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More trouble looms for Mexico, this time on the NAFTA front

Nelson W. Cunningham is president and co-founder of McLarty Associates, an international strategic advisory firm based in Washington. He was a trade and foreign policy adviser in the Clinton White House.

As Mexico reels in the wake of two deadly earthquakes in the past few weeks, the country faces further travails, this time on the economic front. A third round of NAFTA negotiations are being held on the weekend, this time hosted by Canada in Ottawa. The impact of those talks will ripple far and wide.

U.S. President Donald Trump campaigned furiously against the North American free-trade agreement, and since becoming President, his anti-trade focus has intensified. NAFTA is "the worst trade deal in the history of the world," right up there with the Trans-Pacific Partnership (TPP), "which is another disaster done and pushed by special interests who want to rape our country." Germany's trade policy is "bad, very bad," and so is South Korea's and, of course, so is China's.

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The central issue in the NAFTA talks is Mr. Trump's laser focus on bilateral trade deficits, which he sees as evidence that erstwhile allies are taking deep advantage of the United States and costing millions of jobs in the process.

But so far, the talks initiated by the United States this summer have produced somewhat comforting news – no big upsets and even progress on such things as digital trade. This week in New York on the margins of the United Nations meetings, I was in the audience as Prime Minister Justin Trudeau spoke optimistically of the NAFTA talks as a way to advance a "progressive trade agenda." Canada has its own goals it wishes to press. And over lunch with members of the U.S. business community, Mexican Secretary of External Affairs Luis Videgaray gave his own positive spin on the state of the talks so far. Doubtless both countries are more concerned than their public rhetoric would suggest, but hope was in the air.

This weekend, the hopes of progressive NAFTA reformers will run into the stern resolve of U.S. Trade Representative Robert Lighthizer, whose instructions to upend NAFTA are clear. In setting forth U.S. objectives for the talks last month, Mr. Lighthizer first reflected his President's focus: "Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries." The news release accompanying the written objectives trumpeted: "[F]or the first time USTR has included deficit reduction as a specific objective for the NAFTA negotiations."

Canada's trade with the United States is roughly balanced (though the news release darkly noted: "Market access issues have arisen in Canada with respect to dairy, wine, grain and other products.") But not so with Mexico, whose trade deficit with the United States is more than $60-billion (U.S.) annually. All other issues on the table pale in comparison to the challenge of fundamentally reshaping the U.S.-Mexico trading relationship to eliminate a deficit of that size.

While the United States' negotiating objectives assert the country will seek to reduce that deficit by expanding its exports, Mexico's economy is comparatively small and its citizens' and businesses' purchasing power comparatively limited. Can Mexico afford to buy $60-billion more from United States, rather than producing it themselves? Voluntarily? That equals 6 per cent of their total GDP. Doubtful.

The realistic options for shrinking the trade deficit meaningfully are brutal, echoes from the bad old days of economic nationalism: high tariffs, tight quotas or managed trade (think "voluntary" restrictions on auto and semiconductor imports to the United States from Japan back in the 1980s). As a matter of principle, Canada and Mexico will and should roundly reject these throwbacks. As a matter of practice, the impact on the Mexican economy could be disastrous.

When the United States begins to press hard on the deficit issue is when the NAFTA talks truly risk collapse. But does the U.S. administration really mean it? Would the government really put at risk a framework that has not only brought stability to supply chains that crisscross the three countries but also brought the three governments to unprecedented levels of co-operation across the entire range of issues that can drive neighbours badly apart?

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Anyone who doubts Mr, Trump's resolve has not been paying attention. His views on the evils of trade deficits run deep.

Indeed, his focus on trade deficits – along with his other signature issue, immigration – stand out as remarkably stable strands in Mr. Trump's world view. They are two steel rods in the shifting sands of his words and policies, visible through the decades and connecting strongly to his political base.

Do not expect Mr. Trump to change now.

So, as the NAFTA negotiators gather in Ottawa this weekend, and as Mr. Lighthizer joins them for the finale of the Sept. 23 to 27 round, no one should be surprised if their first objective is, finally, the centrepiece of discussions – and if the rhetoric becomes superheated very quickly. Mr. Lighthizer opened the talks in Washington in August with fireworks; two weeks later, in Mexico City, he was muted – no doubt in some deference to his hosts (indeed the Mexican foreign and economy secretaries made a surprise visit to Washington the week before the Mexico round, many suspect to deliver the message that harsh rhetoric on Mexican soil could cause the talks to collapse.)

But in Ottawa, Mr. Lighthizer may finally feel free to take aim at Mexico and to raise forcefully his boss's principal objection to NAFTA – that $60-billion deficit. Indeed, U.S. Commerce Secretary Wilbur Ross paved the way this week by releasing a study calling for higher U.S. content for NAFTA imports, particularly in the key sectors of autos and auto parts. And if Mr. Lighthizer does unload on Mexico, the results will be felt most strongly in a Mexican capital still reeling from its second earthquake.

And Canadians will hardly be bystanders. If Mexico and the United States come to blows, finally, over the heart of Mr. Trump's objections to NAFTA, we could all find ourselves in a reshaped North America. Walls, anyone?

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Video: View of NAFTA from a Canadian auto-parts plant in Mexico (The Canadian Press)
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