that embargo was the fault of the embargo. And so if you have a tough time in Canada for whatever reason, Prime Minister Carney has an easy target for the blame for all the hardship, it's the United States and the US administration. So >> I think he's been pretty good. As we say in Canada, Metro Shenu, that is a phrase that you know whether you're English or French is like talk about the rally cry masters in our own house. >> You haven't done it yet, but I'm saying if the terrorists drag on >> Yeah, he might. >> Then we get blamed and it becomes inconvenient not to solve the problem. I agree that and again I really don't like the term there was early days of this we called the elbows up for those of you who play hockey it was actually a reference to Gordy how who played for the Detroit Red Wings in the 60s and 70s was an incredible incredible player but he was known to have he'd be one of the dirtiest players in the league and you never wanted to go into the corner with Gordy how because you would have got an elbow in the ear or in the nose >> back before helmets too >> back before they wore helmets so Gordy so elbows up refers to going in the corner and taking no prisoners. I understand why people think it's not my favorite analogy and I don't think it's necessarily helpful to vilify the US and I think it's important that we don't even last month because I looked at the trade numbers normally in a good month about 80% of our goods go to the US. It's dropped about 15% over the last year but it's still the vast vast majority and so for Canada and the US they kind of need each other despite the politicians on both side we kind of need each other. I'm really hopeful that we can get to some level. I mean, Canadians aren't naive enough to, well, I think many people would like this to be the case. Under the best trade agreement ever, the USMCA, the US granted Canada and Mexico under certain conditions tariff-free access to each other's market. The US is by and large saying that's not on the table anymore. That's not how we're going to run the railroad. And so Canadians aren't naive enough to think that it's necessarily going to go back to that. And so, we haven't talked much about the economics. The bigger problem here in Canada right now is the uncertainty. And we've been tracking real investment, so real dollar investment in plant equipment and technology over the last year and a half and it has dropped by a third in Canada. Now you're saying, "Wow, that's terrible." But we also looked at the US data. If you take AI data centers out, let's take those out, it's also dropped by about 22%. Because what's happening is the manufacturers both in Canada and the US are sitting on their hands. Nobody is making investment decisions and that for me and for our sector is really the one of the biggest issues you know CEOs are concerned about and I know policy makers are as well. we're not investing. When we're not investing means that we aren't becoming more competitive visav our competitors outside of Fortress North America, right? So, if we're not investing in new plants and equipment, new technology, adopting robotics, automation and AI, we know our competitors in China and other parts of Asia are doing that while we sit here and argue over the tariff. >> Fair enough. That's a sobering perspective on the investment front. Bill, you have a benediction for us here? I had actually two questions. Go for it. One is the trans shshipment issue, circumvention issue has become bigger recently thanks to the publication of a report actually by Peter Navaro of all people and which I think I commented on a previous episode. It's actually fairly devoid of typical Trumpian rhetoric. You know, I'm smart and everybody else is stupid. And it identifies a real problem. One of the issues I think lurking in the background of the Canadian discussion is the extent to which Chinese parts are coming into Canada legally and then being incorporated into products that then are further exported to the United States. Is that happening? Is that a big deal? When we looked at it last, it was probably a bigger deal for Mexico than it was for Canada. Not that it excuses it. It was more pronounced by Mexico because they have a free trade agreement, more trade with China than we do. That is certainly not in our interest. I think what one of the things that has happened and I would say trans shipment but manufacturers in Canada have been buying more Chinese and Korean steel since the tariffs were applied which is kind of like you know so in a case I know of companies where they would normally bought if either Canadian or American steel but now that there's a tariff on both directions on the steel they're looking to China because even though China steel is tariff because Chinese steel is tariff coming in China can undercut the price. Now that's different than what you're saying. That would be a case of where company will bring steel rod or flat roll in and then convert it to a product. But it then again it wouldn't qualify under USMCA because the rules of origin are pretty strict. You're not koozma compliant and you have to be able to explain you have to be able to prove that you are koozma compliant. I don't think it's as big an issue as it's been made out, but Canada is just as concerned about it because and especially if you think where I am in southern Ontario and near to Quebec for our steel and aluminum manufacturers, they are always concerned about stuff coming in from outside. Now, whether that stuff gets to the US, that's also a concern. We probably need to do a better job of enforcing at the border than we probably do. I think Canada is I would guarantee that we probably are less capacity to inspect shipments coming in than the US does and that's a weakness that we've identified to the government. We now make sure that we just as vigilant making sure stuff doesn't come in and then find its way through. So I think that's a concern for Canada but that's one of those things that in that table in Washington if US said you know what we're really concerned about this we want you to put measures in place to stop it. I mean that's the kind of thing that Canada would say of course but the three of us weren't in the room so we don't know whether they even discussed it. Let me the final question at least for me is which you probably won't want to answer because it's a political question but I can't resist. So the premier of America Doug Ford as you mentioned earlier has been much more outspoken on this than a lot of other Canadian politicians and he was the one that produced the Trumpian reaction when he ran that ad that quoted Ronald Reagan. Is he helping or is he hurting? >> I don't know. I think he has an incredible following in Canada. He kind of says it the way he thinks. I think that sometimes it can be painful and sometimes I don't think it helps. In the most recent spat, it seemed to blow up for 24 hours. He and President Trump traded insults for the better part of 12 hours and then it all stopped. I think most people take their direction from or at least from Prime Minister Carney. And I'm not going to say the comparison. I saw Governor Nuomo say some pretty pointed questions about what's going on between Canada and the US. Our pre premers are actually probably more powerful than governors in a federation and so they have a lot of jurisdiction. Part of Mr. Carney's job is to try to keep everybody in the tent. Once in a while, he's going to spit outside rather than the other way around sometimes. >> Well, the Doug Ford of two days ago was different than the Doug Ford yesterday. >> Oh, yes, he was. >> He was very toned down and consiliatory yesterday. I did notice that after. >> Yeah. So, people kind of expect that of Doug because Doug wears his heart on his sleeve. And I know I've been in meetings with him along with US governors and senators. He is the most pro-American premier we have. He's a businessman. They operate in Toronto and Chicago. He loves America and I think that's probably why he reacts like he does is because he knows how incredible America is and how incredible it is as a powerful house and also a powerful place with great people. And so when he sees the current president who's less respectful than he might be, I think Doug just reacts. >> Well, if he cuts off electricity to the United States, who would be hurt? >> A lot of people in the West everyone tariffs aren't good for anybody. Maybe they're good for the government at the time who's collecting the tariff money, but they're not good for the economy and they're not good for people. To your point, they either restrict goods being available or they raise prices or both. >> Dennis, you probably had a lot of other things to do with this half hour of your schedule for your members. We're delighted that you were willing to talk to us. So, thanks for coming on the show and we're happy to have your remarks and it is illuminating to hear from somebody in the business north of the border on real effects and when we're missing stuff and you are too, we don't feel so bad. So, thanks for joining us. >> Well, thank you both and I'm happy anytime watch this space because it'll change tomorrow. >> Fair enough. Thanks a lot. >> Thanks. >> Yes. Thank you. >> [music] >> You've been listening to the Trey Guys, a CSIS podcast. For more audio content, visit csis.org/mpodcast. Thanks for tuning in. [music]