Domestic Politics the Biggest Threat to NAFTA

The governments of Canada, Mexico and the United States arrived earlier this year at the North American Free Trade Agreement (NAFTA) renegotiations with three different sets of priorities.

Positions on some issues are broadly aligned, suggesting scope for compromise and agreement in those areas, while others appear further apart, diminishing the prospect of a deal being reached within the allotted — and recently extended — timeframe.

Ultimately, however, if negotiations fail and NAFTA ends, it is likely to be politics that is responsible, as each government has infused the talks with home-spun political considerations that are largely defensive and intended for domestic audiences. None appears willing to tolerate an outcome in which its electorate could perceive political leaders as either surrendering new-found principles or allowing the country to be taken advantage of in reaching an agreement. Negotiating manoeuvrability and the associated room for compromise in this context are limited.

The US administration’s stated desire to reduce the US merchandise trade deficit with Mexico and return manufacturing jobs to areas from where they have relocated lies at the heart of the American negotiating strategy. Leaving aside the questions of whether these objectives make economic sense, and, if so, whether a trade agreement might realistically achieve them, the US position assumes the economic outcomes of a deal are easily measurable, and characterises the negotiating process as well as any resulting agreement as zero-sum propositions. This is fundamentally at odds with both the tenets of international trade theory and the reasons most countries seek reciprocal trade agreements.

It would be impossible using the US benchmarks alone (a reduced trade deficit with Mexico and more US manufacturing jobs) for all sides to claim victory in negotiating a better deal for their constituents, presenting Canada and Mexico with a difficult, if not intractable, political problem. One consequent tactic Canada and Mexico might consider is to go “all in” at some point in the negotiations, threatening to walk away unless a more balanced deal can be reached that would allow for a “win-win” interpretation of the outcome.

But it is highly improbable that Canada or Mexico, together or separately, would use the threat of walking away as a means of trying to shift the US toward a more accommodating position. As both countries understand too well, it is the US that is most likely to abandon NAFTA, and do so claiming victory. It was widely reported that Canadian and Mexican leaders intervened in April to salvage the negotiations when President Trump said he was “all set to terminate”. An obvious precedent is the US withdrawal from the Trans-Pacific Partnership at the outset of the Trump administration, something the president promised as a candidate.

In Mexico, the politics of NAFTA are significant and immediate. The significance is largely a product of the US president’s use of aggressive rhetoric in citing problems Mexico has supposedly thrust upon the US. Immigration and trade have been singled out as areas that need to be addressed, essentially putting Mexico on notice that major changes favouring US interests need to be forthcoming.

Predictably, the messages have not been well received in Mexico. Multiyear trends in public opinion polls show that a steady increase in trust of the US (and a steady decline in distrust) reversed sharply after the 2016 US elections. These opinion changes, combined with new rules on electoral eligibility — essentially allowing for independent candidates — and a wave of populism driven by discontent that is now common in many countries, suggest Mexico could be on the verge of a notable shift in the domestic political dynamics of its relationship with the US. NAFTA will be very much in focus in the 2018 elections, in which President Peña Nieto will not be running, and any candidate’s acquiescence to US objectives would likely quickly prove politically untenable.

While the electoral cycle is not at play in Canada, it seems clear the Liberal government’s domestic political priorities have shaped its NAFTA wish list. Specifically, near the top of Minister of Foreign Affairs Freeland’s priorities for modernising NAFTA is to make it more “progressive”, including through new chapters on gender rights and indigenous peoples.

Tellingly, the minister acknowledged in her August 2017 speech outlining Canada’s NAFTA priorities that its precursor, the Canada-US Free Trade Agreement, had been put in place by a Conservative government — and vehemently opposed by the Liberal party of the day. By attaching such a high priority to a new, more progressive NAFTA, the government’s agenda appears driven to some degree by a Liberal desire for a credible co-ownership claim to a trade deal that, with the benefit of hindsight, it admits was wrongly opposed.

None of the three countries’ domestic political considerations that are now interwoven with NAFTA renegotiations necessarily preclude a mutually beneficial agreement being reached. Combined, however, they will make it much more difficult. Trade negotiators are always constrained, bound as they are by national economic interests as well as narrower interests of groups that have already successfully sought trade protection. While it is debatable whether the additional political constraints on NAFTA negotiators serve national or narrower interests, the risk is real that they could scupper the negotiations, as they are likely to be rigidly adhered to, and areas of compromise may be difficult to identify, let alone agree on.

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