NAFTA Negotiations From The Other Side: What Mexico And Canada Can Do

NAFTA Negotiations From The Other Side:

What Mexico And Canada Can Do

NOV 28, 2017

Phil Levy , FORBES CONTRIBUTORI write about international economic policy, with a focus on trade Opinions expressed by Forbes Contributors are their own.

While Americans were preparing to roast turkeys earlier this month, the fifth round of the North American Free Trade Agreement (NAFTA) renegotiations concluded in Mexico City. The talks didn’t go so well.  While we await the sixth round in Montreal in January, it's worth thinking about why the process is not working well.

Canadian, Mexican, and American flags stand on display during the fifth round of North American Free Trade Agreement (NAFTA) negotiations in Mexico City, Mexico, on Tuesday, Nov. 21, 2017. Photographer: Alejandro Cegarra/Bloomberg

There are certainly good ideas around about how the United States could constructively change its approach to the renegotiation talks, but President Trump and his top trade officials seem fairly set in their current, blustering approach. In a world of negotiations that traditionally relies heavily on precedent, the Trump approach has featured radical departures, such as ideas for automatically terminating NAFTA, or for dictating the share of U.S. content that must be in North American cars.

Instead of rehashing the deficiencies of such proposals, what if we take the Trump administration at its word and consider its strategy as set for the time being. What, then, are the options open to the Canadians and the Mexicans at the negotiating table?

Here are four broad approaches they might take, along with some of the pros and cons for each:

1.                  Just say yes

As problematic as the Trump administration NAFTA proposals may be from an economic standpoint, the demise of NAFTA could be damaging to the Mexican and Canadian economies. Might it not be better to give in to U.S. demands? This need not mean complete capitulation; there could be haggling about the details.

The advantage, of course, would be that the negotiators would strike a deal, thereby alleviating the threat of termination. But the disadvantages loom larger. The Trump administration would not be able to get its most controversial proposals through Congress, since the radical ideas do not have the requisite domestic support. Without Congress, there would be no new agreement.

Could that actually be a good thing for the Mexicans and Canadians? What harm would there be in agreeing to wild proposals if those proposals never come into force?

There would be two types of harm. First, Mexico and Canada have their own domestic politics. Even if they do not expect the objectionable agreements to come into force, they could still face strong pushback at home for having conceded the points. Second, there would be the concern that empty concessions made in these talks might set a precedent and be taken as a starting point in later negotiations.

Thus, there is no easy way to just say yes.

2.                 Just say no

If the Trump proposals are misguided and damaging, then, why not just say no and walk away from the talks? This one is easier to answer. Both Mexico and Canada suspect such a move would give the Trump administration an excuse to terminate NAFTA. That’s a highly undesirable outcome from their perspective.

3.                 Team up

From a U.S. perspective, dividing and conquering might be a fruitful strategy. But that’s exactly the threat that concerns the Canadians and Mexicans.

It is not entirely obvious that their interests align. In each case, their trade with the United States dwarfs their trade with each other. Further, were NAFTA to end, Canada has an earlier free trade agreement with the United States to fall back on; Mexico does not. Yet, to date, the Trump administration’s threatening approach has largely induced the two countries to stick together.

4.                 Agree where they can, but otherwise play for time

If Mexico and Canada can say neither ‘yes’ nor ‘no,’ they are left trying to hold on and hope things change for the better. That is what happened in the last round. Some details were worked out on issues such as digital trade and customs procedures. But the big divisive questions remained unresolved.

There is a twist on this strategy in which the Canadians or Mexicans table their own bold, difficult   proposals. That puts the United States in the position of saying no as well, perhaps alleviating some pressure on the neighbors.

The problem with this general approach is that it threatens to test the patience of the Trump administration. U.S. Trade Representative Robert Lighthizer, after the latest disappointing round, said, “thus far, we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement.” There was no need for Lighthizer to repeat explicitly the threat that failed talks could induce the President to carry out his oft-repeated threat to end NAFTA. Furthermore, a little bit of temporizing could lead to a long delay, as the Mexican elections approaching in summer 2018 will require at least a pause in high-level negotiations.

There are no easy answers for the Canadians and the Mexicans, and that highlights a key failing of the Trump administration’s trade approach. Ideally, a negotiator maneuvers a counterpart into a position where they have little choice but to concede. The Trump administration has maneuvered its NAFTA partners into an apparent dead end.