As Canada returned to the bargaining table Tuesday to renegotiate the North American Free Trade Agreement, hanging over the talks was President Trump’s ominous vow: If Ottawa doesn’t bend to U.S. demands, he’ll lock up a pact with Mexico alone.
Whether Trump meant it or not, it won’t be that easy. More likely his threat is a bluff because there are significant — some say insurmountable — legal constraints and political hurdles to replacing NAFTA with one or two bilateral accords.
Beyond the uncertainty of whether Mexico would even sign an agreement without Canada — Mexican officials gave mixed signals about that — practically no one thinks cutting out Canada is a good idea economically.
NAFTA was designed as a three-way deal to integrate the North American region and create a powerful economic bloc and market. Breaking that up into one or two bilateral deals would create significant disruptions and undercut the supply chains and efficiencies that have been built up over a quarter century.
“NAFTA has made North America a powerhouse, and the only way we can compete for global markets with Asian and European producers is to maintain and strengthen the entire North American production base,” said Rufus Yerxa, president of the National Foreign Trade Council, a business advocacy group.
Since Trump announced Monday that his administration had a trade deal with Mexico and threatened to leave Canada out in the cold, lawyers and congressional leaders have also questioned whether the president has the legal authority to do so.
For one thing, forging a separate bilateral agreement is expected to be accompanied by Trump’s termination of NAFTA — and it’s far from clear that the president has the authority to unilaterally dissolve the pact. Some experts say that power ultimately rests with Congress, which approved the agreement in 1993.
Moreover, the existing “trade promotion authority” that gives the president more leeway in pushing a revised NAFTA through Congress wouldn’t apply to a separate two-country pact. That means Trump probably would need another congressional action to sign and submit a U.S.-Mexico agreement for ratification — and that will almost certainly stir up a huge political fight.
“I think Congress is going to be a bulwark against the possibility of massive chaos and uncertainty by the Trump administration’s move on the chessboard,” said Claire Reade, a former assistant U.S. trade representative, referring to any effort to break NAFTA into pieces.
Getting anything through Congress, particularly if Democrats take control of the House in November, will be all that much harder for Trump. Even Republicans don’t like abandoning the trilateral agreement.
“I think there are technical problems with that, and so my hope is that Canada comes on board rather quickly,” the Republican whip, Sen. John Cornyn of Texas, told reporters Tuesday.
Trump’s ultimatum to Canada partly reflected his preference for bilateral deals and his hardball negotiating style. But it was also a recognition that unless Canada agrees to a revamped NAFTA in a matter of days, it could result in new challenges and more delays in completing a renegotiated NAFTA. That’s because a new president in Mexico will take office Dec. 1.
Allowing the current Mexican president, Enrique Peña Nieto, to sign a deal would provide political cover for the incoming leader, Andrés Manuel López Obrador, since he would not be directly tied to any concessions made to Trump. The U.S. needs to notify Congress of a deal Friday, preferably including Canada, in order to meet a 90-day congressional procedural requirement before the countries can formally sign a deal.
“The incoming administration [in Mexico] would like to have the current president basically approve it before he gets into office. But all of them have been consulted,” Cornyn said. “And I hope we can get this done. And I hope Canada is on board. Because that would eliminate some of the technical procedural problems.”
Treasury Secretary Steven T. Mnuchin said Tuesday that he saw a three-way agreement coming together this week, which would make the potential bilateral problem moot. But he told CNBC that if there isn't a deal with Canada, "we'll move forward with Mexico and then we'll reach a separate agreement with Canada."
Others were not optimistic of a quick settlement between the U.S. and Canada.
“I think you might have to start the process all over again," said a Washington trade lawyer who spoke on the condition of anonymity because of client sensitivities, referring to the trade promotion requirement and 90-day notification requirement.
There are several thorny unresolved issues between Canada and the United States. Both Canada and Mexico strongly objected to a U.S. proposal for a so-called sunset clause that would automatically dissolve NAFTA after five years unless all the parties agreed to renew it. In the end, the U.S. and Mexico agreed to allow a revamped NAFTA’s term to be extended to 16 years, but every six years the parties could still bring up issues for negotiations.
That sunset provision won’t fly with Canadian officials, said Eric Miller, president of the consulting firm Rideau Potomac Strategy Group and advisor to the Canadian government on trade affairs. The U.S. and Canada also will be wrangling over Trump’s personal oft-cited grievance: Canada’s 300% tariff on milk imports and overall protected dairy market.
“Trying to unwind that in a week is very, very difficult,” he said. Like American sugar and agricultural sectors, he said, “dairy farmers are a very powerful lobby” in Canada. And Trump, who is not popular in Canada, has not made it easy for Canadian Prime Minister Justin Trudeau to cave in without risking significant political costs with his domestic constituents.
Miller, who is monitoring the talks, said Canada's minister of foreign affairs, Chrystia Freeland, arrived in Washington with her negotiating team, and they were meeting with U.S. Trade Representative Robert Lighthizer and others into late Tuesday afternoon.
At the moment, analysts said Mexico was holding the trilateral talks together, but it’s unclear what it will do if the U.S. and Canada can’t come to terms fairly quickly. Mexican officials may have a hard time selling a U.S.-Mexico-only deal to a public that will be skeptical about an agreement that Canada has balked at.
“Mexicans may have to decide: Are they going to stand with the Canadians or are they going to throw them under the bus?” said William Reinsch, a senior advisor at the Center for Strategic and International Studies.
Like many other trade experts, Reinsch said it was imperative that NAFTA be held together as a three-way pact, to preserve the gains and advantages of the large free-trade zone. Reinsch said, for example, that car companies, which account for a big chunk of the three-way trade, have supply chains that cross both borders.
And the preliminary agreement between the U.S. and Mexico included some notable changes aimed at increasing use of suppliers in North America and giving producers in the region an edge over rivals in Europe and Asia.
But Reinsch said that if the U.S. has separate rules for Canada and Mexico, “it will force [companies] to revise their supply chains to conform to two conflicting standards.” And that, “at a minimum will cost them time and money,” he said. “And it will lead to a more expensive product and less competitive industry.”