August 16, 2017, was a truly historic day for Canadian, Mexican and American negotiators as they kicked off the first round of trade talks to renegotiate the North American Free Trade Agreement (NAFTA). All parties have a long and proven track record of fruitfully negotiating free trade agreements (FTAs). Yet none of them has ever successfully redebated an existing agreement, so they are now in uncharted territory.
The distinction between FTA negotiation and renegotiation hasn’t been lost on Canadian Foreign Affairs Minister Chrystia Freeland, who has compared modernizing an existing agreement to renovating your house while you’re still living in it. “The end result — a nicer kitchen, perhaps, or an energy retrofit — is terrific. But getting there can be a little messy and uncomfortable,” she said recently.
Freeland’s metaphor makes a valid point about some of the discomforts of reopening discussion on something that is already in place. However, it omits two important distinctions that weigh particularly heavily in the current negotiation context.
First, countries renegotiate FTAs for different reasons than the ones that lead them to initiate talks on new FTAs. To continue with Freeland’s metaphor, building your dream house with your new partner is quite different than renovating your kitchen because your spouse can’t stop complaining about how much he or she hates it. Second, in contrast to regular trade talks, should renegotiation discussions go awry, it is by no means clear that you can simply return to the status quo. Indeed, you may well be forced out of your house entirely.
The Trump administration did not push for a NAFTA renegotiation because it wanted to create a modernized NAFTA 2.0 that benefits all sides. The President has made his deep dissatisfaction with NAFTA abundantly clear – most recently during his Phoenix rally speech when he spoke about “terminating” the agreement. Prior to that, he has called it the “worst trade deal in the history of the world,” blaming it for America’s huge trade deficit, the exodus of US manufacturing firms and substantial job losses. For him, an improved trade deal isn’t the litmus test for accepting a modernized NAFTA. Indeed, a new trade deal would be considered “fair” only if the United States receives disproportionately large concessions compared with Mexico and Canada.
The Trump administration’s discontent with NAFTA as it stands implies that Canada should be wary of considering the existing agreement to be the fallback option if renegotiations turn sour (see a recent Fraser Institute paper by Steven Globerman and Christopher Sands). Trump has on multiple occasions suggested that NAFTA has made the United States worse off and that he’s ready to scrap the agreement if no acceptable compromise is found. Canada’s alternative to a successful renegotiation may thus be a return to the old Canada-US FTA of 1989 or, even worse, to the World Trade Organization conditions.
Many of these threats might be political bluster, and it may well be that in the end cooler heads in Washington are able to contain the Trump administration’s inflammatory rhetoric. Robert Wolfe has argued in Policy Options that Canada and Mexico have considerable leverage if the US is looking for a quick deal. Joel Trachtman has contended that the Trump administration can’t withdraw from NAFTA without a nod from Congress.
The threats highlight the added dimension, however, of renegotiating a trade agreement with a disillusioned partner: you might end up having to decide on a deal that disproportionately favours your counterpart or even leaves you worse off.
So, should Canada be prepared to go as far as accepting a worse deal? Bargaining theory says yes. Our negotiators should leave the trade talks only if a new agreement makes us worse off than under the most credible fallback option. If Trump’s threat to ditch NAFTA is plausible (which is still debatable), we should at least in theory be open to accepting a NAFTA 0.8.
Political forces, however, would make this scenario a difficult pill to swallow for Prime Minister Justin Trudeau. The Canadian public would see disproportionate concessions to our southern neighbour as a sign of weakness, a perception that our government would want to avoid at all costs.
All this suggests that a renegotiated NAFTA will be more difficult to conclude than a regular FTA. The antagonistic political climate, where the US wants to win big and Canada and Mexico do not want to lose, severely constrains the set of amendments that all parties can agree upon. And even if an agreement eventually materializes, it is not clear whether Canadians will perceive it as a modernized NAFTA 2.0 or an arm-twisted NAFTA 0.8.
This article is part of the Trade Policy for Uncertain Times special feature.
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