Whither NAFTA Negotiations Now?

After yesterday's revelation that Trump is not negotiating with Canada in good faith, where do NAFTA negotiations go from here?

Up to this point, I have chosen to be quiet about the NAFTA negotiations because I really don't believe they will go anywhere.  If an agreement is reached, Trump's track record in business strongly suggests it won't be honoured; and far more likely is that Trump will sabotage any negotiations to suit his own ends.

I will start off by saying that I think Trudeau and Freeland have done an excellent job of managing what amounts to a no-win situation. Trump has engaged in a lot of goading, attempting to get an emotional response out of Trudeau only to find that met with nothing.  This isn't a bad thing.  It speaks to Trudeau being more than capable of recognizing what Trump is doing, and not dignifying it with a response. Give a guy like Trump the emotional response he's looking for (anger, impulsive "hitting back", etc.), and he sees "a win" - a situation where he can manipulate more because he's got the other party reacting emotionally to his provocations.

Reaching back to my experiences in grade school, the first comment I have is that you never give a bully what they want - EVER.  In this regard, Canada's government has (so far) done the most appropriate things it can.

Right now, the NAFTA talks have turned into a game of "chicken".  Trump is hoping that Canada will blink and sign whatever this deal with Mexico is before Mexico's government changes over in September.  Canada continues to approach this as normal negotiations.  This isn't a bad thing at all, as it both moves Canada's interests forward, while not granting Trump the emotional reaction he's looking for.

From Canada's point of view, if NAFTA is going to die, forcing Trump to kill it is advantageous.  If Canada walks away, then Trump (and Canada's conservatives) will be able to blame the Trudeau government for not "being able to negotiate".  If Canada persists (and we're good at that) in negotiating until Trump loses patience and kills the talks off, then Trudeau can legitimately say "we did all we could, and the other side wasn't willing to play ball".

There are a couple of angles on this discussion that I think need further consideration.  First is the sudden rush with Mexico. From the G&M article above (possibly behind a paywall):

Cesar Rojas, global economist, Citigroup: 

“The current Mexican administration remains hopeful that Canada will join the agreement, but some officials have stated that Mexico would move forward with a bilateral deal if Canada does not join. We note, however, that the incoming Mexican administration highlighted that Canada is key for the NAFTA renegotiation … If the final negotiations extend further and the agreement is to be signed by the incoming Mexican administration, then there is a risk that an agreement is delayed as the new Mexican negotiation team (which has been an observer over the last few weeks) could review other issues.”

This is important.  The current Mexican government is on its way out after an election in June.  From Canada's point of view, this points to potential weaknesses in the deal that a new administration in Mexico may not be willing to support.  Things could get very sticky if the Mexican government suddenly becomes unwilling to ratify the proposed bilateral agreement.  The current Mexican government may well have negotiated an agreement for future political advantage for their allies rather than the nation's interests. (Note:  this is entirely speculative, as I have little to no familiarity with the currents of Mexican politics)

David Rosenberg, chief economist at Gluskin Sheff + Associates: 

“My hope is that Canada does not cave in to a bully with a gun against our head (the threat of 25-per-cent auto tariffs) and realizes that nothing is going to get approved in Congress without the ‘true north strong and free’ being involved. This seems to be an area where the legislative branch is starting to show some backbone, at least verbally, and I do sense that the president has underestimated where most of Congress stands on this issue of Canada being excluded from any agreement.”

JPMorgan Chase analysts: 

“The U.S. Congress could be a major hurdle, as it could disapprove of the administration trying to shoehorn a separate bilateral deal using the existing Trade Promotion (aka ‘fast track’) Authority initiated in May 2017 covering the tripartite NAFTA inclusive of Canada. In the event the bilateral U.S.-Mexico agreement cannot be fast-tracked, the White House would need to restart the trade negotiation notification and consultation process for bilateral deal(s). Such a process would require new Congressional TPA notification and consultation and would almost certainly extend the potential timeline by 10 months or more, and beyond the Nov. 30 agreement signing window U.S. and Mexican negotiators are trying to achieve.”

These two analyst comments point out that Congress may well be less than willing to roll over on a trade deal for Trump.  Now, that has to be contrasted with the fact that the current US Congress has been seemingly far too willing to be compliant with Trump's demands.  Only time will tell. Trump and his advisors have been remarkably adept at exploiting gaps in the constraints in place to check on the abuse of executive power. Whether they have enough leverage to convince Congress (a majority of whom are from states who will be adversely affected by a "NAFTA 2" that doesn't include Canada) to vote against their own state level interests is unknown.

So far, most of Trump's abuses of power have not affected state level economies and powers. American politics often protects the powers and interests of local states rather jealously.  The levers Trump has been using to this point may not be adequate for this fight.

For its part, Canada will be best served by staying the course. The irony of Trump's recent statements is that they confirm what we have suspected for some time:  namely that Trump has not been negotiating in good faith. Now it is out there for all the world to see.  Trudeau is not being "weak" if he lets NAFTA 2 fail - he is, in fact acting in Canada's interests. A NAFTA which is hostile to Canada's interests is hegemony, not an agreement.