In recent months, the collective wisdom among NAFTA commentators has been that the United States was pushing one-sided, win-lose demands on Canada and Mexico as a set up for giving notice of withdrawal from the agreement. That was then. Now, a much more nuanced picture is emerging, significantly reducing the probability of the U.S. side taking that step, even as a negotiating tactic.
The telltale signs of this shift have been accumulating over the past few weeks. Most notably, President Donald Trump's first State of the Union address last week did not mention the North American free-trade agreement explicitly, making a vow merely to "fix bad trade deals and negotiate new ones."
That kind of toned-down rhetoric was also evident in his recent appearance at the annual Davos gabfest of business and political elites in Switzerland, as well as in various news interviews.
A similar tone was struck by U.S. negotiators following the most recent round of talks in Montreal. There were no breakthroughs on tough issues, but the three parties agreed to keep talking.
Further, there has been more vocal opposition from Canada and Mexico. Prime Minister Justin Trudeau is reported as saying "Canada is willing to walk away from NAFTA if the United States proposes a bad deal." Mexico has also threatened to walk away from a one-sided deal. (Both Canada and Mexico are signatories to the recently revived and rebranded Trans-Pacific Partnership, thereby preserving preferential access to each other's markets in the absence of NAFTA.)
Does all this signal a turning of the tide, or is it more likely a short-term feint? The evidence suggests the former; and, as always, it's mainly about U.S. politics.
The principal driver is the fact the President needs all the friends he can get now that the Robert Mueller special counsel investigation is drawing closer to the White House – this means primarily Republicans in Congress. Republicans have historically been pro-trade liberalization, and recently 36 of 51 Republican senators signed a letter to the President stating "the next step to advance the economy requires that we keep NAFTA in place, but modernize it to better reflect our 21st-century economy." Similar views have been expressed forcefully by the U.S. business community.
NAFTA also needs now to be placed in the context of U.S. midterm elections in November when all of the House of Representatives and a third of the Senate are up for re-election. Notice of withdrawal from NAFTA would be a net negative for Republicans electorally, given the reliance of many states on exports to Canada and Mexico. The last thing the President needs is to be blamed by his own party for unnecessary losses that could jeopardize Republican majorities in both houses.
There is also probably a growing realization in the administration that ripping up NAFTA is not the most effective "America First" policy. A much bigger booster of investment in the United States was the recently passed tax legislation.
In any event, lingering uncertainty about NAFTA through protracted negotiations is quite effective on its own in skewing investment to the United States – witness Fiat Chrysler's recent decision to move a truck plant from Mexico to the United States.
Further, Mr. Trump may now understand better that pursuing existing statutory trade-remedy authorities is a good way to trumpet "America First" policies, even if ultimately offside international rules. Recent actions against solar panel and washing-machine imports from Asia, on top of actions against Canadian lumber and aircraft (now quashed by the U.S. International Trade Commission), give red meat to the electoral base without having to rip up trade agreements.
What then, is the likely scenario going forward? It appears to be more of the same trench warfare, potentially leading to exhaustion and stalemate. Alternatively, faced with that likelihood, the U.S. side might start emulating Canada by actually looking for compromise.
The scenario is, of course, complicated by the rapidly-approaching midterm campaign as well as the forthcoming Mexican presidential election.
The best advice to the NAFTA parties, therefore, is to be absent, at least publicly, from the political level from negotiations and leave it to the technocrats for the time being.
All that translates into a serious stock-taking toward the end of 2018 once the political landscape in the United States is reset.
In the meantime, Canadians should not be under any illusion that this is a good outcome.
The longer business uncertainty continues, the less likely North American investment decisions are to favour Canada. After all, even with a secure and stable NAFTA, it always has been a struggle to attract investments to Canada in order to serve primarily the 12-times larger U.S. market.