May 8, 2017 / 7:01 PM / 2 months ago

Canada political pressures force PM's hand on U.S. trade disputes

5 Min Read

OTTAWA, May 8 (Reuters) - Canada escalated a trade dispute with United States by making threats Washington called inappropriate in part because Prime Minister Justin Trudeau is under pressure to secure support in a key region ahead of the country's 2019 elections.

Washington last month slapped tariffs on timber imports, alleging they are unfairly subsidized, prompting Trudeau to say he was considering a ban on exports of U.S. coal through Pacific ports.

As well as lumber, the administration of U.S. President Donald Trump has targeted Canadian dairy farmers, while Boeing Corp launched a trade challenge against Montreal-based planemaker Bombardier Inc.

All three are vital to the economy of Quebec, Canada's second most-populous province. And Quebec is seen as vital to Trudeau's hopes of maintaining a strong grip on power in a national election set for October 2019.

As contentious talks on renegotiating NAFTA draw ever closer, Trudeau has little choice but to defend dairy farmers and offer help to the lumber industry, even though that is likely to prompt fresh U.S. challenges.

"Quebec is the key," said one senior Liberal organizer.

The predominantly French-speaking province holds 78 of the 338 seats in the House of Commons and Liberals acknowledge they need to win extra seats there to offset expected losses elsewhere in 2019.

The challenge is that the Liberals won 40 seats in Quebec in 2015, which was far more than expected.

The Liberals say they can capture another 10 to 15 seats, but only if everything goes their way. This in effect means showing support for the dairy industry - and its industry's influential lobby - amid a fresh attack from Washington.

The United States has long complained about Canada's system of domestic protections for its dairy industry, which bars most imports and keeps prices high. Trump last month branded the industry "a disgrace."

The system is unpopular in large parts of Canada, where people complain about paying high prices for milk and cheese.

No Choice?

Trudeau, however, has little choice but to defend it.

Christian Bourque, a pollster for Leger Marketing, noted there are dairy farms in every part of Quebec.

"If you're seen as attacking farming and the land, it's probably easy for the farmers' union to get Quebeckers onside. You don't necessarily want to forget farmers," he said in an interview.

While observers say there is little risk of Trudeau being defeated outright in 2019, the danger for the Liberals is losing enough seats to lose their majority, forcing them to rely on opposition parties to govern and pass budgets. This would inevitably mean political compromises and a diluted policy agenda.

The Liberals have so far tried to maintain calm as tensions on trade ratchet up, relying on a series of visits from cabinet ministers and senior officials to key states and constituencies to press the message that trade benefits both sides.

Bark vs Bite

The outreach efforts will continue, according to a source familiar with official strategy, adding that Ottawa will show its teeth where necessary.

"Do people honestly expect the Canadian government just to say 'We accept these lumber duties, we will move on and pay the price?'" asked the source, who requested anonymity given the sensitivity of the situation.

In a sign of the mounting pressures, former Quebec Liberal premier Jean Charest said Ottawa should consider loan guarantees to affected firms to help them pay for the tariffs.

"It is very black and white now: either the government supports them or they will just close down," he said in an interview.

Although giving such aid could prompt fresh challenges from the U.S. industry, insiders make clear the Ottawa government has no option.

In the short term, Trudeau faces few immediate threats. Polls show the Liberals well ahead of the opposition Conservatives and New Democrats, both of which have stand-in leaders and will not choose permanent replacements until later this year.

"He's had an exceptionally long honeymoon, he's still having a honeymoon, but that has a lot to do with the absence of opposition," said pollster Nik Nanos.

Although being seen to openly favor one province or region over another can be politically fatal in Canada, Liberal sensitivity toward Quebec is clear.

When it came time to deciding on federal aid to Bombardier - a company which has already received billions in subsidies from Ottawa - the Liberals made clear the only question was not if, but how much.

Party operatives also admitted relief after it became clear the government would not have to decide before the 2019 election on whether to allow TransCanada Corp to build a crude oil pipeline across Quebec.

Environmentalists and aboriginal activists had promised high-profile protests that senior Quebec Liberals said they feared could hurt the party's political chances. (Additional reporting by Andrea Hopkins, editing by G Crosse)

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