A Risky NAFTA Two-Step

August 2, 2018

The United States, Canada, and Mexico began the renegotiation of NAFTA on August 16, 2017 . Nearly a year later, there is no deal. This week, talks aimed at finishing a deal by the end of August begin, now that the July 1 Mexican elections are complete. But these talks are different: negotiators for the United States and Mexico are talking bilaterally, without the Canadians.

Canadian officials insist that they have not been frozen out , and the Canadian and Mexican governments insist that they are working toward a trilateral NAFTA 2.0.

Yet President Donald Trump has suggested publicly that the outcome could be two bilateral deals, a Mexico-U.S. free trade agreement and a Canada-U.S. free trade agreement—a MUFTA and a CUFTA that would replace NAFTA. U.S. Trade Representative Robert Lighthizer raised this possibility as early as February 2018.

It is easy to see the appeal of two deals from the perspective of President Trump. It would kill off NAFTA, which he thinks ranks among the “worst deals ever.” And in bilateral negotiations, the United States could exert maximum leverage against its smaller and more trade dependent neighbors to obtain greater concessions.

There are risks inherent in two bilateral deals, too. Two sets of rules raise the complexity and compliance costs on businesses and can operate as a hidden tax or penalty, hurting competitiveness.

Bilateral deals are also naturally smaller undertakings that cover smaller amounts of trade. That can make it harder for the United States to muster political and bureaucratic support for enforcing commitments, updating terms, and pursuing cooperation on non-tariff barriers to trade such as regulatory cooperation and customs facilitation.

This was the U.S. experience when the Barack Obama administration opted for “dual-bilateral” talks with Canada and Mexico on regulatory cooperation and border security to replace the trilateral Security and Prosperity Partnership for North America (SPP) launched by the George W. Bush administration. The United and States and Mexico worked together in the High-Level Regulatory Cooperation Council and the Commission on 21 ^st Century Border Management, while the United States and Canada collaborated in the Regulatory Cooperation Council and Beyond the Border Working Group. These four separate efforts made progress on “low hanging fruit” topics but struggled to overcome deep-seated differences.

Dual-bilateralism also required U.S. officials to keep track of four sets of talks at once, with hundreds of other priorities and distractions diverting them from North American issues, particularly at the senior political level where the most difficult issues are resolved. The maximum leverage that the United States can wield in a bilateral trade negotiation cannot be sustained once a deal is ratified and the technical work toward a single market for goods and services in North America shifts to myriad conversations among officials.

A bilateral deal that is imposed by the United States on a partner in a weaker position will also damage good will that is needed on both sides to uphold the spirit of an agreement. Imagine a CUFTA that forces Canada to give up dairy supply management; resentful Canadian officials might decide to protect the Canadian dairy sector with complicated new regulatory standards or by imposing new border inspections on U.S. dairy products. A MUFTA that eliminated investor-state dispute settlement because the United States wanted to discourage U.S. investment in Mexico could lead Mexicans to seek Chinese investment instead, allowing Mexico to become an export platform for Chinese products into the United States.

Which brings us back to competitiveness. NAFTA benefited some U.S. companies by allowing them to take advantage of specialized talent, cutting edge research and innovation, or lowest-cost production in all three countries, leading to better products, lower costs, and stronger profits. Other firms benefitted from NAFTA because it opened up a market of nearly half a billion people, allowing for more sales and economies of scale that lowered costs. Tariff cuts acted like tax cuts in boosting economic growth in all three countries. NAFTA rules, such as the Rule of Origin, imposed a compliance burden on business, as did the post-September 11, 2001 security upgrades at U.S. borders.

The challenge since NAFTA took effect has been to build on it with additional government-to-government cooperation so that our firms get the full benefit of a single North American market, and at an affordable cost of doing business.

If the United States shuts Canada out and proceeds to renegotiate on a two-step basis with Mexico first, and Canada next, a MUFTA and a CUFTA that look like “better deals” to Trump in the short term could end up doing less for business and individuals in all three countries than we could achieve through a trilateral NAFTA 2.0 that generates goodwill in all three countries.

Christopher Sands is a senior associate of the Center for Strategic and International Studies and a senior research professor and director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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