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NAFTA talks: Three scenarios and three bad outcomes

Lawrence Herman is a senior fellow of the C.D. Howe Institute in Toronto and former Canadian diplomat who practises international trade law.

With NAFTA Round 3 starting this weekend in Ottawa, good news is hard to come by.

Optimism is being dimmed by a lack of common purpose among the three countries, as Canada and Mexico try to deal with U.S. President Donald Trump's aggressive "America first" agenda, aimed at hammering the two smaller partners into submission.

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Unlike previous trade talks under Bill Clinton, George H.W. Bush and Ronald Reagan, and even going back to the 1910 U.S.-Canada reciprocity negotiations, there are few shared objectives with the Americans on critical issues this time around.

If there's anything positive to report, it's that three negotiating teams are diligently trying to find some areas of consensus in this brooding atmosphere, faced with the unrealistically short time-frame imposed by political circumstance. A deal must be done by early 2018 to avoid being caught up in the Mexican presidential election and the U.S. midterm elections later in the year. This weekend's negotiations will increase the pressure.

Overlaying all of this are Mr. Trump's threats to withdraw from the North American free-trade agreement if he doesn't get his way. Recognizing the situation is still pretty fluid, here are three possible scenarios based on what we've seen so far. None is particularly encouraging.

Scenario 1

The negotiations succeed with a NAFTA 2.0 deal by year-end or early in 2018. For Canada and Mexico, getting it approved is relatively straightforward. In the United States, under fast-track authority, it's just the first step in a long and complicated journey:

  • First, Mr. Trump has to give Congress 90 days advance notice before he can even sign the amended NAFTA. Congress can, and will, express its own views on the deal during this notification period.
  • After signing it, Mr. Trump has to submit the text plus draft implementing legislation to Congress. But that won’t happen until the International Trade Commission completes an independent assessment, which can take a maximum of 105 days.
  • All told, it could take at least 225 days before the draft bill is even sent to Congress, whereupon the Senate and House of Representatives each have 90 “sessional” days to consider it and either approve or reject the package. Sessional days mean when each house is sitting, not calendar days. There is no definitive requirement as to when the 90-day period is to begin.

With this timeline, a vote can't realistically happen before Congress adjourns for midterm elections. Even if it did, Congressional action would coincide with the Mexican election in July, 2018. It is hard to see NAFTA not being a political hot potato in both countries.

During this time, any signed deal will be hostage to shifting political tides in Washington, notwithstanding the fast-track process. For example, Congress could decide to approve the bill, but with conditions that require even more concessions from Canada and Mexico. And that's under the most optimistic scenario. There are two others to consider.

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Scenario 2

The negotiations collapse and Mr. Trump notifies Canada and Mexico that the United States intends to withdraw from NAFTA. Mr. Trump's repeated threats make this scenario entirely plausible.

Pulling the NAFTA plug would raise a huge outcry in the United States and kick-start a bitter constitutional wrangle with Congress over who has pre-eminence over international trade. There is no clear view on whether the President can withdraw from trade agreements without congressional approval. The better view is he can't.

Even if Mr. Trump could revoke NAFTA duty preferences for Canada and Mexico by presidential decree, legislation will be needed to change a slew of U.S. laws in areas beyond tariff rates. The question is whether a Republican-controlled Congress would follow through with such an agenda.

There will be long and bitter court battles under this scenario, taking months if not years to resolve. In the meantime, markets will be unsettled with so much uncertainty overhanging Canada-U.S. business relations.

Scenario 3

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The negotiations collapse and further talks are suspended. While Mr. Trump blusters and points fingers, he doesn't pull the withdrawal trigger. Negotiations go into deep freeze. Mr. Trump seeks revenge through Twitter. Even with the bitter political animus that results, bilateral trade under the NAFTA umbrella goes on.

The downside is that under this scenario, the White House could use its considerable arsenal to intensify pressure on Canada and Mexico through things such as Mr. Trump's tweets and a variety of trade restrictions in the hope of restarting talks on U.S. turf. Quotas on Canadian steel under a national-security guise could be applied. The Bombardier-Boeing dispute would go ahead. Any deal on softwood lumber would be at risk. We'll have a better sense of which of these scenarios is more likely after this next round and the round in Washington after that. The ground could shift and things could improve. At this point, however, the news is anything but encouraging.

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