The NAFTA Road Ahead: Why Canada Must Be in the Fast Lane

Meredith Lilly

In multilateral trade negotiations as in so many things, timing is everything. The NAFTA 2.0 process is unfolding under certain time constraints involving Mexico’s July 2018 election and a concurrent schedule for the Trump administration to renew fast track authority or Congress not to. As Meredith Lilly, Simon Reisman Chair at Carleton University, writes, Canada should strategize accordingly.

As it seeks to renegotiate NAFTA, the Trump administration rages from one political crisis to the next. A tipping point may have arrived following the events in Charlottesville, when increasing numbers of Republicans and U.S. business leaders formally distanced themselves from the president. Moving forward, Republican members of Congress will be less inclined to give the president any political wins that don’t also reflect their own goals for governing—especially as U.S. mid-terms approach. This means that a renegotiated NAFTA deal must increasingly respond to the views of Republican members in order to clear the necessary Congressional hurdles. This erosion of Trump’s authority within GOP circles improves the political calculation considerably for Canada and Mexico.

But before addressing what a new NAFTA might look like for Canada under an emboldened Republican Congress, we must first turn to the negotiation timeline. The U.S. has set up a dizzying schedule of seven rounds over five months, which some trade experts have dismissed as unrealistic. But many interested observers do not appreciate the importance of Mexico’s upcoming election in steering the direction and pace of these NAFTA talks. Even if the Trump administration were not imploding, Mexico’s 2018 election has been that country’s NAFTA 2.0 “trump card” all along.

Mexico’s presidential elections will be held in July 2018, but the associated political disruption will stretch over eight months from approximately March (when campaigning heats up) to December (when the new President is sworn in and following U.S .mid-terms). Term limits bar Mexico’s current president, Enrique Peña Nieto, from running again, and his party is unpopular. Meanwhile, left-leaning populist challenger Andrés Manuel López Obrador is leading in the polls. He is fiercely anti-Trump and opposes Peña Nieto’s reforms to open Mexico’s energy markets to foreign investment. If elected, López Obrador could jeopardize the entire negotiation. While much could change to thwart López Obrador’s chances of victory next summer, both Peña Nieto and the Trump administration must now roll out a NAFTA negotiating strategy as if López Obrador could win.

But to be clear, Mexico would concede little in an accelerated negotiation. There is just no reason for a weakened, outgoing Mexican president to stain whatever legacy he hopes to leave behind by making major concessions to Trump. In that respect, Peña Nieto may be driven to conclude an agreement to protect his own energy reforms from an uncertain future by entrenching new investment and energy commitments into a revised NAFTA.

With the other two NAFTA partners strongly motivated to achieve a deal quickly, Canada has no choice but to join them on the turnpike. Ironically, the 2017 NAFTA dynamics are shaping up to repeat the Trans-Pacific Partnership (TPP) conclusion two years ago, when Canada was heading into its own federal election.  With major TPP countries determined to strike an agreement—driven by Barack Obama’s departure from office—Canada was forced to either continue negotiating into the 2015 election or risk being left out of the agreement entirely.

Of course, events at the negotiating table can easily slow things down. As much as U.S. Trade Representative Robert Lighthizer would like to reach an early deal, he still must deliver enough “wins” to Trump’s supporters to avoid another presidential threat to withdraw from NAFTA entirely. A thin, rushed deal would weaken Republican chances in the mid-terms among key constituencies of voters, making the promise of a delayed, comprehensive deal more attractive by comparison. To balance such interests, the U.S. will require some specific victories if any agreement is to be reached by early 2018.

So, if a quick deal happens, what could that realistically look like for Canada? Of course, we can expect new chapters on e-commerce, labour and the environment, and expansion of trade in services. Although there is plenty of potential controversy to sideline progress on these chapters (Mexico will be defensive on labour and the environment while Canada will defend its culture, telecom and financial services sectors), the three countries also share common goals that will help them find agreement. Achieving those gains—combined with the many unmentioned and non-controversial changes that have already achieved consensus—would represent major advances to benefit all three economies.

But in other areas where Canada is threatened by Trump’s goals, we can find safety in numbers with Mexico and moderate Republicans in Congress. This is good news for the auto sector in all three countries, since few American legislators are on board with their president’s scorched-earth intentions to kill the sector’s competitiveness through stronger U.S. content requirements. Although the 62.5 per cent NAFTA content threshold may in fact rise, auto manufacturers also may not need to change their sourcing practices as a result. For example, if the industry’s requests to allow software and systems design to be reflected as NAFTA regional content, the industry could meet a higher regional content standard without revising its core practices. If negotiators instead focus on modernizing NAFTA’s outdated tracing system, the auto sector could be more competitive as a result.

Canada and Mexico’s interests are also aligned on the need to maintain key aspects of dispute resolution, to fend off any new American attempts to introduce country of origin labelling, and to resist U.S. proposals to advance sub-national procurement in Mexico and Canada while blocking reciprocal access to U.S. markets. Since the same U.S. threats that undermine Canadian interests would also be bad for Mexico, the U.S. administration is unlikely to succeed with those goals on an accelerated timeline.

Instead, Canadian sectors should worry most where Canadian interests are isolated from those of Mexico and mainstream Republicans. Canadian dairy will certainly be targeted by the U.S., which will push Canada to offer comparable market access to TPP negotiations (3.25 per cent). Meanwhile, both American and Mexican dairy industries have cooperated with other countries to request a World Trade Organization investigation into Canadian regulatory changes around the classification of milk ingredients. Given the level of attention to this specific matter in Washington, it seems inevitable that Canada’s dairy ingredient strategy and associated pricing structures will be targeted at the NAFTA table. Since Foreign Affairs Minister Chrystia Freeland has made no public commitments to Canada’s dairy sector beyond keeping the supply management system intact, Canada still has room to negotiate.

Other areas where Canada is perceived to be protectionist or acting unfairly toward American interests will also be easy targets for a president who uses populist resentment to wage political wars. The easier it is to explain a given trade dispute in 140 characters, the greater the risk to Canada. This is one of the reasons Canada’s very low de minimis level of $20 for on-line shopping is being targeted. Other changes in NAFTA could have much more serious implications for Canada, but few can offer Trump an equivalent political pay-off.

What about Freeland’s goals for Canada in the negotiations—new gender and indigenous chapters and changes to temporary entry for skilled professionals?  Nice as the first two may sound, if Freeland succeeds, the chapters are likely to be largely symbolic and devoid of any enforceable measures (as per the Canada-Chile gender chapter on which Freeland wants to model NAFTA). In addition, since countries negotiate trade agreements from a position of self-interest, Canadians should ask what Freeland is willing to trade away to get Mexico and the U.S. to sign on.

And while it would be tremendous if Canada were able to modernize temporary entry provisions in NAFTA, we face separate challenges over that issue. My own research traces the history of temporary entry in U.S. trade negotiations, starting with NAFTA. In short, ever since the U.S. Congress reluctantly approved temporary entry provisions in its free trade deals with Chile and Singapore in the early 2000s, Congress has forbidden U.S. trade negotiators from inserting such provisions again.

More than a decade later, little has changed. In 2015, even when all 11 other TPP countries negotiated a temporary entry chapter, the U.S. under Obama’s leadership stood alone in its refusal. It is difficult to imagine how Lighthizer could now slip this politically sensitive issue into NAFTA negotiations without having signaled any intention to do so. On this point, it is important to note that Lighthizer’s July 17 letter outlining U.S. objectives for the negotiations was not a political stunt: it fulfilled a legal requirement to consult Congress and outline “a detailed and comprehensive summary of specific objectives” for using the same U.S. legislative instrument once intended to pass TPP to instead modernize NAFTA. Despite an awareness that modernizing labour mobility provisions would be a key objective for both Canada and Mexico, Lighthizer’s letter was silent on the topic. Although Canada should certainly try to modernize the list of NAFTA skilled professionals, we will need considerable help from U.S. business leaders who can both benefit and influence Congress.

And what if the fast track to NAFTA 2.0 fails and negotiations are put on the back burner through the long Mexican electoral siesta? Canada will have months to ponder its goals for a more scenic tour of NAFTA, but it is difficult to imagine how negotiating conditions will improve for Canada the longer the process drags on. Some will wager that Donald Trump will be out of office before negotiations can resume. But for those not willing to gamble such dangerous odds, Canada’s best bet is to hunker down and work quickly.

Meredith Lilly is Associate Professor and holder of the Simon Reisman Chair in International Affairs at Carleton University.