There has recently been a great deal of debate about whether any NAFTA renegotiations will be conducted bilaterally (Canada and the U.S. one-on-one) or trilaterally (Canada, the United States, and Mexico together). In reality, it can only be both. Where NAFTA is, essentially, a trilateral framework comprised of a series of bilateral agreements, some aspects will require all three parties while others will concern only two of them. For Canadian businesses, understanding how the renegotiations could take place is critical to determining how best to position themselves.
Divide and conquer
On his third full day in office, and in what the White House described as his “first executive action”, President Trump signed a memo to the United States Trade Representative which stated in part: “it is the intention of my Administration to deal directly with individual countries on a one-on-one (or bilateral) basis in negotiating future trade deals.” While the Trump Administration claimed that this “ushers in a new era of U.S. trade policy” that is likely truer in principle than it is in practice. Historically, even in multilateral negotiations, Americans have always gone it alone.
By way of illustrative example, consider how the United States conducted itself within the context of the multilateral Trans-Pacific Partnership negotiations during the Obama Administration. As former Prime Minister Stephen Harper explained it at the time: “There are twelve countries around the table, but, frankly, we are not sitting around the table very much. It is mostly the United States talking to each country individually. I’m not sure how that’s going to work in terms of getting to a comprehensive deal, but that dynamic has really been driven by the Americans.”
In trade negotiation parlance, this is often called a ‘hub and spoke’ strategy. One party, usually the dominant party, will position themselves at the centre of the negotiations – akin to the hub on a wagon wheel – and then deal with every other party, the ‘spokes’ of the wheel, in isolation. Not only does that allow the central party to maximize its leverage, it also allows them to play all of the other negotiating parties off each other. This is not to suggest that the United States always prefers the ‘hub and spoke’ approach only that it traditionally does in multilateral contexts.
During his Senate confirmation hearings, Commerce Secretary Wilbur Ross offered his view on the limitations of the hub and spoke model. Noting that there is “nothing inherently wrong” with such multilateral negotiations, he said “as somebody who has negotiated a lot of transactions I can tell you the more complex the environment within which you’re negotiating the less likely you are to get to a sensible result…what happens is that the other countries get the benefit of things they didn’t even ask for because you had to give them to someone else.”
Why does it matter?
When President Trump and his team provide formal notification to Congress in advance of the NAFTA renegotiation talks, it is anticipated that he will outline at least some of the Administration’s objectives and priorities. When that information enters general circulation, Canadian officials will have a better sense of the areas where Canada and Mexico could work together – or align their respective approaches – as well as those areas where Canada will be on its own. Armed with that ammunition, Canada will gain a far greater ability to develop its negotiating strategy.
In areas where Canada and Mexico may potentially share common interests – such as rules of origin for the auto manufacturing sector – business leaders may advocate closer coordination between Canadian and Mexican negotiating teams by providing important factual support for our common positions. In addition, or in those areas where Mexico has little interest or, even, a conflicting interest, the role of Canadian business leaders could be to identify third party stakeholder allies in the United States who may help to engage and influence U.S. negotiators.
Irrespective of whether such allies exist, either in Mexico or the United States, Canadian businesses must provide whatever information they can to our negotiators about concessions they are prepared to accommodate and those they cannot accept. Business leaders cannot assume that Canadian officials will have any of this information readily at their disposal. The federal government has finite resources available to collect and assess so-called ‘real time’ information, intelligence, or insights about the commercial interests of impacted sectors.
According to Hill+Knowlton Strategies’ Principal Advisor Gordon Ritchie, a former Ambassador for Trade Negotiations and former Deputy Chief Trade Negotiator for the Canada-US free trade agreement, the ability to access reliable information from industry stakeholders is a key factor that will impact the Canadian government’s negotiating strategy. A second factor that will be taken into account is the degree of integration between Canadian, American and Mexican industries that has taken place since the original Canada-US FTA and subsequent NAFTA were negotiated.
While Foreign Minister Chrystia Freeland has correctly noted that formal NAFTA renegotiation talks have yet to begin, informal consultations between various levels of government as well as between federal government departments has already begun in earnest. Canada’s Ambassador to the United States, David MacNaughton, has already reached out to provincial governments, urging them to undertake stakeholder consultations on an expedited basis. This advice to public sector entities applies equally to private sector enterprises. Time is of the essence.
Canadian and Mexican officials have said publicly that they anticipate the NAFTA renegotiations could begin as early as June or July of 2017. Both the American and Mexican political calendars require that the talks be either well-advanced or concluded by early 2018 – before voters go to the polls for their mid-term and presidential elections respectively. This creates an extremely narrow window of time for all three countries to achieve mutually acceptable agreements, something that could potentially benefit Canada’s position if it is adequately prepared.