Update on NAFTA Renegotiations – The Trump Card?

As a nation that depends on exports for much of our prosperity, the renegotiation of NAFTA is critically important to our economy. President Trump’s latest protectionist volley this week- the imposition of tariffs on steel and aluminum from a number of countries, including Canada, is another Trumpian twist in the ongoing saga. Here is a quick update and analysis of the current state of NAFTA negotiations.

Canada’s Negotiation Strategy

The Canadian government has approached renegotiating NAFTA through two strategies: a progressive free trade agenda and a “charm offensive” to build support for NAFTA in the United States.

The Canadian government’s progressive free trade agenda aims to include chapters on gender, climate change, First Nations and labour protections into new trade agreements. This is a policy response to decreasing public support for trade globally and a tactical response to the various Trump demands for changes to the existing NAFTA deal.

The Canadian government has also employed an unprecedented outreach strategy to build support for NAFTA in the United States- logging hundreds of meetings with Democrats, Republicans, Governors, diplomats and commercial stakeholders across the US pushing the message that NAFTA is an integral economic agreement. Building a coalition of supporters for NAFTA in the US has been a signature part of Canada’s negotiating strategy and it appears to have helped.

Trilateral Political Considerations 

The United States

At the core of the American negotiating position is Donald Trump’s 2016 campaign commitment in states such as Michigan, Wisconsin and Pennsylvania that he would return lost manufacturing jobs to workers. Consequently, any new deal would need to arguably advance that goal, however difficult that might be in practice.

Midterm elections this fall and increased pressure from stakeholders, including many industries with integrated supply chain arrangements with Canada, are pushing the United States to reach some agreement. Republican Congressional leadership has signalled that a deal on NAFTA has to be reached within weeks in order to be ratified by Congress before the midterms in November. If the Democrats then take control of the House of Representatives, the White House will not be able to count on a politically aligned Congress to pass a new NAFTA.  

Although President Trump has the constitutional authority to reach a new deal or abrogate the existing deal, Congress is responsible for the legislative changes to practically implement the changes to a new NAFTA or the withdrawal from the existing deal. President Trump also has to give six months notice of his intention to withdraw from the deal. 

President Trump’s decision to apply tariffs to steel and aluminum from Canada, Mexico and the European Union was, in part, to increase domestic political pressure on Mexico and Canada and force them to start making concessions on the President’s politically toxic demands for NAFTA. Canada has responded with a broad list of tariffs to take effect next month, which are targeted to impact sectors in key districts and states ahead of US midterms, with the view of creating concern about Trump’s trade posture among voters. This emerging trade war could overshadow the NAFTA negotiations in the short term and further delay negotiations. 

Mexico

The domestic political environment in Mexico is pressuring the United States to reach an agreement soon – Mexico’s presidential election takes place on July 1, 2018.  This potential change in leadership, especially to the more left-wing, populist candidate, Andrés Manuel López Obrador, could have serious impacts on the NAFTA agreement. Obrador has said that he would change Mexico’s approach if a deal is not reached prior to his election. 

Canada

The Canadian federal election will take place in October 2019. The Liberal government has more room to make concessions before 2019 than it will in the months before an election. The opposition parties are unlikely to allow the Liberal government to go into an election facing anything but withering criticisms from them for any concessions made by Canada to reach a deal.  

Canadian officials are aiming to reach a partial new deal in the coming weeks and are hopeful but not optimistic that the White House and Mexico will sign it. 

Conclusions

Until this week, it appeared that the three countries were closer than ever to reaching some new deal, involving concessions by Mexico on rules of origin and labour issues. Trump could have claimed victory- he had changed the deal to get lost manufacturing jobs back. However, Trump appears to believe negotiations are a zero-sum game. This explains his decision to include Canada and Mexico in the tariffs on steel and aluminum- an attempt to leverage both countries into agreeing to American demands. But the pressure move on Mexico and Canada may well be the political tipping point that prevents either of them from signing any deal in the near term.

Richard Mahoney is a partner in McMillan LLP and Managing Director of McMillan Vantage Policy Group, the only public affairs, government relations and communications firm anchored in a national law firm. Richard’s full bio can be found at mcmillan.ca/RichardMahoney.