There is no greater economic issue facing Canada in 2018 than the renegotiation of the North American Free Trade Agreement, the pact that for 24 years defined this country’s economy, along with those of Mexico and the United States.
So, with the sixth round of talks under way—and a near palpable sense of pessimism in the air—Maclean’s set out to answer an essential question: Can three qualified, knowledgeable and reasonable negotiators reach an agreement to save NAFTA? Given their governments’ opening positions—but absent the racket of politics—can a trio of delegates representing their respective countries achieve what the official negotiators have so far failed to?
What would such a deal look like?
Okay, that’s three questions. But they’re vital ones. And to answer them, we’ve enlisted expert volunteers to participate in a shadow NAFTA negotiation that will unfold over the coming weeks, more or less in synch with the real ones. To state the obvious, this is an exercise in broad strokes: our delegates are tasked with tweaking the framework of NAFTA, addressing only the devilish details that stand in the way of that challenge, on five major subjects: auto and rules of origin, supply management and agriculture, conflict resolution (chapters 11 and 19), the sunset clause, and intellectual property and data. At the end of the complex three-round negotiation, they will have one choice: Deal or no deal.
To that end, we asked our representatives to focus on five high-friction areas: the auto sector, agriculture, dairy and supply management, dispute-resolution mechanisms and a proposed “sunset clause” at which point the parties must renew the deal or end it. But they face no restriction. They are free to introduce other issues if they believe it could lead to an agreement. Read all the negotiations on the topics specifically, or the transcript in full, here.
Now, meet our negotiators:
Christopher Sands (United States) is a Senior Research Professor and Director of the Center for Canadian Studies at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, D.C. where he has previously worked for several think tanks, most notably the Center for Strategic and International Studies and the Hudson Institute. He is American, originally from Detroit, Michigan.
Dan Ciuriak (Canada) is a former Deputy Chief Economist at Global Affairs Canada, runs a consulting practice focussed on quantifying trade agreements, and holds fellowships with the C.D. Howe Institute, the Centre for International Governance Innovation, and the Asia Pacific Foundation of Canada.
Hugo Perezcano Diaz (Mexico) is the Deputy Director of International Economic Law with the International Law Research Program (ILRP), at the Centre for International Governance Innovation. Prior to joining CIGI, he was an attorney and international trade consultant in private practice. He worked for the Mexican government’s Secretariat of Economy for nearly 20 years, serving as head of the trade remedy authority, and formerly as general counsel for international trade negotiations. He was actively involved in the NAFTA and the Uruguay Round negotiations.
The United States, as the prime mover of these negotiations, gave its opening remarks first.
Sands: I should probably start by saying something like: “You’re probably wondering why I’ve called you all here today.” (laughter)
The United States, a long time ago, back in the days of Henry Clay, shortly after the War of 1812, adopted what we call in American history the American System, which was a high-tariff wall, a central bank and revenue from the tariff being put into infrastructure to help open up the West. Because economic growth comes from one or two things—either you use your inputs more efficiently or you add inputs—this addition to the productive input to the American economy helped the U.S. go from pretty poor on most socioeconomic indicators in the 1820s to being truly competitive by the end of the 19th century.
At that point, we saw our biggest challenge being colonialism and the mercantilist system that locked us out of markets, where Britain, France, and other countries including Spain, had got first. And so we became proponents of the open door and open trade. Admittedly, this was because we got to the game late. But we wanted to be treated as all other foreign countries are treated. This gave us an ability, because we were successful in pursuing that course, to expand the United States’ productive capacity as an exporter. And that helped further the American dream and keeping the American economy strong.
We ended the Second World War with a commitment to trying to help other countries rebuild. And we did that through a mix of financial assistance and programs designed to bring products to market and encourage the development of export markets. By the end of the Uruguay round [of trade negotiations within the framework of the General Agreement on Tariffs and Trade], we began to see that there was a new promise that we could offer developing countries, and that was export-led growth. So we led an opening of major developed economies to developing economies. NAFTA was very much in that context. Mexico was going to be offered the chance to grow as an emerging market through access to the consumer base in the United States and in Canada, which had the wealth to be able to buy more sophisticated products higher up on the value chain. The implicit assumption was that, as Mexico grew, Mexicans would buy more American products, become a richer market, and the U.S. in general would move up the value chain in terms of what it produced—that all boats would float.
This is the theory, the gamble, that President Trump explicitly has rejected. He believes that, while we generously opened ourselves to emerging markets, many of our trade partners—China in particular—manipulated the rules in such a way that they retained protections in their domestic market while taking advantage of the openness of our market. And it was the American worker who paid the price. Now, yes, automation and other technologies were part of that story. But many people in the United States felt left behind.
This was not a Republican policy or a Democratic policy: both parties’ establishments promoted the openness of the U.S. And our establishment profited quite nicely from all of this, as did yours. There was a period when the U.S. seemed to have the upper hand, when we saw economic nationalism in Canada under the Pierre Trudeau government. We saw economic nationalism in Mexico prior to the opening that NAFTA provided for more democratic governance. So the rekindling of some economic nationalism in the U.S. should come as no surprise.
Our goal is fundamentally is not to destroy NAFTA but to create a more fair balance. The idea that our workers were eventually going to be benefiting from exports to Canada and Mexico has not materialized. The elites have done well, but we’ve left people behind. So what we want to do is put America first. We want to make sure we’ve done a good deal for our workers, that employment is at the centre of our trade policy. And we hope that in doing so, changing some of these rules, we can reform NAFTA so that it works for all three of our countries.
Mexico should know that, while Mexico certainly as an emerging market has taken advantage of the U.S. growth, that isn’t the problem. It’s the cheating that’s the problem. And Mexico by far is a smaller problem than China is. So this NAFTA negotiation, for us, is a signal of where we intend to go globally. This conversation will be had at the World Trade Organization (WTO), and will be had with China, and will be had throughout the international system. We feel that we can treat Mexico fairly but also demand fair treatment in return. From this, and from doing the same with Canada, we think we can make not just America, but North America, great again. But only if we’re all committed to fairness on all sides.
The Canadians then responded with their own opening statement, which sought to establish that it would not abandon Mexico in these talks, but also that it would only accept a “progressive trade agenda.”
Ciuriak: First of all, we recognize that politics will make this negotiation very difficult, as the outcome must also be presentable in Ottawa and in Mexico City as positive for the three parties. So politically, visible concessions will be required. We see Washington will also have to move on this. And that means that we see rhetorical statements such as [U.S. trade representative] Robert Lighthizer’s, “Give us some candy with nothing in return,” as very much negotiable and an opening position, not the nature of the landing zone that we wish to define for NAFTA 2.0.
Second point would be that win-win trade outcomes not only puts America first, but Canada first and it Mexico first. There is no inconsistency with a trade-liberalizing deal and each party being able to go back to their electorates and say this was a win for us. It’s only when you get protectionism that you get into the lose-lose category—or possibly win-lose if you have large economies imposing tariffs and making terms with trade gains, that it’s possible to get some kind of (inaudible) from this system that has hardly a significant win.
Secondly, I very much [understand] what you say, Chris, about the issues regarding Mexico. From the Canadian perspective, we face many of the same issues that the United States does in terms of the shift of manufacturing jobs down to Mexico. It’s a matter of some concern here—and the commentary in Canada has also been about the possibility that maybe NAFTA was not such a good deal for Canada because of this very outcome which you described.
But we don’t see figuratively throwing Mexico under the bus as an option. Because it’s not clear to us that it is a case of Mexico cheating, if you will, on the trade rules, so much as the U.S. corporations which have invested in Mexico cheating. All the data indicate that Mexican wages have not kept up with productivity. Now, it’s a question of who’s paying those wages. Well, largely it’s multinational corporations. So a strong, progressive trade agenda which emphasizes corporate social responsibility, essentially a Fordist (ph) kind of agenda, which ensures that Mexican wages and living standards rise as part of the NAFTA big-picture outcome—that would drive the Mexican demand for products from North America across the board, because we have preferential access to the Mexican market. Having Mexican incomes rise is part of the agenda here.
So we see a progressive trade agenda not only as important in terms of taking back to the Canadian electorate an outcome which says we are addressing the inequities in globalization that have emerged over the past decade, but also to making NAFTA a fairer deal—a deal for all parties. We need to think about the progressive trade agenda as an integral part of the solution to making NAFTA work better.
Now turning to the big overview picture of how we want this to come out: I would emphasize that we are looking in this negotiation at identifying as rapidly as possible a landing zone for these negotiations. To date, that has not been put on the table so far. And it’s not obvious what such a landing zone looks like.I think this is the main challenge of our shadow negotiations.
I would put it out then to move forward on this as follows. Essential modernization elements of NAFTA 2.0: we have already negotiated that in the Trans-Pacific Partnership, and we do not want to return to those in NAFTA 2.0 talks. I think this puts 80 per cent of the text, if not more, already into the decided column. We only need to consider the issues of rebalancing, which have been put squarely on the table by Washington. So these have to be addressed, and we also have to recognize that sometimes what constitutes modernizing may blur with rebalancing.
Canada has made clear—and Washington has also at least rhetorically signalled—that NAFTA 2.0 is to be about freer trade, not protectionism. However, the answer to this may be that the NAFTA 2.0 might be somewhat less comprehensive than the NAFTA 1.0. The way forward may be to get freer trade is to pull some things off the table. We have to be prepared and look for areas where less might be more. It’s not obvious, I think, that the outcome of the past wave of globalization has been entirely positive. It has led to many inequities in terms of its impacts—not only on blue collar workers, but in general on the middle class and on income distribution. So we have to be prepared for the fact worldwide the model of globalization is changing, and NAFTA 2.0 will be part of that—of the changing of the rules of the game for this new version of globalization. And that might involve somewhat greater freedom to manoeuvre for domestic policy. I think we have to keep that on the table.
In terms of the overall liberalization quotient that NAFTA 2.0 has to deliver, I would point out that 76.5 percent of Canada’s tariffs are already MFN-zero (meaning they have no impact on Canada’s most-favoured trading partners). The areas where we have tariffs of any significance are in a handful of sectors. They are well known. Autos is one of them, which we’ll be discussing in detail; and obviously the supply managed sectors. I’ll talk about those very briefly. But by and large, we’re already operating at close to free-trade terms. Any imbalances which have emerged therefore have to be considered not faults of cheating but rather the fact that the way that globalization works has not been generating the desired balances.
Finally, Mexico laid out its objectives, which included honest revision of an agreement Perezcano Diaz saw as in need of a refresh.
Perezcano Diaz: I want to say at the outset that NAFTA has worked very well over the years for all three countries. We have created one of the largest and most dynamic free-trade zones in the world. Trade between the three countries has increased exponentially, especially if we consider what it might have been absent the NAFTA.
Now, the U.S. has raised concerns about the agreement being 20 years old, outdated in some ways, or in many ways, and in need of modernizing and upgrading. Mexico agrees that the NAFTA can indeed be upgraded and modernized. I agree with Dan’s comments, and I must say that it was unfortunate that the U.S. pulled out of TPP, which was in fact intended to bring modernization to trade between the three NAFTA parties while extending it to other countries and maintaining NAFTA.
I will say this quite candidly here among colleagues and partners: while Mexico has been content to remain in the comfort zone to maintain the NAFTA in its current form, I believe this is a great opportunity to revise our 20-plus-year-old agreement. We must do so with a view to improving it—and here I wholeheartedly agree with you both—in a balanced way. Mexico is all for it.
We also recognize that the U.S. has raised some important concerns. But we must use the appropriate tools to deal with them and to try to resolve them. Indeed, the NAFTA is just that: a tool, an economic-policy tool. It is neither the source nor the solution for all economics problems, real or perceived. And if we fail to acknowledge this, we run the risk of dismantling, to a greater or lesser extent, an agreement that has worked well, and of not resolving those other problems. I am looking forward to an honest and frank discussion. While we will be reporting and responding to our constituencies and the media, our discussions here at the table are confidential, and that will allow us to speak our minds and hash out these issues.
I agree with many of the things that you both have said. I agree that we should have more stringent rules to preclude cheating and circumventing the agreement; to have better rules that prevent anyone from taking undue advantage of others by circumventing the NAFTA. I also agree that we need more stringent provisions and standards that will raise wages and standards of living, especially in Mexico, but as well in the U.S. and Canada. There, I think that Mexico and the NAFTA – I would not say that it has failed, but it has come short. Now, it is not a problem that is exclusive to NAFTA. It is a problem of trade agreements in general. Therefore, I think that this serves as an opportunity to all three parties to actually come up with creative and progressive solutions, not only in terms of the trade in North America, but how we approach trade globally.
Our next negotiation will take place in mid-to-late February. Keep your eyes out for our negotiators to take a second crack at this and other high-friction issues to see if they can find common ground.
Read the transcript in full, here. Or click below to go to the section topic they negotiated:
- Opening statements
- Auto industry and rules of origin
- Supply management and agriculture
- Conflict resolution (Chapter 11 and Chapter 19)
- Sunset clause
- Intellectual property and data
Edited by Charlie Gillis, Adrian Lee, Nick Taylor-Vaisey and David Thomas