The U.S.-Mexico Agreement Complicates Canada’s NAFTA Endgame

On August 27, the United States and Mexico announced a preliminary agreement in principle to modernize the 24-year-old North American Free Trade Agreement (NAFTA). During the press briefing, President Trump and U.S. Trade Representative Robert Lighthizer sent mixed messages about whether the outcome would be the trilateral NAFTA update consistent with the administration’s notification to Congress in 2017, but the president indicated that negotiations with Canada would begin “almost immediately.”

The public materials are short on specifics. As Ambassador Lighthizer quipped, “If you’re not confused, you’re just not paying attention.” But what is known appears to make an agreement with Canada more, not less, difficult. Specifically:

  • Several aspects of the agreement on intellectual property (IP) will be challenging for Canada to implement. Anti-counterfeiting enforcement, copyright, trademark, and trade secrets obligations may require changes to Canadian law. Likewise, establishing a “notice and takedown” system for copyright safe harbors for internet service providers was opposed by Canada in the Trans-Pacific Partnership(TPP) negotiations.
  • Procedural safeguards for geographic indications may be inconsistent with Canada’s obligations under the Canada-European Comprehensive Economic and Trade Agreement (CETA) and their agreement with Europe.
  • Ten-year data protection for biologics was rejected by Canada in TPP negotiations.
  • Mexico agreed to a Customs de minimis threshold of $100; Canada’s is CAD20.
  • “Most Favored Nation” (MFN), national treatment, and market access for financial services firms, along with prohibitions on local data storage requirements, likely exceed Canada’s current commitments.

While not in the text released by the United States, officials stated that Mexico and the United States agreed to drop Chapter 19 of NAFTA, which allows for challenges to unfair trade practices. Chapter 19 was a carryover from the Canada-U.S. Free Trade Agreement (FTA) and remains a key interest of Canada.

On another contentious issue, the United States and Mexico agreed to a sunset clause that would terminate the agreement unless all parties agreed to extend it; but instead of the five-year sunset that the United States proposed, the agreement is for a sunset after 16 years. While not ideal, this longer timeframe would provide more certainty for investors and business and might be acceptable to Canada, which has objected to having a sunset clause in past rounds.

The administration tactic of negotiating first with Mexico may create leverage for the United States. The Trump administration must give Congress a 90-day notice before signing a new trade deal under the terms of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the current legislative authority for the executive branch to negotiate trade deals. Mexico’s President-elect, Andrés Manuel López Obrador (AMLO) has indicated a willingness to ratify a trade deal completed before he takes office on December 1, 2018. That makes Saturday, September 1, the deadline for the U.S. notification to Congress of a deal that would be signed November 30. The administration has 30 days after notification to produce a text of the agreement, which gives a bit of breathing room for negotiators to finalize commitments and button up the text in early-September.

Although it is possible that AMLO might allow this extra time for U.S.-Canada bilateral talks—provided they don’t lead to major changes for Mexico—as things stand now, Canada has less than a week to agree to join the U.S.-Mexico agreement and preserve the trilateral trade rules in North America.

Canadian Prime Minister Justin Trudeau was elected in October 2015 and faces a federal election in October 2019. If voters think Trudeau has made too many last-minute concessions to stay in NAFTA, his chances of re-election are poor. And if Trudeau does not join the U.S.-Mexico agreement and instead opts to negotiate a U.S.-Canada trade agreement, he could end up negotiating in the months before an election, giving the United States additional leverage.

Instead, Trudeau could call a “snap” election. Canada’s parliamentary system allows for the government to prorogue Parliament and seek an election at any time, just as it permits the opposition to bring down a government through a vote of no confidence. Trudeau could justify an early election by arguing that he needs a mandate from voters to enter bilateral negotiations with the United States with the country solidly behind him. Then, rather than run against other opposition parties, Trudeau’s Liberal Party could frame the election as a kind of referendum on Donald Trump.

Canadian election campaigns can be as short as 36 days long, during which Canada would not engage in bilateral trade talks. If Trudeau’s gamble worked and Canadians voted to give the Liberals a renewed mandate, the United States would face a fresh government with a mandate from voters to confront the United States more forcefully in 2019 and beyond.

In response to a newly re-elected Canadian government, the Trump administration could try to put additional pressure on Canada by announcing U.S. withdrawal from NAFTA, but under the NAFTA exit clause, this decision would not take effect for six months during which it would be subject to challenge in court on the grounds that trade policy is an Article 1 power granted to Congress under the U.S. Constitution.

What then? NAFTA would remain in place for U.S.-Canada trade and for Canada-Mexico trade. Not only would NAFTA not be eliminated, but pressure on future U.S. administrations from the business community could lead to the reincorporation of U.S.-Mexico trade into a NAFTA framework to simplify compliance.

Meanwhile, the ill-will generated by the United States hardball approach to Canada would undermine efforts to eliminate nontariff barriers through regulatory cooperation, which represent more significant barriers to U.S. trade and investment in Canada than tariffs.

President Trump’s NAFTA legacy might prove no more durable than President Obama’s TPP. Sometimes how you play the game matters. Now is the time for the United States to pivot and work with Mexico to get Canada to join the agreement in principle and make the North American economy a win for all three countries.

Scott Miller is a senior adviser with the Abshire-Inamori Leadership Academy at the Center for Strategic Studies (CSIS) in Washington, D.C. Christopher Sands is a senior associate at CSIS 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).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Image
Scott Miller
Senior Mentor (Non-resident), Executive Education
Image
Christopher Sands

Christopher Sands

Senior Associate (Non-resident), Americas Program