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Mexico has much to gain from a NAFTA that includes Canada, but has little leverage to push for a three-way deal, analysts here say, as the country is left largely on the sidelines while U.S. and Canadian negotiators discuss dispute-resolution mechanisms and other issues that Prime Minister Justin Trudeau said this week could be deal-breakers for Canada.

Mexican NAFTA media coverage on Wednesday focused on Mr. Trudeau's statements that maintaining Chapter 19, the dispute-settlement clauses, is essential. It is less important to Mexico, whose negotiating team agreed to its elimination in the bilateral deal with the United States reached on Aug. 27.

For Mexican negotiators, it was an agreement with the Americans that was crucial. "In the case of Mexico, having the certainty of a deal is important because essentially we need the foreign investment and the national investment," said Luis Foncerrada Pascal, director of the Centre for the Study of Private Sector Economics, a think tank in the capital. There has been a sharp decline in investment during the period of uncertainty while the North American free-trade agreement has been reopened, he said.

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"And for Mexico I do think, and that’s the general consensus, that it is necessary to have Canada in the deal – it doesn’t make sense to have just a bilateral deal with the States. It’s still very important to have total integration of the region – not just in terms of production and inputs, but it’s essential for Mexico in terms of law."

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Uniform law on intellectual property and other issues across the region creates a hospitable environment for investors in all sectors, he said. "It’s probably been the most important legacy of NAFTA – and in that sense, we believe that having Canada is absolutely essential.”

Antonio Ortiz-Mena, a former head of economic affairs at the Mexican embassy in Washington, said Canada's participation is critical for two reasons: first, because it is not at all clear that the U.S. Congress could legally approve a bilateral deal, and second, because even if Congress did engage with a deal that didn't contain Canada, it's unclear if it would win sufficient votes to pass into law. "Imagine the response from northern states," he said in a telephone interview from Washington.

"Substantively, Mexico needs Canada – Mexico is very attractive as an investment destination because of NAFTA, which created a single set of trilateral rules to deal with trade and investment," said Mr. Ortiz-Mena, who is now a senior vice-president at the Albright Stonebridge Group and whose doctoral dissertation focused on NAFTA dispute resolution.

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"Even assuming the bilateral deal were accepted and ratified by Congress, we would have a set of rules for Mexico-U.S. trade and a set of different rules for Mexico-Canada trade … and who knows what would happen in terms of U.S.-Canada rules? Would they go back to the old Canada-U.S. free-trade agreement? We would have three sets of rules, which would make it very difficult for companies to operate in a seamless manner in North America and make production there less efficient and make Mexico a less attractive direction for inward [foreign direct investment]."

But the issue could be difficult to resolve, Mr. Ortiz-Mena said, given that the Trump administration has made clear it wants Chapter 19 eliminated. He called that a not-entirely-rational impulse, given that the arbitration panels have favoured the United States in some rulings. "This is more of an ideological sovereignty-related decision than a pragmatic one; if it was pragmatic, they'd want to keep it. The issue is that if Mexico or Canada want to seek redress, they don't want a [multinational] panel reviewing it."

Mexico's negotiators appear to have concluded that Chapter 19 does not particularly help the country, a view Mr. Ortíz-Mena called shortsighted − the fact that Mexico has not often won NAFTA adjudications may reflect more on the substance of the cases than the usefulness of the panels. "Second is the counterfactual – do U.S. trade authorities review their cases more carefully because they know they can be taken to a Chapter 19 panel? It’s Sherlock Holmes's dog that didn't bark – there is a dissuasive element – so I don’t like to see it go away. I'd rather see it be more accountable and more transparent."

Fernando Gonzalez-Rojas, a professor of international trade at the Monterrey Institute of Technology and Higher Education in Mexico City and former dispute-settlement lawyer at the World Trade Organization, said Mexico is willing to move forward without Canada if Congress is inclined to consider a bilateral deal.

"The trilateral agreement makes more sense in many ways − it provides greater benefits," he said. "Mexico wants Canada to join the agreement, but that’s not Mexico’s priority."

Foreign Affairs Minister Chrystia Freeland was asked Wednesday about comments the Prime Minister made about Donald Trump regarding NAFTA. Justin Trudeau told a radio station the U.S. President doesn’t always follow rules. The Canadian Press
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