Canada and Mexico Prepare for Life After NAFTA

After wrapping up a series of seemingly optimistic talks on the North American Free Trade Agreement, the United States, Canada, and Mexico showed just how far apart they remain on the thorniest issues. The continued impasse sets the stage for a final pressure-packed round of talks in Mexico City next month — if domestic politics in all three countries leave room for a deal at all this year.

Even as the Trump administration continues to try to compel its neighbors to accept a revised trade deal on its own terms, Canada and Mexico are forging ahead with new trade pacts of their own. That’s a sign of how much the global economy has changed since NAFTA was written a quarter-century ago, and of continued global momentum for multilateral free trade agreements despite President Donald Trump’s “America first” trade skepticism.

Canada and Mexico signed on last week to a new Trans-Pacific Partnership with nine other Pacific Rim nations, a massive trade pact that doesn’t include the United States after Trump withdrew soon after taking office. Last fall, Canada’s trade accord with the European Union went into effect — something the United States has yet to achieve. Mexico expects to revise its own trade deal with the European Union this spring.

And Mexico and Canada are both taking part in yet another free trade bloc, the Pacific Alliance, which now encompasses Colombia, Peru, Chile, Singapore, Australia, and New Zealand.

“We can’t just assume that, because we’re the United States, that the world is going to agree to what we put out there,” said Eric Farnsworth, vice president of the U.S.-based Council of the Americas and a negotiator on the original NAFTA. “It’s become a more diversified marketplace globally, and the administration is coming to terms with what that means.”

Since talks to revise NAFTA began last year, the United States has insisted on conditions that both Canada and Mexico considered unacceptable. On Monday, Canadian Foreign Affairs Minister Chrystia Freeland reiterated that U.S. proposals — including mandating more U.S.-made content in cars and automatically letting the trade pact expire after five years — are “unprecedented.”

Former Mexican trade negotiators think the bare-knuckle U.S. approach shows a misunderstanding of how the economy has evolved since the 1990s, especially when it comes to the importance of the United States to its neighbors.

The Trump administration “thinks they have more leverage than they do, and they are overplaying their hand,” said Antonio Ortiz-Mena, a former Mexican trade negotiator now at the Albright Stonebridge Group. “Mexico does have other options — they may not be ideal, but they’re options that weren’t available 25 years ago.”

Those additional options are one reason that Mexico and Canada have so far pushed back against the toughest U.S. demands during a half-dozen rounds of talks to update NAFTA, which went into effect in 1994. After the latest round, U.S. Trade Representative Robert Lighthizer quickly shot down the optimistic news reports suggesting the three sides were getting closer to resolving many of their differences.

He brushed aside a Canadian counterproposal to update the way NAFTA deals with automotive components by including more software and intellectual property; Ottawa figures that would benefit the United States and assuage Trump administration demands for more U.S. content in cars.

But Lighthizer said the Canadian proposal would lead to less North American content in vehicles and “is the opposite of what we were trying to do.” That dismayed observers who thought the technology focus of the Canadian proposal could help bridge the gap on one of the most contentious issues in the talks.

“Canada apparently proposed a creative rethink of how and which of the internal parts make up the true value of a car, in light of nearly 25 years of technological advancements since the original NAFTA was negotiated,” said Chad Bown, a trade expert at the Peterson Institute for International Economics. “Lighthizer dismissed that proposal out of hand.”

While Trump himself often (and erroneously) takes aim at U.S.-Mexico trade, Lighthizer lit into Canada. Zeroing in on the trade balance, a favorite metric of Trump administration officials if not of trade experts, he bemoaned the U.S. trade deficit in goods with Canada, before lambasting a recent, sweeping Canadian complaint made before the World Trade Organization.

“It makes one wonder if all parties are truly committed to mutually beneficial trade,” he said.

In response, Freeland made clear the philosophical gulf that separates the Trump administration’s approach to trade from those of its closest partners.

“Canadians do not view trade as a zero-sum game in which one side must lose in order for the other to win,” she said. And while dismissing trade balances as the best gauge of a trade relationship, she pointed out that the United States actually has an overall trade surplus with Canada in goods and services.

She also pushed back on the autos dispute, warning that the U.S. proposal mandating more American content risks “dismantling” cross-border supply chains that have sprung up in the last couple decades.

That leaves one last negotiating session in Mexico City next month to try to bridge the so-far-impassable divides. Lighthizer, while acknowledging that “some real headway was made” on less-contentious chapters, expressed frustration with the glacial progress of talks so far and said he expects the pace to accelerate in Mexico, where he hopes to see a “major breakthrough.”

The problem is that even if negotiators could iron out acceptable solutions to the technical problems, the NAFTA talks are inseparable from politics. Mexico has presidential elections in July, which both shortens the time left to make a deal and makes Mexican leaders less able to concede anything to Washington.

This fall, U.S. congressional midterm elections create another pitfall for NAFTA. Trump campaigned on revising or even tearing up the accord and has made NAFTA-bashing a staple of his speeches, though he seems to have ruled out the idea of announcing the U.S. withdrawal in Tuesday’s State of the Union address.

But he’s also gotten an earful from those who have benefited from NAFTA — including many in the politically important Farm and Rust Belts. That leaves the administration facing a choice between backing down on a signature campaign pledge or threatening big chunks of the U.S. economy — in an election year.

“The problem for Trump is that he is getting a steady message from agriculture and industry: If he tears up NAFTA, nothing good happens. It’s not going to bring back jobs, and it’s going to create a lot of losers,” said Charles Roh, a deputy chief U.S. negotiator of the original NAFTA agreement. “Then he’ll own the outcome, a lot like with health care.”