The Rise of North American Brinksmanship

Three years ago, I wrote an IBJ Insight entitled “Championing North America’s Potential,” which celebrated economic cooperation between Canada, Mexico and the United States in light of the bold plans established at the Toluca Leaders’ Summit. Highlighting the potential for increased regional collaboration on numerous issues—ranging from energy to infrastructure to human capital—that article emphasized the many benefits to be gained by achieving a deeper institutionalization of the continental relationship.

Since then, economic integration along with regional collaboration (such as the unprecedented cooperation in climate policy over the past few years) has put North America on the verge of becoming the most competitive region in the world. But there was still significant room for improvement when the U.S. presidential race heated up last year. At the time, in anticipation of a Clinton victory, a number of American, Canadian, and Mexican think tanks started working with the Wilson Center in Washington to jointly design an agenda for the next phase of regional cooperation.

Initiated at the behest of the North American leaders of the day, these discussions focused on updating the North American Free Trade Agreement (NAFTA) to include issues related to e-commerce, labour-market flexibility, energy markets, and how to improve access for small and medium-sized enterprises.

All of this was turned on its head by Donald Trump’s surprise victory in November’s presidential election. Shortly after, instead of having conversations about how to take NAFTA to the next level, those same think tankers were focused on trying to ensure the trade agreement’s mere survival after Inauguration Day, with a few hopeful souls clinging to the thought that a renegotiation of NAFTA might possibly open the door to modernization. The early days of the new Trump administration have quickly put paid to those hopes.

Constructive dialogue between the United States and Mexico has collapsed thanks to disagreements regarding the benefits of free trade and U.S. demands that Mexico pay for the border wall that Trump promised to build while campaigning for the Oval Office. Furthermore, signals from Ottawa suggest the Canadian government might be ready to sacrifice NAFTA for a bilateral trade deal with Washington, leaving Mexico out in the cold.

To its credit, the isolated Mexican government isn’t taking things lying down. It is fighting back, asserting national pride and unity, while declaring itself ready to give up NAFTA rather than sign a new agreement that does not serve the national interest. Put simply, Mexico is gearing up for a trade war and identifying the products on which a retaliatory tariff would have the biggest political impact.

As a result, we are heading into a near future not of trilateral accords but of hub and spoke, with the United States having successfully split Canada from Mexico and looking to secure preferential treatment from both. More broadly, there is a heavily protectionist scent in the air, with the Border Adjustment Tax (BAT) a central part of the Republican plan in Congress. A 20 per cent BAT would mean significant price rises on a wide range of consumer goods, with automobile manufacturers estimating a rise of between 9 and 16 per cent in the final sticker price, depending on the amount of non-American content in the vehicle.

Fortunately for Mexico, the nation has a long list of free trade agreements with 45 countries.  It also has 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries, and nine trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). To compensate for the potential loss of NAFTA, the government is now considering negotiations on six new FTAs.

Mexico is also a negotiating party and signatory to the Trans-Pacific Partnership (TPP). Although President Trump withdrew the United States from the TPP in January, China is exhibiting interest in formulating a replacement agreement to strengthen its economic sway over the Asia-Pacific region. China has already signaled that it will seek to inject new energy into its hitherto inertial economic relationship with Mexico, and it is actively seeking agreements with Canada on raw materials and energy. Other countries are also ready to leap into the space exposed by the breakdown of North American cooperation.

That said, there is little that can be done in the short term to replace the extraordinary benefits of NAFTA if it is indeed doomed to expire. Although it is indisputable that there have been varying positive and negative impacts on Canada, the United States, and Mexico, North American economic cooperation has not been all negative for the U.S. economy, where recent research by the Wilson Center’s Mexico Institute has shown that almost five million jobs depend on the current trading relationship with Mexico.

The success of North American economic integration over the past 20 years has relied on the integration of supply chains, the cost-savings in the manufacturing process brought about by the complementarities of the three economies, and the advances in competitiveness and productivity that have resulted from competition for investment within the region. That integrated production platform will not disappear overnight, but the cost reductions will be reduced at the same time as the incentives to seek suppliers from outside the region are increased.

Furthermore, America’s BAT would likely apply to all imports, and Mexico and Canada would recover part of their comparative advantage from the expected rise in the value of the U.S. dollar. But the prospect of American firms being punished by the Trump administration with an import tariff for investing outside of the United States has already deterred at least one major firm from shifting its production southwards.

While recent events do not bode well for North American economic cooperation, NAFTA’s partners may still somehow forge a new common agenda. Keep in mind that some powerful Republicans in Congress are beginning to push back against Washington’s brinksmanship with Mexico. Meanwhile, Mexico’s own response has surprised the Trump administration, garnering a joint statement committing both sides to work their differences out as part of a comprehensive discussion on all aspects of the bilateral relationship. Given the heightened tensions, it will be difficult to find common ground in these discussions. But there is at least hope for a positive outcome with important U.S. actors—including the new secretaries of state, homeland security, and defense—now actively emphasizing the importance of a positive relationship with Mexico.

Nevertheless, the plans drawn up by think tankers to help advance continental integration now have to be stored away and kept safe to be brought out again if current U.S. economic thinking changes. North American businesses and communities that have reaped the rewards of the last two decades of progress would do well to make sure they are not forgotten.

3 responses on “The Rise of North American Brinksmanship

  1. Adi

    Think about it, when America wants to rebuild their nation why world is crying? Why world is talking about North American unification ….

    Water and money finds the slope. World is at receiving end of the America’s TAX PAYERS money. Trade should be fair and benefit Americans too. Don’t you think?

    Do you know how many hours an average small income American works per day? They should get returns on their TAX DOLLARS too.

    Trump understood the reality. He is the first bold president to put American interests ahead of global leadership. I’m not sure why democrats are not willing to put American interests ahead of their global extravaganza. First time, 50% of people who voted for Trump realized American interests are ahead of Global waste. Hope rest of the world understands it. America doesn’t stand surplus anymore. they have to clean up their houses first.

  2. John Kerr

    Some very good analysis but the average worker in the American heartland observes more than statistics dredged up by academics. He sees the effects of cheap immigrant labour on wages where he lives. He sees factories shipped overseas (and I have visited several in China myself) or to Mexico. He may have had to train his foreign replacement worker before being laid off, as often happens.
    The country with the surplus is usually at a big disadvantage in a trade war. Mexico is also now dependent on oil imports from the United States. Neither Canada or Mexico can replace the US as a trading partner.
    A $20 billion wall could be paid off in 5 years with $4 billion in annual tariffs on $300 million of imports from Mexico. That would be a 1.3% tariff. 10 years would be around 0.75%. I doubt it would have any impact on trade at all. This too shall pass. Trump will declare victory and move on.

  3. Allan Portis

    You tell us of “NAFTA’s extraordinary benefits”. It’s regrettable the Elites/Experts never figured a way to look beyond their own interests and ensure all citizens shared in those benefits. “Trickle Down” does not work. As a farm boy I know of only one thing that flows down, and The Precariat Class is tired of being dumped on.

    And now we’re told advances in Artificial Intelligence and Automation will eliminate nine of every ten jobs.

    Canada and my native New Zealand have only a limited time to get ahead of the curve or we will be facing our own versions of Trump.

    I suggest folk who are looking for answers read Guy Standing’s book A PRECARIAT CHARTER.

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