Renegotiating NAFTA: One or three new agreements?

There may be method in the apparent madness of Mr. Trump’s trade policy pronouncements with their simplistic mercantilist differentiation between good and bad trading partners.

The populist rhetoric certainly plays to the president’s electoral base, but underlying it is a longstanding American preference for dealing with trading partners bilaterally where possible.

The reason is that, as the world’s largest economy, there is greater negotiating leverage when dealing one-on-one with trading partners than in dealing with them in a larger group like the World Trade Organization (WTO), or even the much smaller (seemingly failed) Trans Pacific Partnership (TPP).

Indeed, outright rejection of TPP by the new president, even though it was clearly in U.S. economic and geopolitical interests, may be at least partially reflective of a renewed American focus on the advantages of bilateralism. Perhaps it is an early signal of what the “art of the deal” means to Mr. Trump.

The underlying strategic benefit of a focus on bilateral deals is that the U.S. then becomes the trade and investment hub in a series of spokes in which it has preferential access to the markets of bilateral partners, but those partners – the spokes – do not enjoy preferential access to each other’s markets unless they also negotiate bilateral deals.

This preference for bilateralism was reinforced in recent days by news reports of the Administration’s forthcoming 2017 Trade Policy Agenda document that explicitly favors bilateral over multilateral negotiations as better serving U.S. goals of “free and fair” trade relations.

Not surprisingly, as a small open economy, bilateralism has historically not been Canada’s first choice. Canada has favored multilateral agreements on the premise that we could get a better deal within a larger group through the countervailing interests of the major players.

In the 1980’s we broke that mold with the Canada-U.S. FTA because at the time, although risky, we thought we could go further and faster one-on-one with our largest trading partner than through the sclerotic multilateral process. Besides, we could enjoy preferential access to the U.S. market while multilateral agreements caught up.

Canada has continued down the bilateral path as an implicit second-best approach because of the ongoing intractability of getting to agreement among larger groups, let alone 100-plus nations in the WTO.

In that regard, the trilateral NAFTA has been a bit of an anomaly. Soon after the Canada-US FTA, the U.S. and Mexico began serious discussions about a bilateral agreement. Canada moved quickly to be included mainly for defensive reasons – to have at least as good access to the American market as any access that Mexico might negotiate bilaterally with the U.S. Plus, it saved us the step of negotiating our own bilateral agreement with Mexico, a rapidly growing market.

That was then. Now, we are faced with the prospect of a U.S.-driven return to bilateralism, resulting potentially in three trade agreements: Canada-U.S.; U.S.-Mexico; and Canada-Mexico.

This would not be an ideal outcome from a Canadian perspective, especially if somewhat different provisions in the three agreements served to disrupt well-established, integrated North American supply chains.

It would, however, be better than an intractable mess involving three-way negotiations trying to solve largely bilateral issues.

This is where the structuring of the negotiating process could have a major payoff in terms of outcomes that are acceptable to all three countries.

In my view, given the divergent starting points of the three countries, the best way of proceeding would be to maintain a trilateral umbrella but break up the negotiations into three sets of bilateral dialogues.

Subsequently, a trilateral steering group could see whether there was enough common ground for a revised NAFTA.  An alternative would be to revert to a broad, principled NAFTA chapeau, with three bilateral sub-agreements that detailed specific commitments.

Such an approach would maximize the probability over the longer term of coherence in the rules of doing business within North America.  It would also help in the short term to assuage Mexican concerns about “being thrown under the bus”.

Although this may be a pragmatic way of managing the negotiations, the actual structure of any new arrangements is entirely speculative at this point in time. The final architecture and content of the deal (or deals) will be driven largely by the array of issues that the three countries put on the table (or tables) and ultimately resolve.

In the meantime, let’s hope that cool professionalism outweighs emotional rhetoric in all three countries, thereby facilitating win-win-win outcomes.

Andrei Sulzenko is a former Canadian trade negotiator and is currently an Executive Fellow at the School of Public Policy, University of Calgary.