Canada, Mexico forming alliance against U.S. protectionist approach to NAFTA

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Canada and Mexico are working together behind the scenes to present a united front against U.S. President Donald Trump's protectionist NAFTA demands and control the tenor of the trade talks.

The two sides hold regular back-channel discussions – from Foreign Affairs Minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo down to staffers from the respective governments – to compare notes on the U.S. positions and keep one another up to speed on their respective strategies, sources with knowledge of the communications said.

As the fifth round of the renegotiation of the North American free-trade agreement (NAFTA) opens this week in the tony Polanco area of Mexico City, the pact's junior partners have never been more aligned: They plan to hold firm against U.S. demands on autos, procurement and a sunset clause while seeking quick agreement on less contentious issues.

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"My impression is that there has been a fair amount of consultation and co-ordinated strategy developing between Canada and Mexico," said Andres Rozental, a Mexican former deputy foreign minister, who has been following the talks. "And I think that's positive."

But Ottawa is playing something of a double game. Even as it extensively co-ordinates its efforts with Mexico City, sources with knowledge of the Canadian government's thinking concede the country would agree to a two-way negotiation with the United States if NAFTA talks break down.

Under exactly which circumstances Canada would ditch Mexico are unclear.

One source insisted Canada would only contemplate a new bilateral deal with the United States if Washington completely pulled out of NAFTA and there was zero chance of a three-way pact. A different source, however, said Canada would consider bilateral talks if the NAFTA renegotiation reached a deadlock and the United States offered a two-way pact instead.

For now, however, the two countries are standing shoulder to shoulder.

Mexico plans to present a counterproposal to the U.S. demand for a sunset clause that would terminate NAFTA in five years unless all three countries agree to extend it. Under the Mexican plan, the five-year period would simply be a review with the option for the agreement to be updated. Mexico is also working on a counterproposal to Mr. Trump's demands on rules of origin, which included mandating a 50-per-cent U.S. content requirement for all vehicles made in Mexico and Canada. The rules-of-origin issue is set for four days of talks, stretching from Saturday to Tuesday.

For the most part, however, the fifth round is set to focus largely on less-contentious issues in a bid to make progress before tackling the most-difficult sticking points. The countries' respective ministers – Ms. Freeland, Mr. Guajardo and U.S. trade czar Robert Lighthizer – will not attend this time.

Financial services, customs procedures and investment are scheduled to get large chunks of time at these talks. Some controversial measures will be largely shunted off for future rounds: Dispute resolution is scheduled for just one day and procurement for two.

John Weekes, who was Canada's chief negotiator in the original NAFTA talks in the early 1990s, said Canada and Mexico stand a better chance of resisting the U.S. onslaught if they co-operate.

"It would be perfectly natural to be sharing information about where the Americans are coming from, and what tactics might be useful to push back," said Mr. Weekes, senior business adviser in Bennett Jones's Ottawa office. "A united front makes for a better prospect of a successful negotiation."

Mr. Weekes said he co-ordinated regularly during the original talks with his Mexican counterpart, Herminio Blanco, dining with him and several subordinates before every round. On one occasion, for instance, Mr. Weekes explained to Mexico the importance of getting a cultural carve-out in NAFTA – allowing Ottawa a free hand to protect cultural companies and enforce Canadian content requirements – and Mr. Blanco agreed not to intervene when Canada hashed the issue out with the U.S.

"We wanted to make sure each understood where each other was coming from so we didn't inadvertently do anything to get in the way of each other," Mr. Weekes recalled.

Jaime Zabludovsky, a Mexican former trade negotiator who has been advising the government, said he believes Canada is sincere in its desire to keep Mexico in the pact. Not only have the three economies become so heavily integrated – with auto companies regularly manufacturing products between all three countries – but in Mr. Trump's "America-first world," he argued Canada would face the same demands on rules of origin and dispute settlement if it negotiated alone.

"I don't see why doing two bilateral negotiations would make anything easier," he said. "The same obstacles in NAFTA would be there in a bilateral one."

And Luis de la Calle, who helped negotiate the original NAFTA deal for the Mexican government, argued that Canada needs Mexico just as Mexico needs Canada: The prospects of getting any trade deal through the U.S. Congress are uncertain, and he contended that an updated NAFTA stands a better chance of approval than two new, separate bilateral agreements.

Since the days he was at the table, when both Democrats and Republicans worked together to get NAFTA through, the political climate in the U.S. has shifted dramatically.

"When you negotiated the original Canada-U.S. free-trade agreement in 1987, and then when we did NAFTA in 1993, there was a window of opportunity that allowed Canada and Mexico to reach deals with the United States," he said. "That window of opportunity is now closed."