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US nemesis in NAFTA: Canada, not Mexico

The United States and Canada have one of the largest trade relationships in the world.

President Donald Trump met for the first time Monday with Canadian Prime Minister Justin Trudeau.

“We have a very prominent trade relationship with Canada,” Trump said at the news conference.

But the trade relationship between the United States and Canada over the years has not been as smooth as one might think. There have been trade wars, acts of retaliation, allegations of dumping and job losses.

“Our business relationship is obviously strong … but the relationship has been rocky, despite the agreements we have,” says Stuart Trew, editor of the Canadian Center for Policy Alternatives, a think tank in Ottawa, Canada’s capital.

Trump has often criticized Mexico and NAFTA, the trade agreement between the United States, Mexico and Canada. But Canada is rarely mentioned.

However, there have been more lawsuits over NAFTA disputes against Canada, almost all by US companies, than against Mexico. Even today, Canada has strict tariffs against the United States, and the two sides recently resolved a bitter beef dispute.

Most leaders and experts stress that trade ties between the two nations are strong and mostly positive. But Canada and the United States have had many battles along the way.

Now Trump wants to renegotiate NAFTA, which will be at the top of the agenda in his meeting with Trudeau.

1. Canada gets into more trouble with NAFTA than Mexico

Listening to Trump, one might think that Mexico is the bad actor in NAFTA. But since NAFTA’s creation in 1994, 39 complaints have been filed against Canada, almost all by US companies. Known in the industry as investor-state dispute resolution, it allows companies to resolve cases under a special panel of NAFTA judges instead of local courts in Mexico, Canada, or the US.

There have only been 23 complaints against Mexico. (By comparison, companies from Mexico and Canada have filed a total of 21 complaints against the US.)

And increasingly, Canada is the target of American complaints. Since 2005, Canada has been affected by 70% of NAFTA dispute claims, according to CCPA, a Canadian research firm.

2. The timber battle between the United States and Canada

NAFTA is not the only sore area. In 2002, the US imposed a tariff of approximately 30% on Canadian lumber, claiming that Canada was “dumping” its lumber on the US market. Canada rejected the claim, arguing that the tariff cost its logging companies 30,000 jobs.

“It was a very sour point in Canada-US relations for quite some time,” says Tom Velk, an economics professor at McGill University in Montreal.

The dispute originated in the 1980s, when US logging companies said their Canadian counterparts were not playing fair.

Whether Canada actually broke the rules is a matter of dispute.

Canadian officials deny that the government is subsidizing softwood lumber companies in Canada. American logging companies still claim that they are, and a US Commerce Department report found that Canada was giving subsidies to logging companies in 2004. It did not say whether the subsidies were ongoing.

According to the complaints, Canada subsidized the logging companies because the government owns much of the land from which the wood comes. That subsidy, on top of Canada’s huge lumber supply, allowed Canada to price its lumber below what US companies can charge.

The World Trade Organization eventually sided with Canada, denying the US claim, and the two sides reached an agreement in 2006 to end the tariff.

However, that agreement and its subsequent grace period expired in October, and the two sides are at it again. The Obama and Trudeau administrations were unable to reach a compromise before Obama left office and it remains a contentious trade issue with US lumber companies calling for tariffs once again.

Related: ‘Without NAFTA’ we’d be out of business

3. Smoot-Hawley sparks the US-Canada trade war

Things got even worse during the Great Depression. In 1930, Congress wanted to protect American jobs from world trade. So the United States imposed tariffs on all countries that shipped goods to the United States in an effort to protect workers.

It was called the Smoot-Hawley Act. Today, it is widely accepted that this law made the Great Depression worse than it was.

Canada was furious and retaliated against the US more than any other country, sparking a trade war.

“Canada was so outraged that they … raised their own tariffs on certain products to match the new US tariff,” according to Doug Irwin, a Dartmouth professor and author of “Peddling Protectionism: Smoot-Hawley and the Great Depression.”

For example, the US raised a tariff on eggs from 8 cents to 10 cents (after all, these are 1930s prices). Canada retaliated by also raising its tariff from 3 cents to 10 cents, a threefold increase.

Exports dropped dramatically: In 1929, the US exported nearly 920,000 eggs to Canada. Three years later, she only shipped about 14,000 eggs, according to Irwin.

Related: Remember Smoot-Hawley: America’s Last Great Trade War

4. Canada’s sky-high tariffs on US eggs, poultry, and milk.

Fast forward to today. Smoot-Hawley is long gone, but Canada continues to levy high tariffs on US imports of eggs, chicken and milk.

For example, some tariffs on eggs go as high as 238% per dozen, according to to the Canadian Department of Agriculture. Some milk imports, depending on the fat content, reach 292%.

“They’re so expensive you can’t bring them in. There are no American eggs in Quebec,” says Velk.

According to the Canadian Embassy in the US, the reality is very different. Its officials say that despite some stiff tariffs, Canada is one of the top export markets for American milk, poultry and eggs.

The United States has tariffs on some goods from all countries, but they are not as high as Canada’s.

Experts say these tariffs continue to bother some US dairy and poultry producers, some of whom are challenged to sell on the Canadian market. But they doubt much will change since the tariffs have been in place for decades.

Related: Those Reagan Tariffs Trump Loves To Talk About

5. COOLer heads and the future of NAFTA

Despite all these disputes, experts point out that this business relationship remains one of the best in the world.

In fact, the two countries are so interconnected now that when trade disputes break out, US companies sometimes side with Canadian companies and against US lawmakers.

For example, Canadian meat producers challenged a US law that required them to label the place of birth, rearing, and slaughter of cattle. The Canadians said the law discriminated against their meat being sold in the US and took the case to the WTO.

The WTO sided with Canada, and last December, Congress repeated the country-of-origin labeling law. US meat producers, whose business is intertwined with Canada, actually supported their counterparts in Canada, arguing that the regulation was too onerous.

As for Trump’s proposal to break up NAFTA, many US and Canadian experts say it’s not worth renegotiating or ending the deal. The three countries that are part of the agreement are so entangled with each other that untangling all that integration would be detrimental to trade and economic growth.

–Editor’s Note: This story was originally published on August 11, 2016. We have since updated it.

CNNMoney (New York) First Posted Feb 13, 2017: 11:11am ET


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