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North American free-trade agreement negotiators from the United States and Mexico have been engaged bilaterally for some time while Canada waits on the sidelines for a return to the negotiations. The U.S. and Mexico were reported to have been trying to come to a “handshake” agreement last week, and reports over the weekend suggest the two countries are edging closer to agreement on some key issues.

Having said that, the biggest contentious issue between the United States and Mexico, trade in autos, now seems to have been dealt with pending resolution of other significant bilateral issues such as trade in seasonal produce as well as energy trade and investment (the Mexican constitution mandates state control of petroleum resources).

From a Canadian perspective, the temporary shift to bilateral negotiations on issues primarily of interest to our two other trading partners may prove to be an effective means of unpacking an otherwise complex three-way discussion.

Should the United States and Mexico come to agreement in principle on a few big issues, the question is whether the U.S. will subsequently push for a bilateral negotiation with Canada before returning to the trilateral table. After all, issues such as Canada’s supply management do not figure prominently between the United States and Mexico. Alternatively, there may be an immediate return to three-way talks.

Either way, agreement on autos probably serves to unlock other difficult issues for a renewed, if not necessarily improved, NAFTA. It gives the United States a putative win on the biggest public dimension of the negotiations. This is because the tentative deal apparently locks in higher North American content requirements, along with certain minimum wage guarantees that will, at the margin, improve the likelihood of new auto investment in the U.S. compared to Mexico. Even if that doesn’t happen, it will clearly be the victory spin in Trump administration talking points.

Canada should certainly be able to live with this limited attempt at “managed trade” in autos. After all, since NAFTA implementation, Canada has been barely holding its own in automotive production, with major growth going to Mexico. As a proxy for relative success, in 2017 Canada assembled 2.2 million vehicles while enjoying sales of two million – rough balance. The United States assembled 11.2 million vehicles but consumed 17.2 million, and Mexico assembled 4.1 million vehicles but had sales of only one million. This means that the new rules should favour the United States and Canada relative to Mexico, but who knows?

Still on autos, the content debate was always somewhat academic because the fallback for auto companies not meeting the NAFTA requirements was to pay the respective “bound” tariffs agreed to by all three countries under the World Trade Organization (WTO) agreements. In the case of the United States, that is merely 2.5 per cent for cars – hardly a punitive measure given that exchange rates fluctuate more than that in any given year. Canada’s rate is 6 per cent.

Given this problem, the U.S. side apparently proposed to Mexico that the fallback tariff in the event of non-compliance with the new rules be raised to 25 per cent, the same amount being mooted in the bogus U.S. inquiry into the impact of automotive imports on national security. The Mexican side rightly balked at this WTO-illegal proposal, but they have apparently agreed to apply it only to new investments, thereby “grandfathering” existing facilities.

From a Canadian perspective, in the interests of a broader deal, it would make sense to hold our free-trader noses and agree to something that will probably not affect Canada at all – we have not had a new automotive plant in this country in more than 30 years, and there is no reason to expect any in the future.

A three-way auto agreement along these lines provides the United States with an incentive to deal less dogmatically with the remaining contentious issues. In this regard, the key for Canada will be to avoid NAFTA-minus outcomes on issues of importance such as adjudication of trade remedy disputes (Chapter 19) and procurement. That will be difficult, but there is now good reason for optimism on compromise from heretofore, intransigent U.S. positions.

An added incentive for compromise by the U.S. side on issues of importance to Canada will be for greater flexibility on our part with respect to the archaic supply-management system that unfairly taxes Canadian consumers and inhibits the growth of the food processing sector, one of Canada’s largest employers. That would be a win for both Canada and the United States.

The makings for a new NAFTA are now at hand. The Trump administration needs a trade win before the midterm elections; the incoming Mexican president would like to get NAFTA off the table before assuming office; and presumably the federal Liberals would like some distance between a so-so NAFTA outcome and the election next year. Let’s hope the negotiators have the wit to close the deal.

Andrei Sulzenko is a former trade negotiator and is currently an Executive Fellow at the School of Public Policy, University of Calgary.

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