There are currently a great number of business owners, corporate executives and front-line workers across North America holding their breath in anticipation of what they believe will be the outcome of the NAFTA negotiations on or before September 30.
That’s the date set out by Washington to deliver the text of a deal with or without Canada before making public (within 30-days) the text to the bilateral trade deal the United States struck with Mexico on August 30. The US administration is following the time constraints designated by the Trade Promotion Authority, also known as fast track, to ensure the agreement is subject to a straight up-or-down vote by the US Congress. Any amendments would require the negotiations to be reopened.
The fast-track timing allows for a total of 90 days for consultation with Congress and stakeholders to consider the proposed agreement prior to beginning the legislative ratification process. This also coincides critically with December 1, when Mexico transitions power to its new President Andrés Manuel López Obrador. The current administrations both of Mexico and the United States would prefer to see the deal ratified by both countries in advance of Mexico’s new president taking power as there is concern from both countries that his administration could reject some of the provisions, forcing the parties back to the negotiating table.
However, Canadian officials have been taking a hard line in negotiations and have stated they would rather have no deal than bind Canada to a bad deal. They also feel that the US Congress would only support a trilateral free trade deal. However, that support was called into question recently when Republican Congressman and House Whip, Steve Scalise, made a statement suggesting Congress was growing impatient with Canada’s negotiating tactics.
That could be just tough talk in hopes of hastening the conclusion of negotiations that have been going on for more than a year in advance of a critical mid-term election and the initiation of a new government in Mexico. Canada hopes so, but also knows that President Donald Trump has demonstrated his willingness to staunchly uphold his negotiating positions.
With the deadline upon us, the question is, what happens if Canada and the US don’t sign a deal? As has been the case throughout the NAFTA negotiations, the answer isn’t black and white.
Canada could still insert itself into the bilateral deal. If no deal is reached by September 30th, there’s no reason Canada couldn’t continue to negotiate in hopes of inserting itself into the deal after that date. Speculation has emerged the Canadian delegation is loath to publicly accept a deal that most believe will contain concessions on access to the Canadian dairy market before the provincial election on October 1 in Quebec, where much of Canada’s dairy is produced.
Meanwhile the text of the US-Mexico deal will be made publicly available in accordance with US law. But that agreement is likely already being drawn up with placeholders to include Canada, and there’s no reason those placeholders couldn’t be filled just as easily at some future date. The US Congress may be willing to accommodate such changes to ensure there is a tri-lateral deal. However, the stakes are high; a misplayed wager will have political and economic consequences for all parties.
The US could withdraw from NAFTA. In the event no deal is reached between the US and Canada by September 30th, Washington could conceivable choose to officially withdraw from NAFTA as it puts its bilateral deal with Mexico before Congress.
This would set off a six-month timeline for the termination of the agreement, during which time the US and Canada could (and likely would) continue to negotiate to either find a way to include Canada in a trilateral deal with Mexico or negotiate a separate bilateral agreement with Canada.
There could be a zombie NAFTA. If Washington chooses to withdraw from NAFTA, only Congress can repeal the actual legislation associated with NAFTA. If Congress refused to do so, it would create what is often referred to as a Zombie NAFTA in which the agreement itself becomes defunct but many of the laws and provisions would continue to live on while others (such as the Chapter 19 dispute resolution mechanism) would no longer apply.
That would be almost as detrimental as a Congressional approval of US withdrawal from NAFTA as cross-border investment would likely grind to a halt in response to the uncertainty around the terms of trade.
However, if Congress were to approve the US-Mexico bilateral deal, it’s almost certain lawmakers would also approve a withdrawal from NAFTA as the bilateral deal would ultimately override the terms of NAFTA.
The US could impose tariffs on Canadian automobile imports. The threat of a 25-percent tariff on auto imports under Section 232 of the Trade Expansion Act of 1962—the same law the US used to impose tariffs on steel and aluminum—has been repeatedly mentioned by Trump administration officials. Such a move would have one of two effects. The first is that it could generate enough bad blood between Washington and Ottawa (and Canadians and Americans) to indefinitely stall free trade negotiations in spite of the economic consequences. The second is that it would become enough of a political liability to Canada’s governing Liberal Party that it would prompt Ottawa to offer greater concessions within a revised NAFTA to hasten Canada’s inclusion in a trilateral deal.
It should be noted, however, that one of the lingering issues in the NAFTA talks is that Washington won’t provide Ottawa with guarantees that it won’t impose the Section 232 tariffs on Canadian automobiles even in the event a deal is reached on NAFTA.
Congress could reject the US-Mexico bilateral trade deal. Despite some recent signs of frustration and impatience, members of Congress have signalled repeatedly they would prefer a trilateral deal over a bilateral one with Mexico. In response, they could refuse to ratify the bilateral deal, ultimately forcing resumption of talks between the US and Canada.
Resumption of negotiations would likely mean no deal could be reached until well into 2019 as the US would be in the midst of mid-term elections or a lame-duck Congress for the remainder of 2018 and a new Mexican administration would likely want to revisit whatever terms were agreed to by the current administration.
Canadian officials, emboldened by Congress’s preference for a trilateral deal, would be less inclined to concede provisions of the agreement they deem critical to Canada’s economic and industrial well-being, especially since 2019 is an election year in Canada. There’s also the possibility the makeup of Congress could change dramatically with the mid-term elections, shifting the focus of the negotiations to issues of greater concern to Democrats in Congress.
This would mean a prolonged period of uncertainty and diminished foreign investment in Canada, the US and Mexico, resulting in a softening of economic growth, which will ultimately hurt all three nations involved.
What does all this mean?
It means that the immediate period is really only another phase of negotiations that have been ongoing for more than year. September 30 will mark the end of this phase and October 1 will mark the beginning of the next phase. And we’ll know soon enough what the tone and pace of negotiations will be in that phase. The saga will almost certainly continue in one form or another.
Candace Sider is vice president of Government and Regulatory Affairs North America at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.