In mid-May, Canada thought it saw an opening for a quick NAFTA deal.
With a key congressional deadline looming, Canadian officials offered the Trump administration two big prizes: new auto sector rules that would move jobs out of Mexico and more access to the protected Canadian dairy market for American farmers. In exchange, they asked that the United States take most of its other demands off the table.
Mexican negotiators were blindsided. They were not ready to agree to the tougher auto rules. And they believed they had a handshake agreement with Canada going into the talks: Neither of the North American free-trade agreement’s junior partners would seek a separate peace with the United States.
This episode, described to The Globe and Mail by sources in the Canadian government, and U.S. and Mexican industry leaders briefed on it, helps explain what many saw as a double-cross that Mexico pulled on Canada last week.
For a month, the U.S. and Mexico negotiated without Canada, insisting that they were merely working out bilateral matters that did not concern Ottawa. But last week, the two countries unveiled a nearly complete NAFTA deal and pressed Canada to sign on or risk getting kicked out of the continental trade pact.
Mexico, in effect, did to Canada what Canada had done to Mexico.
“Canada swung for the fences in May with a skinny NAFTA deal. I think Mexico remembered that,” said Daniel Ujczo, an Ohio-based trade lawyer representing auto and steel companies that trade under NAFTA. “Any country in Canada’s position would have tried that, but it came with risks, and one of the risks manifested itself [last] week.”
Two factors in Canada’s May gambit particularly aggravated some on the Mexican team. For one, said one Mexican industry source, the three sides had already set up a meeting to negotiate the most contentious auto proposal: mandating that 40 to 45 per cent of the content in all North American-made vehicles come from factories paying at least US$16 an hour. The idea of the measure was to push auto jobs away from Mexico, where workers earn close to US$4 an hour.
But Canada cancelled the meeting at the last minute, the source said, and instead proposed that the auto rules be written into NAFTA with no further negotiation.
Also complicating things was that Economy Minister Ildefonso Guajardo, Mexico’s point-man on the negotiations, had just won an internal battle with Foreign Minister Luis Videgaray. Mr. Guajardo was pushing for Mexico to take its time and keep negotiating, while Mr. Videgaray insisted the country should go for a quick deal. No sooner had Mr. Guajardo won his government over to the idea of a longer negotiation, than Canada embarrassed him by proposing a quick deal, said one source familiar with the internal Mexican machinations.
Mr. Guajardo’s office would not comment for this story or make the minister available for an interview. Mr. Videgaray did not respond to The Globe’s questions.
The Canada-Mexico relationship has long been complicated. The two countries made a secret pact before NAFTA talks started in August of 2017 that neither would cut a deal with the United States behind the other’s back, Canadian and Mexican sources said.
But Canada refused to make such a commitment in public. While Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland repeatedly affirmed that they wanted a trilateral NAFTA, they would not go the extra step of promising never to make a two-way deal with the U.S.
When Mr. Trudeau visited Mexico City last fall, President Enrique Pena Nieto greeted him with a lavish banquet and invited him to address the Senate. But it was not enough to coax a public promise.
Nonetheless, the two countries kept up a back-channel during NAFTA talks, co-ordinating frequently as they resisted Mr. Trump’s efforts to write protectionist trade barriers into the pact. Ms. Freeland has spoken frequently with Mr. Guajardo; their respective negotiators were in regular contact; and staffers in Ms. Freeland’s office and Mr. Trudeau’s often communicated with their counterparts in the Mexican government.
At a January round of NAFTA talks in Montreal, Canadian negotiators first proposed the idea of linking wages to automotive content. The idea was to get the United States to take one of its most protectionist demands – that all North American-made autos contain at least 50 per cent U.S. content – off the table.
The U.S. embraced the idea and came up with a specific proposal to require up to 45 per cent of a vehicle to come from factories paying US$16 an hour. The Mexicans balked: Such a requirement would strip their country, with its much lower labour costs, of its ability to compete for auto investment. They presented a counterproposal that would have applied a wage requirement to just 20 per cent of auto content, said a source with knowledge of the negotiating position.
Discussions continued through the spring. U.S. House Speaker Paul Ryan set Friday, May 17, as the deadline for a deal that could be presented to the current Congress for approval.
That was when Canada made its move, presenting a NAFTA accord that included the 40- to 45-per-cent content figure without further negotiation. As the clock ticked down, Mr. Trudeau’s chief of staff, Katie Telford, and NAFTA czar Brian Clow scrambled to Washington to make a last-ditch pitch to Mr. Trump’s advisers.
Mr. Trudeau himself hinted at the proposal in an event at the Economic Club of New York.
“To be honest, we are down to a point where there is a good deal on the table,” he said. “It’s right down to the last conversations.”
Some of the President’s top advisers – including economic chief Larry Kudlow, Treasury Secretary Steve Mnuchin and son-in-law Jared Kushner – were inclined to take the offer, said government and industry officials with knowledge of the talks. But Mr. Lighthizer rejected it.
That afternoon, Mr. Guajardo fired a warning shot at the Prime Minister.
“A clarification is necessary,” he tweeted at Mr. Trudeau. “Any renegotiated #NAFTA that implies losses of existing Mexican jobs is unacceptable.”
Mario Maldonado, a prominent business journalist who has closely covered the negotiations for his column in Mexico’s El Universal newspaper, said Mexican negotiators were caught off-guard and initially upset with Canada’s play, but quickly recovered.
“They felt that way at the beginning – but as the meetings continued, they realized it didn’t work, so they didn’t care so much about it after this moment happened,” he said.
And it wasn’t long before the shoe was on the other foot.
In July, Mr. Lighthizer invited the Mexican team to keep negotiating without Canada in the room. American and Mexican officials reassured their Canadian counterparts that there was nothing to worry about: The U.S. and Mexico were simply working out their differences on the auto issue – which Canada had already agreed to – and other bilateral matters that did not concern Ottawa. Once these were finished, they said, Canada would be invited back to the table. Mexican officials repeated the same assurances publicly as talks dragged on through August.
Yet, Canada had at least some inkling that discussions had gone further than mere bilateral issues. Two Canadian officials acknowledged in late August that the U.S. and Mexico had negotiated some trilateral matters, including dispute settlement and intellectual property. But they insisted any such discussions would have been preliminary in nature.
When U.S.-Mexico talks ended Aug. 27, the charade was exposed: The two countries emerged with a complete deal to overhaul nearly every aspect of NAFTA. Despite the Canada-Mexico back-channel, Canadian officials were caught off-guard. Two sources said the Canadians didn't even have all the details on what the other two countries had agreed to for days after the announcement.
Mexico joined the U.S. in warning that, if Canada did not accept the revamped pact, it would be cut out of NAFTA.
“There will be a free-trade agreement with the United States regardless of whether Canada continues or not,” Mr. Videgaray said in a news conference at the Mexican embassy in Washington. “We have a complete understanding between Mexico and the United States.”
The proposed deal Mexico agreed to contains the wage-related 40- to 45-per-cent auto-content requirement it had found untenable in the spring.
Several factors changed the calculus for Mexico. For one, President Enrique Pena Nieto wants to finish a revamped NAFTA before his term expires in December, as the pact will help preserve his signature reforms to the Mexican energy market. For another, his successor, leftist Andres Manuel Lopez Obrador, elected in July, wants the deal out of the way before he takes office so that his government doesn’t have to carry responsibility for the aspects that will be unpopular in Mexico. And when the president-elect’s representative, Jesus Seade, joined the talks, he worked out a compromise solution to Mr. Lighthizer’s sunset clause, another tough demand previous rounds of negotiations had not been able to crack.
“To reach a deal before December, Videgaray and Jesus Seade worked closely together and came up with the deal,” Mr. Maldonado said. “Guajardo was sidelined by the end.”
Mexico was also eager to end the chill on investment that had set in since talks began.
“The uncertainty has not been good for Mexico: Our exchange rate and investment decisions are subject to what occurs in this negotiation and it has lasted very long,” said Beatriz Leycegui Gardoqui, a former Mexican trade negotiator. “There is a change in government to one that has very different policies of how they see trade and view NAFTA. For the companies and the Mexican government that is leaving, it was better to try to close a deal.”
In effect, Canada’s gambit in the spring served no interest but that of the United States. Canada saw the deal rejected, only for Mexico to agree to its most difficult provision anyway.
Mr. Lighthizer successfully pursued a divide-and-conquer strategy in talks, but he had some help from his negotiating partners in making it happen.
Jose Luis de la Cruz, the top economics adviser to Mexico’s main industry lobby, said the Canadian and Mexican pushes for bilateral deals were the inevitable consequence of each country having different needs in its negotiations with the U.S.
“In Mexico, the sensation is that we have to go forward. We would prefer if it’s trilateral, but if it’s necessary to go forward with bilateral, then …”
Jorge Guajardo, a former Mexican diplomat, says that splitting talks in half was more a practical matter than an attempt to cheat one country or another.
“Here you have a case of prisoner’s dilemma: You’re hoping the person in the next room won’t give up before you do,” he said. “In the best of circumstances, trilateral talks are complicated. In the age of Trump, they are almost impossible."