The United States and Mexico have reached an agreement to revamp the North American Free Trade Agreement. The governments were short on the details, but one thing that is certain is that Washington would like to change the pact’s name to “The United States-Mexico Trade Agreement.” Noticeably absent from this name is Canada. Mexico has said it hopes Canada will join, but what Mexico hopes for is irrelevant. This now comes down to whether Canada and the U.S. can work out their bilateral issues in the same way Mexico and the U.S. just did.
NAFTA is a trilateral agreement in name. It’s better thought of as two distinct bilateral economic relationships: one between the U.S. and Canada, and one between the U.S. and Mexico. Mexico and Canada simply don’t trade that much with each other. Canada imported more from China in 2017 than it did from Mexico, and just 1.4 percent of its exports went to Mexico. Just under 3 percent of Mexico’s exports went to Canada, and just over 2 percent of its imports came from Canada. And though Canada and Mexico have some interests in common, overall, the trade issues at stake are different for both sides. What Mexico negotiates with the U.S. on, say, fruit exports has little to do with what Canada negotiates with the U.S. on dairy exports.
It is little wonder, then, that the trilateral format of NAFTA negotiations broke down in May. Shortly thereafter, the U.S. and Mexico began negotiating directly with each other. (There were concerns that the election of Andres Manuel Lopez Obrador could derail U.S.-Mexico relations. They were misplaced.) Since then, the U.S. and Mexico have whittled away at their disagreements. The U.S. softened its stance on including a “sunset clause” to force new negotiations every five years. Mexico conceded on auto content regulations, agreeing to increase the percentage of auto content made in the U.S. and Mexico to 75 percent from 62.5 percent and requiring 45 percent of auto content to be made by workers making at least $16 an hour.
If recent trade relations are any indication, talks with Canada promise to be more contentious. Canada’s official response to today’s announcement was stately; its foreign minister said that such a deal was a “necessary requirement for any renewed NAFTA agreement.” But beneath this veneer of pleasantries, one of the main fault lines is already clear: Canada is still talking about NAFTA, and the U.S. is not. The U.S. and Canada have been butting heads publicly ever since Washington denied Canada an exemption from steel and aluminum tariffs earlier this year. Ottawa responded with almost $13 billion worth of tariffs on U.S. goods of its own.
There are, of course, domestic political considerations to today’s announcement. By changing the name of the agreement, President Donald Trump can show his base that he fulfilled his promise to “rip up” NAFTA when he got to office, even if its fundamentals remain in place. But this is about more than domestic politics. Today’s press conference didn’t just mark the end of U.S.-Mexico negotiations – they also marked the beginning of U.S.-Canada negotiations.
It sets Washington’s opening position. By publicly announcing an understanding with Mexico, the U.S. pressures Canada to fall in line. Either “negotiate fairly,” in the words of Trump, or walk away, or so the thinking goes.
In the end, the importance of bilateral trade between Canada and the U.S. will force both sides to compromise, much like how it did with the U.S. and Mexico. The negotiations won’t be pretty, but NAFTA will survive in some form or another, regardless of whatever new name (or names) it is given. Today’s announcement shows that the U.S. is open to compromise but also willing to walk away from the table. Canada can’t afford to walk. Let the bargaining begin.