Laura Dawson is director of the Wilson Center's Canada Institute in Washington.
As Canada heads into the fifth scheduled round of North America free-trade agreement talks on Friday, there is speculation that this will be the round when increasingly untenable demands from the United States will lead Canada to walk away from the talks.
True, Canada walked away from the free-trade negotiations with the United States in 1987. It did the same in 2016, in the negotiations with the European Union over Canada-European Union Comprehensive Trade Agreement (CETA). But both walkouts were predicated on two assumptions: First, that the negotiations could go no further at the bureaucratic level and would have to be elevated to the political level for resolution, and second, the credible belief that the other side wanted a deal.
In the current NAFTA 2.0 negotiations, Canada and Mexico are under no illusions that the U.S. negotiators will call them back with a compromise if they walk. It is quite possible that the negotiators from the Office of the United States Trade Representative (USTR), who are part of the Executive Office of the President, are under instructions to let the deal fail.
Mexico and Canada, and a substantial share of U.S. industry and agriculture, have a modernization agenda they are seeking to achieve through this negotiation. In roughly 20 of 24 NAFTA issue areas, productive negotiations are likely to continue, following a predictable model of offer and response, revise and compromise. These include small business, expansion of digital services and use of new technologies to facilitate customs clearance.
Market access commitments (i.e., tariffs) are another story, and the complexity of managing three-country supply chains is one of the reasons for Canada's limited agreement last week at the Trans-Pacific Partnership leaders summit.
The real sticking points are the four so-called "poison pills." These include severe cuts to current levels of government procurement access; a sunset clause that would kill the deal on the basis of U.S. trade-deficit triggers; automotive rules of origin that no North American automotive company could currently meet; and a dispute settlement system that allows participants to opt out at will.
Former prime minister Stephen Harper suggests that Canada devise compromise proposals that meet the U.S. administration half way on these deal-killing initiatives. But if the intention of these provisions is to sink the deal, a proposal that leaves the NAFTA "mostly dead" (to quote The Princess Bride's Miracle Max) will not satisfy either anti-trade or pro-trade factions in the U.S.
Instead, the negotiators should focus on reaching a provisional settlement on issues where there is common ground and leave the job of rescuing the deal from a hostile administration to the U.S. Congress, where it belongs. But leaders from the major trade committees – House Ways and Means and Senate Finance Committee – have yet to seriously engage on the trade file. Understandable when they are facing so many other legislative and governance challenges.
At present, there are enough pro-trade Republicans in Congress to preserve NAFTA but the balance of power may shift after the November 2018 midterm elections. More Trump Republicans or anti-trade Democrats could skew the consensus away from NAFTA. If so, pro-trade factions in the U.S. will have to rely on court actions to try to suspend or delay presidential actions to remove the United States from the agreement.
In terms of likely outcomes, the least likely outcome is the swift and successful completion of a modernized NAFTA. However, complete dissolution of the deal is also unlikely. (The Wall Street Journal puts the odds at one in four.) Most legal experts agree that it would be very difficult for President Donald Trump to fully remove the U.S. from NAFTA without the approval of Congress.
The more likely scenarios are that Mr. Trump launches a notice of withdrawal that is blocked for a couple of years by the legislative or judicial branch. Pro-trade organizations are already preparing to launch legal actions to halt or slow down a presidential action. At the legislative level, Congress, under the rules of Trade Promotion Authority, has the right to either accept or reject a finished deal. Thus, the main site of legislative influence takes place at the end of the negotiations. In the meantime, however, Congress can let the USTR know that it will not support a deal that disrupts supply chains, deflects foreign investment or provokes foreign retaliation.
The most likely short-term option is a zombie NAFTA that is neither alive nor dead while North American business waits for a presidential change of heart or a change of president. The zombie option is preferable to a completely dead NAFTA, but the economic effects of such instability are undeniably negative for all three countries.
It is not necessary to kill the deal to torpedo the U.S. economy. In a letter to Commerce Secretary Wilbur Ross, more than 80 U.S. agricultural groups said they were "sadly confident" that the initiation of withdrawal measures alone would trigger cancellation of commodity orders and product-specific retaliation.
It is not certain that the NAFTA will fail, but what is clear is that the resolution of the issue lies in the hands of U.S. legislators. Faced with this reality, Canadian negotiators should continue to work on the issues where they can make a difference, recognizing that once they the leave the table, influence over final outcomes moves out of Canadian control.