The end of NAFTA? What the U.S.-Mexico trade deal means for Canada

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There was a time when Mexico was seeking reassurances from Canada about not being excluded from the NAFTA renegotiations prompted by the United States.

On Monday, though, it was the U.S. and Mexico that announced a deal to change the 25-year old trade pact, with Canada pressured to sign on by Friday.

And the message to Ottawa from U.S. President Donald Trump was clear: Take it or leave it.

“We’re starting negotiations with Canada pretty much immediately,” Trump said. However, he added, the Canadian economy is “a smaller segment, Mexico is a very large trading partner.”

READ MORE: Trump announces new U.S.-Mexico trade deal, plans to eliminate NAFTA name

WATCH: Donald Trump formally announced the United States/Mexico trade agreement, saying it would supersede NAFTA.
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Trump announces United States/Mexico trade agreement, says NAFTA is over

Throughout the press conference, the U.S. president portrayed the new agreement as a bilateral trade deal, in which Canada might or might not be included.

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“They used to call it NAFTA. We’re going to call it the United States-Mexico Trade Agreement. We’ll get rid of the name NAFTA,” Trump told reporters, adding that the name had a “bad connotation.”

READ MORE: Freeland heading to Washington after Trump announces plans to scrap NAFTA

The White House is telling Canada to “sign on the dotted line,” Avery Shenfeld, chief economist at CIBC Capital Markets, told Global News.

But it isn’t entirely clear, yet, what Ottawa would be agreeing to.

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Trump says trade deal with Canada will be next priority after Mexico

Is this the end of NAFTA?

“I think the reality is that we’re still likely to end up with a three-way deal,” Shenfeld told Global News.

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And that means there would still be a North American free trade agreement, whatever the U.S. president wants to call it.

Details on what the U.S.-Mexican deal contains are scant, but media leaks indicate the two have agreed to raise the threshold for North American auto content in NAFTA vehicles to 75 per cent, up from the current level of 62.5 per cent. Also, the new pact would require 40 per cent to 45 per cent of auto content to be made by workers earning at least US$16 per hour, something that would reduce Mexico’s ability to attract manufacturers based on US$4 an-hour wages.

For Ottawa, “it will either be a tariff on cars or a negotiated deal,” Trump said. The White House has previously threatened to impose tariffs of 25 per cent on imports of cars, trucks and auto parts from foreign countries, including Canada.

WATCH: U.S., Mexico reach preliminary trade deal without Canada  

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U.S., Mexico reach preliminary trade deal without Canada

But the auto sector is unlikely to be a sticking point for Canada, which wouldn’t be affected by the wage provisions and appeared open to higher auto content rules in the past, Shenfeld said.

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READ MORE: Canada’s auto stocks spike after U.S., Mexico announce trade agreement

The U.S.-Mexico pact is also said to include a compromise on what had been a key point of friction between Ottawa and Washington: The U.S. demand for a sunset clause that would force the renegotiation of the deal every five years.

Instead, the deal will come up for review every six years, with the potential for expiration after 16 years.

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Less is known, however, about what the U.S.-Mexico pact says on a number of other issues that have proven to be “poison pills” for the Canada-U.S. negotiations, said Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University.

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These include U.S. demands to curtail Canada’s and Mexico’s ability to bid for U.S. government contracts and to scrap dispute-resolution provisions. Mexico agreed to eliminate dispute settlement panels for certain anti-dumping cases, a move that could complicate talks with Canada.

READ MORE: Can Canada live without NAFTA dispute-resolution mechanism?

Canada’s supply management system could be the biggest hurdle to a new deal

However, it is Ottawa’s treatment of dairy products that will likely be the biggest issue for Canadian and U.S. negotiators, Sands predicted.

Canada’s supply management system, which sets production quotas and prices for domestic dairy products while imposing steep tariffs on imports, was very much on President Trump’s mind on Monday.

“You know, they have the tariffs of almost 300 per cent on some of our dairy products,” Trump said referring to Canada.

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At the start of the negotiations, “the U.S. assumed, wrongly, that because [former Prime Minister Stephen] Harper was willing to make concessions on [supply management] for the [Trans-Pacific Partnership] TPP talks, this government would be willing to do the same,” Sands said.
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But supply management is a much bigger issue for Trudeau’s political base, Sands added.

Still, Canada could perhaps get a deal and preserve supply management if it is willing to accept the rest of the U.S.-Mexico pact, he noted.

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The alternative: a bilateral U.S.-Canada deal

If Canada doesn’t add its signature to the agreement inked by Washington and Mexico City, it will likely negotiate a separate bilateral deal with the U.S., Sands said.

This now appears a concrete possibility, as the U.S. administration has been signalling since April that is has a strong preference for bilateral over multilateral deals. Negotiating one-on-one with other countries gives the U.S. greater leverage, Sands noted.

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The end result could be one U.S.-Mexico deal, one Canada-U.S. deal and one agreement between Canada and Mexico that would be based on whatever is left on NAFTA, Sands said. This could considerably complicate the trade rules governing North American trade and possibly create an incentive for some businesses to relocate to the U.S., he added.

“The more complex and North America-based your supply chain, the more you are vulnerable,” Sands said.

Manufacturing companies in the auto sector and aerospace industry would likely be among those feeling the biggest impact, he noted.

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Mexico could keep the door open for Canada

The U.S. has said it hopes to conclude negotiations with Canada by Friday in order to give the U.S. Congress the required 90 days to review the deal and allow outgoing Mexican President Enrique Pena Nieto to sign it before leaving office on Dec. 1.

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The text of the pact itself won’t be made publicly available until 30 days from today, Sands said, another element that puts the Trudeau government in a tough negotiating spot.

But Ottawa might be able to extend its negotiating window and still sign on to a three-way deal with a little help from Mexico, Sands said.

Speaking with President Trump’s speakerphone in the Oval Office, President Pena Nieto repeatedly stressed the importance of keeping Canada in the pact.

If his successor, president-elect Andres Manuel Lopez Obrador, is equally keen on including Ottawa in the deal, he might be able to keep the window open for Canada a little longer, Sands said.

It’s Canada’s turn now, it seems, to seek reassurances from Mexico.

WATCH: Scotty Greenwood, the CEO of the Canadian American Business Council explains why there could be a trilateral agreement within a week

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What’s next for NAFTA?

With a file from Reuters


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