November 21, 2024

By John M. Weekes

There is considerable confusion, in the aftermath of the US presidential election outcome, surrounding the future of trade relations in North America. At least two Canadian premiers – of Ontario and Alberta – have suggested that future trade relations between Canada and the United States should be governed by a bilateral agreement, one that would not include Mexico. At this writing, Ontario Premier Doug Ford has just announced that he wants separate bilateral deals negotiated “now”, and that his fellow premiers back him up. Why this might be a good idea, or how it might be achieved is not at all clear.

Let’s start with what the provisions of the CUSMA (known as USMCA in the US) say about the continuation of the agreement. Article 34.6 provides an option for withdrawal under which any of the three countries could withdraw from the agreement on six months written notice. Article 34.7 provides for the review and possible extension of the agreement after the agreement is in force for six years i.e. July 1, 2026. Under this clause, the operation of the agreement will be reviewed by the parties. As part of the review, the parties will consider whether they wish to extend the agreement for a further period. In the absence of any agreement to extend the CUSMA, the agreement would terminate after a period of 16 years, i.e. on July 1, 2036. There is no provision for kicking a country out of the agreement. But there is plenty of time to consider the stakes and negotiate before any hard decisions need to be made.

Now is the time to be considering how to secure the best outcome for Canada and Canadians. At this point, we don’t even know for sure whether the review will lead to a negotiation although that now seems very likely. It is certainly premature to be musing about endgame issues such as whether Mexico should be dropped from the partnership. Indeed, it would be presumptuous and dangerous for Canada to talk about this matter without having a clear sense of where the Americans stand. After all, the Americans have a lot more at stake in their relationship with Mexico than does Canada. Donald Trump has already linked tariff treatment for Mexico with Mexican policy on restraining migration. He will not want to throw his leverage away by destroying the CUSMA.

Trump’s election victory has Canadians in panic mode, desperately trying to figure out how to ingratiate themselves to Trump even before they know what the detailed American approach will be. This scurrying about north of the border will encourage the Trump team to think that they are on the right track for getting new concessions from Canada.

A key reason why some Canadians are proposing that Mexico be ejected from the deal is that Mexico may become a back door for Chinese incursions into the North American market. There is no evidence that Chinese-made products are being transshipped through Mexico into the United States and Canada. Indeed, the CUSMA rules of origin would prevent this from happening. There are growing signs that Mexico itself is concerned about Chinese exports into Mexico and investment by Chinese companies in Mexico. Mexican tariffs are being raised against Chinese imports and senior Mexican officials are contemplating putting an investment screening mechanism in force that would give Mexico a handle to control undesirable Chinese investment.

It is certainly premature to be musing about whether Mexico should be dropped from the partnership. Indeed, it would be presumptuous and dangerous for Canada to talk about this without having a clear sense of where the Americans stand.

A better approach for Canadian interests would be to work with the United States and Mexico to ensure that all three North American countries put in place a common approach to managing the challenge that China poses to North America. Slamming the door on Mexico would leave them with little alternative but to make a strategic partnership with China. This could create a disaster for American business. Imagine the power of a combined Chinese and Mexican effort aimed at capturing markets in Latin America in which American businesses currently have an important stake. And make no mistake about it – the Chinese are currently showing great interest in Mexico. But Mexico has every interest in wanting to strengthen its position in North America. Partnering with China would be very much a choice of last resort for them.

Let’s not forget the importance of Mexico as a trading partner. The country is now the largest trading partner of the United States, relegating Canada to number two, although for the time being Canada remains the largest import market for US goods exports. Mexico is Canada’s third-largest trading partner. Mexico, with a population approaching 130 million is a growing and diversified market. According to World Bank GDP data for 2023, Canada is ranked 10th with a GDP of US$2.14 trillion while Mexico is ranked 12th with a GDP of US$1.79 trillion. Mexico is an important partner for Canada, with scope to become more important. If we didn’t already have a trade agreement with Mexico, we would be seeking to negotiate one on an urgent basis, as we have just done with Indonesia.

It is in Canada’s interest to work with both Mexico and the United States in the coming negotiation over the future of the CUSMA. As many observers have already commented, the main American focus will probably be on Mexico. If true, this would take some of the heat off Canada. The trilateral dynamic might well be beneficial in protecting Canadian interests. Or would we rather try negotiating a new bilateral agreement with the United States in which we would have their undivided attention at the negotiating table? Canadians have concerns about some of the recent measures put in place in Mexico, notably in the energy and agriculture sectors. These are also a concern for the United States and in any new negotiation Canada would benefit from the negotiating leverage of the US in seeing these matters addressed.

Instead of fretting about what might happen, let’s prepare ourselves for a negotiation in which we would have the opportunity of increasing benefits for Canada and strengthening North American competitiveness. A good place to start would be to look at the recent proposal put out by the Canada West Foundation, the Business Council of Alberta, the Calgary Chamber of Commerce, Calgary Economic Development, and the Canadian Global Affairs Institute. Such ideas would not only be beneficial for Canada, they would also capture the imagination of many Americans and Mexicans and help contribute to a successful renewal of the North American partnership.

John Weekes, who was Canada’s chief negotiator for the original NAFTA, is a member of the Expert Group on Canada-U.S. Relations, and a fellow of the Canadian Global Affairs Institute.