John Weekes

How NAFTA Be­came the USMCA

Policy - - In This Issue - John Weekes

The con­trast be­tween the cir­cum­stances of the orig­i­nal NAFTA ne­go­ti­a­tions in 1991-92 and the rene­go­ti­a­tion over the past year could hardly be starker. Twenty-seven years ago, Prime Min­is­ter Brian Mul­roney, Pres­i­dent Ge­orge H. W. Bush and Pres­i­dent Car­los Sali­nas an­nounced their com­mit­ment to en­ter tri­lat­eral ne­go­ti­a­tions with the ob­jec­tive of con­clud­ing an am­bi­tious agree­ment that would elim­i­nate or re­duce to the maxi-

mum ex­tent pos­si­ble bar­ri­ers to the free flow of goods, ser­vices and in­vest­ment across the North Amer­i­can con­ti­nent.

In 2017, Pres­i­dent Don­ald Trump en­tered the White House in­tent on tear­ing up or re­bal­anc­ing Amer­ica’s in­ter­na­tional trade com­mit­ments. Trump and Trade Rep­re­sen­ta­tive Robert Lighthizer did not want agree­ments with strong en­force­able rules that fet­tered the ca­pac­ity of the United States to use its power to bully its part­ners into agree­ing to re­bal­anc­ing the trade rules in Amer­ica’s favour.

In 1991, the three lead­ers all strongly be­lieved that closer co­op­er­a­tion through trade as a win, win, win propo­si­tion. For Trump, it is a zero-sum game. If Canada or Mex­ico is do­ing well, then it must be at the ex­pense of the U.S.

Trump had re­peat­edly called NAFTA the worst trade agree­ment ever ne­go­ti­ated and promised to rene­go­ti­ate it or with­draw from it. Demon­strat­ing his an­tipa­thy to trade agree­ments, he with­drew Amer­ica from the Tran­sPa­cific Part­ner­ship Agree­ment on his sec­ond day in of­fice.

Trump had re­peat­edly called NAFTA the worst trade agree­ment ever ne­go­ti­ated and promised to rene­go­ti­ate it or with­draw from it. Demon­strat­ing his an­tipa­thy to trade agree­ments, he with­drew Amer­ica from the Tran­sPa­cific Part­ner­ship Agree­ment on his sec­ond day in of­fice.

When the ne­go­ti­a­tions to “mod­ern­ize and re­bal­ance” the NAFTA got un­der­way in Au­gust of last year it was un­clear whether Trump’s real ob­jec­tive was to reach a new agree­ment or to press out­ra­geous de­mands to en­sure fail­ure and then to with­draw from NAFTA. Pow­er­ful and ef­fi­cient North Amer­i­can sup­ply chains built un­der 25 years of a pre­dictable and se­cure NAFTA trade en­vi­ron­ment were at risk. A cloud of un­cer­tainty stalled in­vest­ment in Canada and Mex­ico and also, but to a lesser ex­tent, in the U.S. Mex­ico was de­mo­nized by con­stant vit­ri­olic rhetoric from the White House and even Canada was in­creas­ingly vil­i­fied as an al­leged un­fair trader.

In the first NAFTA ne­go­ti­a­tion, the lead­ers of the U.S. and Mex­ico em­braced the op­por­tu­nity to build a new part­ner­ship be­tween the two coun­tries that would put a cen­tury and a half of an­i­mos­ity and war be­hind them. To­gether with Canada, they saw the ne­go­ti­a­tions as an op­por­tu­nity to make a stronger North Amer­ica in an in­creas­ingly com­pet­i­tive global en­vi­ron­ment. Their vi­sion was that the syn­er­gies of the NAFTA part­ner­ship would make each coun­try more pros­per­ous and bet­ter able to com­pete glob­ally.

Un­for­tu­nately, these ideas were not shared by the Trump ad­min­is­tra­tion. For Trump it was “Amer­ica First” com­bined with the ap­par­ent view that Amer­ica was bet­ter off op­er­at­ing alone as it con­fronted new global chal­lenges. With Trump, there was no sense that the North Amer­i­can part­ner­ship would help the U.S. meet the chal­lenges posed by a ris­ing China. In 1991, the three lead­ers all strongly be­lieved that closer co­op­er­a­tion through trade as a win, win, win propo­si­tion. For Trump, it is a zero-sum game. If Canada or Mex­ico is do­ing well, then it must be at the ex­pense of the U.S.

In the fall of 2017, Lighthizer put a series of poi­son pill pro­pos­als on the ne­go­ti­at­ing ta­ble which made it look un­likely that any rea­son­able ac­com­mo­da­tion could be found. In par­tic­u­lar, the Amer­i­cans came for­ward with pro­pos­als to:

• Sun­set the NAFTA af­ter five years un­less all three coun­tries specif­i­cally said they wanted it to con­tinue; • Elim­i­nate or weaken all the dis­pute set­tle­ment pro­vi­sions of the NAFTA to strengthen the ca­pac­ity of the U.S. use its power to get what it wanted;

• Al­ter the rules of ori­gin in the au­to­mo­bile sec­tor to re­quire that any au­to­mo­bile en­ter­ing the US market would need 50 per cent US con­tent to ben­e­fit from the NAFTA zero duty; • Dis­tort the gov­ern­ment pro­cure­ment as­pects of the NAFTA so that the op­por­tu­ni­ties for Canada and Mex­ico to com­pete in the US pro­cure­ment market would be se­verely re­duced.

This was not a ne­go­ti­a­tion in which Trump and Lighthizer were pre­pared to en­gage in give-and-take. For them, the ob­jec­tive was to re­bal­ance the NAFTA in their favour by re­duc­ing the ben­e­fits in the deal for Canada and Mex­ico.

For­tu­nately, many in the U.S. did not share Trump’s views on trade and NAFTA, in­clud­ing many in his own party and even in the White House. In fact, many were ve­he­mently op­posed to Lighthizer’s pro­pos­als. Canada and Mex­ico both con­ducted vig­or­ous ad­vo­cacy cam­paigns across the U.S. to re­in­force this vein of sup­port for NAFTA. The Cana­dian ef­fort was un­prece­dented in its in­ten­sity and scope. This was

not just a fed­eral gov­ern­ment ef­fort but one that had the en­thu­si­as­tic in­volve­ment of all the po­lit­i­cal par­ties, the prov­inces, cities, the busi­ness, and im­por­tant el­e­ments of civil so­ci­ety. This was a true Team Canada ap­proach. Cana­dian ad­vo­cates met with their coun­ter­parts vir­tu­ally ev­ery­where in the U.S. The mes­sage spoke to the value of trade be­tween Canada and the US. and em­pha­sized just how ben­e­fi­cial trade with Canada is for Amer­i­can com­mu­ni­ties and work­ers, and how the North Amer­i­can sup­ply chains make North Amer­ica stronger in a global mar­ket­place. Im­por­tantly, this mes­sage also found a re­cep­tive au­di­ence in Congress and in state cap­i­tals.

This awak­en­ing and mo­bi­liza­tion of a pro-NAFTA con­stituency may be the most im­por­tant out­come of the last two years. This con­stituency will re­main valu­able to Cana­di­ans long af­ter Trump has left the White House.

At the same time, with Trump threat­en­ing to blow up NAFTA, many Amer­i­cans were con­duct­ing their own anal­y­sis about the value of NAFTA and the jobs it sup­ports across the U.S. For years, NAFTA had be­come a po­lit­i­cal whip­ping boy but most Amer­i­cans tuned out the noise and did not ex­pect any pres­i­dent would se­ri­ously con­sider ter­mi­nat­ing the agree­ment. This work and anal­y­sis led a very large num­ber of Amer­i­cans to con­clude that NAFTA was in fact valu­able to the U.S., al­though they rec­og­nized that it would ben­e­fit from a dose of mod­ern­iza­tion. This awak­en­ing and mo­bi­liza­tion of a pro-NAFTA con­stituency may be the most im­por­tant out­come of the last two years. This con­stituency will re­main valu­able to Cana­di­ans long af­ter Trump has left the White House.

As if to prove how valu­able NAFTA was to Amer­i­cans, Trump de­cided un­der Sec­tion 232 of U.S. law to ap­ply global tar­iffs for phoney na­tional se­cu­rity rea­sons on steel and alu­minum im­ports, in­clud­ing from Canada and Mex­ico. This in­evitably led to re­tal­i­a­tion by both coun­tries, which ad­versely af­fected many Amer­i­cans, call­ing into ques­tion whether the pres­i­dent knew how to de­fend their in­ter­ests and liveli­hoods. His threats to put a sim­i­lar tar­iff on au­to­mo­bile im­ports wor­ried Canada and Mex­ico but also cre­ated fur­ther un­ease in the U.S. Twenty-five years ago, the ne­go­ti­a­tions faced dif­fi­cult mo­ments but such bul­ly­ing tac­tics were never de­ployed.

Through­out the ne­go­ti­a­tions, the Cana­dian team led by Prime Min­is­ter Justin Trudeau, For­eign Min­is­ter Chrys­tia Free­land and Chief Ne­go­tia­tor Steve Ver­heul was res­o­lute and ef­fec­tive at the ne­go­ti­at­ing ta­ble, in ad­vo­cacy ef­forts and in the pub­lic war of words.

In the orig­i­nal ne­go­ti­a­tions, the part­ner­ship be­tween Canada and Mex­ico was an im­por­tant part of the ne­go­ti­at­ing dy­namic but in the re­cent ne­go­ti­a­tion it as­sumed greater im­por­tance. Of course, both coun­tries were ne­go­ti­at­ing on be­half of their own con­stituen­cies and in­ter­ests but there was suf­fi­cient com­mon­al­ity of in­ter­est that the out­come is bet­ter than it would have been had they ne­go­ti­ated alone. And in the fi­nal phase, Mex­ico ac­tu­ally en­hanced Canada’s ne­go­ti­at­ing lever­age by strik­ing a sep­a­rate deal with the U.S. For the first time in the ne­go­ti­a­tions, Lighthizer wanted to con­clude a deal with Canada be­cause that was the only way he could se­cure Con­gres­sional sup­port for what he had achieved with Mex­ico. One re­sult was that Canada was able to re­tain the bi­na­tional pan­els on dis­pute set­tle­ment un­der NAFTA Chap­ter 19—a key ob­jec­tive.

Go­ing for­ward into the crit­i­cal pe­riod of Con­gres­sional rat­i­fi­ca­tion of the new U.S. Mex­ico Canada Agree­ment, and be­yond, Canada and Mex­ico will need to con­tinue to work closely to­gether. Both will also need to work closely with the Amer­i­can pro-trade, pro-NAFTA con­stituency.

John Weekes, a se­nior busi­ness ad­viser at Ben­nett Jones LLP, was Canada’s chief ne­go­tia­tor for the NAFTA from 1991 to 1994.

Ge­orge Bush Pres­i­den­tial Li­brary photo

Mex­i­can Pres­i­dent Car­los Sali­nas, U.S. Pres­i­dent Ge­orge Bush and Prime Min­is­ter Brian Mul­roney watch as trade min­is­ters Jaime Serra Puche, Carla Hills, and Michael Wil­son sign the NAFTA for their three coun­tries in San An­to­nio, Texas in Oc­to­ber 1992.

U.S. State Depart­ment Photo

For­eign Min­is­ter Chrys­tia Free­land, U.S. Trade Rep­re­sen­ta­tive Robert Lighthizer and Mex­i­can Min­is­ter of Econ­omy Ilde­fonso Gua­jardo (L to R) par­tic­i­pate in the fourth round of North Amer­i­can Free Trade Agree­ment (NAFTA) ne­go­ti­a­tions at the Gen­eral Ser­vices Ad­min­is­tra­tion Head­quar­ters in Wash­ing­ton, D.C. on Oc­to­ber 17, 2017.

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