How will the Iran war impact CUSMA negotiations?
For Canada’s economy, all roads lead back to CUSMA.
The outcome of the mandated review of the Canada-U.S.-Mexico trade agreement this year will be felt in almost every aspect of life in this country.
At least up until the U.S.-led attack on Iran, the Bank of Canada was citing the CUSMA review as the determining factor in its upcoming decisions on the interest-rate settings that influence the pace of our economic expansion.
The formal CUSMA review, led for Ottawa by Canada-U.S. Trade Minister Dominic LeBlanc, was just getting started when President Donald Trump injected a major new wild card into the talks by going to war against Iran.
Without meaning in any way to minimize the human horrors of the war, it is nonetheless important to try to understand the ramifications of the conflict for the trade-dependent North American market.
Although Trump negotiated CUSMA during his first term, he has in the past year callously broken the terms of the deal and trolled Canada with threats to scrap the agreement altogether.
But his administration is well aware that the U.S. business community—in consultations meant to inform Washington’s position in the CUSMA talks—has overwhelmingly stressed the importance for the economy of maintaining North American free-trade.
At the same time, even before the president launched a military assault on Iran, the inflationary impact of Trump’s tariffs against U.S. allies was contributing to the president’s weak standing in the polls. The Middle East conflict is likely to exacerbate that disapproval, particularly among independent voters who will make the difference in the high-stakes U.S. Congressional midterm elections in November.
Trump may wish to keep CUSMA intact…
With that in mind, you can argue that Trump might shelve his usual anti-trade proclivity and act to keep CUSMA mostly intact to avoid fanning more inflation, economic uncertainty and pain for consumers and corporate America.
You can also add in the fact that the war underscores the value of Canada to the U.S. as a reliable source of energy–theoretically a strong point in LeBlanc’s negotiating position.
"If you're sitting in Washington and you're seeing what's happening to global markets, you're going to be looking at your secure producers and suppliers perhaps slightly differently,” Fen Osler Hampson, a professor of international affairs at Carleton University, told the Canadian Press.
While all that would seem to work in Canada’s favour in the ongoing CUSMA talks, there is unfortunately no way to know if any of it will make much difference in the White House’s approach to the redo of continental free trade.
Despite U.S. businesses’ backing of CUSMA, Trump has continued to call it an “irrelevant” deal that has allowed Canadians to take advantage of Americans. Although the president has maintained open trade for CUSMA-compliant goods, he has ignored the pact in the imposition of sectoral tariffs on Canadian steel, aluminum and lumber–undermining Canada’s industrial capacity while driving up costs for U.S. producers.
But then again…
Even after seeing his main tariff instrument declared illegal by the U.S. Supreme Court, Trump has remained committed to his protectionist strategy.
As for the impact of tariffs on inflation, it may mean little when it comes to Trump’s position on trade and the CUSMA talks. While the president won re-election in large part on his promise to curb consumer price increases, he has generally brushed aside complaints from Americans about higher costs.
Even the fast-climbing gas prices unleashed as part of the Iran war have not rattled the president. He has said the goals of the U.S.-Israeli attack on Iran are more important than pain at the pumps and argued that gas prices will plummet quickly once the conflict is over.
Then there’s the question of fall-out from the response of U.S. allies to Trump’s Middle East military adventure. He hasn’t singled out Canada for criticism for not jumping to bail out the U.S. in the open-ended mess the president created in the oil-rich region. But Canada is of course a member of NATO, which the president has castigated—most recently calling NATO members cowards—for the alliance’s unwillingness to take part in a war on which it was never consulted.
Trump can forget who he is lashing out against from one day to the next. But his frustration with allies over what is proving to be the biggest risk of his presidency could reverberate for some time, possibly adding to his inclination to further disrupt the U.S.’s economic partnerships—and by extension CUSMA.
It will be weeks, possibly months, before we get a sense of how this will play out. In the meantime, the future of Canada’s economy remains up in the air.
