Canada opposes replacing U.S. tariffs with quota system, Freeland says

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Foreign Affairs Minister Chrystia Freeland said Canada opposes replacing U.S. tariffs on Canadian steel and aluminum with a quota system, an indication that Ottawa is digging in its heels on the biggest trade dispute remaining between the two countries.

“I’m not interested in a centrally planned economy. I actually lived in the Soviet Union,” Ms. Freeland said in an exclusive interview on Friday with The Globe and Mail.

The minister said Canada continues to pursue a resolution in which both the U.S. tariffs, and the retaliatory levies Canada imposed on U.S. goods, are dropped.

“Canada is very ready to resolve this. It’s exceedingly simple. From my perspective, we could fix it this afternoon. The fix this afternoon is, everybody lifts their tariffs on each other.”

Sources said this week that the United States wants to impose quotas that would cap the amount of Canadian steel and aluminum crossing the border, and in exchange would drop the U.S. tariffs of 25 per cent on steel and 10 per cent on aluminum. The tariffs have been in place since June; Canada’s retaliatory tariffs have been in effect since July.

One Canadian government source, speaking on condition of anonymity, said Ottawa has rejected the U.S. demand for quotas and told the Americans it opposes quotas of any sort. The source did, however, say Canada might consider a quota that was so high that Canadian exports would likely never reach it. The two sides have made their positions clear to each other, but are not currently negotiating, the source said.

Canada signed an auto tariff side-letter to the USMCA deal that guaranteed that a quota of Canadian exports of autos and auto parts would be exempted from any potential Trump administration tariffs; the quota is so much larger than current exports that it effectively means no Canadian automobile products would be affected.

But Ms. Freeland indicated that Canada has not been negotiating a quota solution to the steel and aluminum dispute, regardless of the level.

“What we are saying, extremely clearly, is the current situation is not good for either country. Let’s just lift the tariffs. That’s the best outcome for everybody.”

In 2017, Canada exported US$7-billion of aluminum and $5.2-billion of steel to the United States, according to Statistics Canada figures.

The tariff issue is the one key trade obstacle left between Canada and the United States after they, along with Mexico, concluded the often fractious negotiations on the proposed United States-Mexico-Canada Agreement on trade at the start of this month. Ms. Freeland led Canada’s negotiating team. She has continued to play a leading role in the subsequent tariff discussions – including hosting a dinner at her Toronto home last week for U.S. Trade Representative Robert Lighthizer and a few other key officials.

Mexico faces the same tariffs on its steel and aluminum shipments to the United States, and a representative of Mexican president-elect Andres Manuel Lopez Obrador recently threatened to block the closing of the USMCA pact, scheduled for the end of November, without a deal on tariffs. Ms. Freeland would not put a Canadian timetable on resolving the tariff dispute, but suggested the conclusion of the proposed USMCA has created momentum for a deal in the relatively near term.

“I do think that the fact that we have an agreement in principle on [the USMCA], it should give us some tailwinds,” she said. “Our single biggest trade issue has been resolved, in a mutually beneficial way. So I think that it’s reasonable to say, ‘Let’s have some goodwill on both sides, and let’s lift these measures.’ That’s certainly the position that Canada is taking now.”

Ms. Freeland played down criticism of what’s known as the China Clause in the text of the USMCA, a section that would require the three countries to formally consult with each other on any free-trade negotiations or agreements with non-market-economy countries. The wording in the section is a thinly veiled reference to China, the world’s second-biggest economy, with which the United States is embroiled in a heated trade war. While many critics have said the clause’s existence reflects an attempt by the United States to limit its USMCA partners’ ability to strike trade deals with China, Ms. Freeland insisted the agreement would not hinder Canada’s pursuit of closer trade ties with the Asian giant.

“We are a sovereign country. Canada, self-evidently, has the right to trade with whomever it chooses, and to negotiate whatever kind of agreements it wants, with whomever it chooses,” she said.

Mexican Economy Minister Ildefonso Guajardo, who headed Mexico’s USMCA negotiations, said in a recent Mexican television interview that the United States pushed for the clause in response to Prime Minister Justin Trudeau’s trip to China late last year for trade talks – a trip that made the Americans unhappy. He also said the initial U.S. demand was for the new trilateral trade deal to include an outright ban on Canada and Mexico making free-trade deals with China. But Ms. Freeland disputed both elements of Mr. Guajardo’s account.

“That’s not what happened when I was in the room,” she said.

She added that the initial U.S. proposal for the clause was not a flat-out ban, but rather that a country “could get kicked out of [the trade pact] by any country on the grounds that it did a deal with a non-market economy.” She said Canada rejected it because it created a new way to break up the trilateral trade partnership. The final deal provided that a country could use a non-market trade deal by one of its partners as grounds to serve a six-month notice that it would leave the USMCA – which is something the agreement would empower its partner countries to do anyway, on any grounds.

With reports from Angela Murphy in Toronto and Adrian Morrow in Washington