By Malcolm Fairbrother*

Canadian Foreign Minister Chrystia Freeland meets with Mexican President Enrique Peña Nieto in July 2018. / Presidencia de la República Mexicana / Flickr / Creative Commons

U.S. President Donald Trump’s threat last week to abrogate free trade with Canada while signing a new bilateral agreement with Mexico alone has led many to think that NAFTA – which will be 25 years old on January 1, 2019 – has no future.  But the likeliest outcome remains just a set of fairly modest changes to the agreement.  Much of Trump’s bluster on NAFTA does not reflect the facts in U.S.-Canada-Mexico trade, though Canadian officials will still have to take his threats seriously.  Canadian Foreign Minister Chrystia Freeland, whose government sat out the United States’ renegotiation of NAFTA with Mexico this summer, rushed to Washington after the bilateral accord was announced, launching new talks with U.S. counterparts.  While Trump has said he will make no concessions, Freeland has continued seeking common ground, and looks ready to compromise on at least some issues.

• The best econometric studies suggest that North American free trade has had disappointingly modest benefits – nowhere near advocates’ earlier projections. But the transition costs of moving to a world without free trade would still be enormously costly for Canada.  The economic and political risk of the highly unlikely, but not completely inconceivable, scenario of losing NAFTA entirely are just too great for the Canadian government to bear.

Canada, which in past negotiations stood up for Mexico on some key issues, now finds itself in the ironic position of looking to Mexico for support.  The two countries are often in a position to benefit from working together, but Trump’s wrath has tempted each to throw the other under the bus – a classic prisoner’s dilemma.

• In the last few weeks, Mexico decided to give the U.S. what it wanted: most importantly, protectionist rules of origin for autos and textiles, and some enhanced intellectual property rights. Mexico calculated that, compared to Trump’s threats not long ago to kill NAFTA in its entirety, these concessions were a modest price to pay to keep the agreement alive.  Also importantly, Mexican leaders appear to have avoided a national humiliation of epic proportions – putting an end to Trump’s dream of getting Mexico to pay for the wall he wants to build on the border.
• Looking for a much-needed “win,” Trump has now made an offer he thinks Canada can’t refuse. His wish list covers things Canada specifically fought hard for in the original free trade talks back in the 1980s and 90s, including protections for Canada’s cultural industries and agricultural supply management programs, and what Canada’s trade minister said in 1992 were “the vitally important dispute settlement provisions” of Chapter 19.  Now, just as Canadian opponents of free trade forewarned in the 1980s, Canada’s economy has become so enmeshed with that of its much larger neighbor that the government cannot say no to the demands of an aggressive administration in Washington.

Yet the situation does not spell disaster for U.S.-Canada trade or for Canada itself.  Trump’s claims notwithstanding, the U.S. Congress has final say over U.S. trade policy, and most of its members (with business lobbyists whispering in their ears) recognize that severing the many economic ties built up between Canada and the United States over the last quarter-century would be unnecessarily disruptive and costly.  Freeland and her negotiators will know that Trump’s threat to kill free trade is not really credible.

•  Even caving on all of Trump’s demands would not be catastrophic for Canada. Contrary to Trump’s zero-sum perspective on trade (like on everything else) as an international battleground, most of the important conflicts with respect to trade are actually within countries.  Canada’s supply management system favors the country’s producers at the expense of consumers, for example, just as do strict rules of origin for U.S. textiles manufacturers.  So while the transition costs of dismantling free trade in North America would be substantial, the impacts of the changes Trump is proposing would be tolerable to all three countries – even if some make no sense (the sunset clause); are just giveaways to specific industries (stricter patents for pharmaceuticals); or favor some industries at the expense of others (U.S. lumber producers and U.S. home builders, respectively, as regards the possible elimination of Chapter 19).  For Canada’s government, the heaviest costs of compromise will be political: Justin Trudeau’s Liberal government will have to choose which bitter pill to swallow, as any concessions will lead to angry recriminations from one domestic constituency or another.

September 7, 2018

* Malcolm Fairbrother is Professor of Sociology at Umeå University and a researcher at the Institute for Futures Studies, both in Sweden.  He is originally from Vancouver, and has been a visiting researcher at multiple institutions in all three countries of North America. He has also participated in the Center’s North America Research Initiative.

By Daniela Stevens*

Canadian Prime Minister Justin Trudeau gives a presentation with Mexican President Enrique Peña Nieto during an official visit to Mexico in October 2017. / Presidencia de la República Mexicana / Flickr / Creative Commons

Facing the growing possibility that the Trump Administration is walking away from the North America Free Trade Agreement (NAFTA), Mexico and Canada are beginning to look for trading partners beyond the United States.  The interdependencies binding the three are strong.  Both Mexico and Canada have deep commercial ties with the United States, which imports about 80 percent of Mexico’s exports and about 70 percent of Canada’s.  Both have significant leverage vis-à-vis the United States as well.  U.S. auto and agriculture industries have a major stake in free trade with Mexico, which also provides important cooperation on security issues and controlling Central American migration.  Liberalization measures within the energy sector by the current Mexican administration make Mexico a strategic partner in terms of energy security.  Canada buys about 19 percent of U.S. exports.

But these ties are fraying as conversations drag on.  Trump Administration proposals are hurting the talks; especially contentious are changes in the “rules of origin” (since the United States proposed increasing the U.S. content of autos to 85 percent from the current 62.5 percent) as well as the inclusion of a “sunset clause” that would make NAFTA expire unless it is renegotiated every five years.  NAFTA’s Article 2205 lets either of the three member countries announce its withdrawal from the accord with six months’ notice.  Canadian and Mexican trade officials have not given such notice yet, but they show signs of heading in that direction.  Both have held high-level meetings with counterparts from South America and Europe, according to official and non-government sources.

• Mexican President Peña Nieto’s administration has expressed a preference for leaving the negotiations over accepting “a free trade agreement that ceases to promote free trade.” President Trump has said that his administration would be willing to negotiate a free trade agreement with Canada alone if the NAFTA talks fail.  However, Canadian Prime Minister Trudeau’s government has stated a preference for keeping the trilateral alive rather than resorting to bilateral agreement, since the terms of the U.S.-Canada deal were more outdated than the NAFTA’s.  The two presidents have been reluctant to take these actions because they apparently believe, as do many experts, that dismantling NAFTA would inevitably create uncertainty and inefficiencies for the three economies.  For example, the auto sector relies on three-way product flows that move several times across borders to be assembled into finished products.  Canadian and Mexican auto parts makers have a direct stake in each other’s dealings with the United States.  Even small duties would add up.
• Nonetheless, some increased trade and a bilateral free trade agreement between just Mexico and Canada is possible. The two countries originally joined NAFTA to protect their access to the U.S. market, not to obtain access to each other’s.  Canadian public opinion and media reflect continued disinterest in Mexico, which is viewed as unstable due to drug-related criminality and corruption.  However, as the completion of a satisfactory NAFTA renegotiation is unlikely, Canadians are exploring deepening the bilateral link.  Mexican interest in Canada is also growing, according to some specialists.  Beyond North America, moreover, Canadians and Mexicans are exploring trade and investment diversification.  Canada is looking for increased cooperation with Latin America, in particular within the Pacific Alliance, a free trade partnership that includes Mexico, Chile, Peru and Colombia, and of which Canada is already Associate Member.  Mexico started a renegotiation last January of its free trade agreement with the European Union, which parties hope to finalize in the next few days.  It has begun warming up neglected ties with the Southern Cone and has already pledged to deepen ties with China.

Trade experts convened recently within the framework of American University’s Robert A. Pastor North America Research Initiative (NARI) were unanimous that that a trilateral agreement that protects the interests of all three partners would be the optimal outcome, but few observers of the NAFTA talks are confident that the Trump Administration will soften its position.  Canada’s commitment to a trilateral renegotiation should exert more pressure on the U.S. to compromise while strengthening both Canada and Mexico’s negotiating positions.  In the event of U.S. withdrawal from NAFTA, however, the two can expand their trade and investment relationship by lowering barriers further through modernization and e-commerce.  In addition, trade can potentially expand between the two since they have similar approaches to achieving various commitments of the Paris Accord involving energy projects and greenhouse gas emissions reductions.  Pastor Scholars concluded that both countries will have to carry out public campaigns to explain to their constituencies the benefits of continued cooperation, either trilateral or bilateral, if the United States significantly alters or abandons NAFTA.  Mexico and Canada have options outside North America in the quest for trade and investment diversification – even though their preferred scenario is a stronger NAFTA.  China, South America, and the European Union arise as the most readily available partners.

December 21, 2017

*Daniela Stevens is a Ph.D. Candidate in the American University School of Public Affairs and a Pastor Scholar.  Her research focuses on national and subnational policies that put a price on carbon emissions.