We have reached the end of a tumultuous year in Canada-U.S. relations. Next year is likely to be much worse.

Trade experts are increasingly convinced that, as early as January, President Donald Trump will announce that the United States is withdrawing from the North American free-trade agreement with Canada and Mexico, launching a period of unprecedented instability.



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"I am extremely worried," said Edward Alden, a senior fellow at the Washington-based Council on Foreign Relations. The loss of NAFTA would be "a real deterioration of the status quo for Canada," he believes. "This is not some future gain forgone. This is big, current losses."

The cost in unemployment and economic stagnation could be severe. If the NAFTA talks fail, "the prevailing view is that we're going to go into a big fog, what some call a zombie state, and I think there's a very real chance of that happening," says Frank McKenna, former Canadian ambassador to the United States. "We'll be in a no-man's land."

But this could be exactly what Mr. Trump wants. "One of the intentions of the administration is to create this kind of investment risk for Canada and Mexico in order to direct investment to the United States," Roland Paris believes. The political scientist was Prime Minister Justin Trudeau's foreign policy adviser before returning to the University of Ottawa in 2016.

Mr. Trump, in other words, might cancel NAFTA – not despite the chaos it would create, but because of it.

Not that long ago, the picture was much rosier. Immediately after Mr. Trump's surprising presidential victory in November, 2016, Mr. Trudeau's team launched an all-fronts charm offensive, aimed at cultivating a strong personal relationship between the Prime Minister and incoming President and at impressing on Mr. Trump that NAFTA was good, not just for Canada, but for the United States as well.

"The hope was that … it would be possible to establish a relationship with him quickly, and work with him as soon as he came into office, and the initial indications were pretty positive," Prof. Paris recalls.

But the charm offensive didn't stop at the White House. Cabinet ministers courted their American counterparts. Mr. Trudeau didn't hesitate to visit Capitol Hill in search of allies in Congress. Premiers were asked to visit state governors; everyone and anyone was available to meet with agricultural and industrial firms and associations.

Things seemed to go well when Mr. Trudeau visited Mr. Trump in Washington in February. "We'll be tweaking it," Mr. Trump said of NAFTA during a press conference with Mr. Trudeau. "We'll be doing certain things that will benefit both of our countries."

But there were already ominous undercurrents. Because the Liberals failed to resolve the softwood lumber dispute with the Obama administration, it became an irritant in the NAFTA talks. And Boeing persuaded Washington to impose punitive import duties on the Bombarider C Series passenger jet, with Ottawa vowing to boycott purchases of Boeing fighter jets in retaliation.

And then the black hats stepped forward.

Both U.S. Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer believe that unfair trade agreements have hurt the U.S. economy. "Deals that have been made historically have resulted in the great loss of manufacturing jobs, a great amount of closed manufacturing businesses," Mr. Ross told said in an interview with CNBC in March. "We don't want that to continue."

During the NAFTA negotiations, the Americans introduced enough poison pills to fell a horse. Any new agreement would have to be renegotiated after five years. The dispute-resolution mechanism would be gutted. U.S. content in auto parts had to go up, way up. Access to U.S. government contracts by Canadian and Mexican firms had to go down, way down.

"We're asking two countries to give up some privileges that they have enjoyed for 22 years," Mr. Ross told CNBC in October. "And we're not in a position to offer anything else in return. So that's a tough sell."

When Mr. Trudeau returned to Washington to meet with the President in October, the mood was grim.

"I've been opposed to NAFTA for a long time," Mr.Trump said, as Mr. Trudeau looked on. "… And I think Justin understands this: If we can't make a deal, it'll be terminated and that will be fine."

"We have to be ready for anything," Mr. Trudeau told reporters later that day. The trip highlighted the fact that, however well the two men get along personally, Mr. Trudeau's feminist, environmentalist, pro-labour, pro-globalization world view is antithetical to Mr. Trump's values.

"There's a fundamental political incompatibility between the two of them that's become more obvious with each passing day," Mr. Alden observes.

By late December, the NAFTA talks appeared at high risk of failure. "Every indication seems to me to be that the administration is going to terminate NAFTA, then indicate that they have six months before it actually expires to get a deal," Kansas Senator Jerry Moran said in a radio interview. Another senator, unnamed, told the journal Inside U.S. Trade that Mr. Trump would set the six-month clock ticking at the end of January.

Despite his early reassurances, "I don't think Trump's position has really changed," Mr. Alden says. "He says a lot of things, and contradicts himself frequently, but his hostility toward NAFTA has been a constant."

Stephen Harper believes the Trudeau government should try to negotiate the best available deal, whatever that deal might be. "It does not matter whether current American proposals are worse than what we have right now," the former prime minister wrote in October in a leaked memorandum to clients of his consulting firm. "What matters in evaluating them is whether it is worth having a trade agreement with the Americans or not."

Prof. Paris believes this is bad advice. "I don't think that Stephen Harper would be following the advice as prime minister that he's giving as ex-prime minister."

After all, things could be as different a year from now as they were a year ago. The U.S. mid-term elections will be in November, and the future of NAFTA could be a major issue in those elections.

The U.S. tax-cut legislation is unpopular, and special counsel Robert Mueller continues to investigate possible links between the Trump team and Russia during the 2016 election campaign. By the end of 2018, Mr. Trump might be a much-weakened president.

"The political circumstance in the United States may shift to Canada's advantage over time," Prof. Paris says. "It cuts both ways."

Mr. McKenna, the former ambassador, predicts that, eventually, things will settle down. "Ultimately, there will be a relationship between Canada and the U.S., whether it's multilateral or bilateral, but it's going to be very messy getting there."

How messy? That's what 2018 will reveal. Buckle up.


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Lyle Konner
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Konner & Associates Financial Services Inc.
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