Frenemies

Frenemies

On May 18, the Trump administration sent formal notice to the U.S. Congress that it intends to renegotiate the terms of the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada.  The move initiates a 90-day waiting period before actual negotiations may begin, during which business groups can provide their input on the pact and the U.S. negotiating team may draw up its objectives and strategy for the talks with Mexico and Canada.  U.S. President Donald Trump has called NAFTA “the worst deal in history” and “a disaster” and threatened to unilaterally withdraw the United States from the accord, however in recent weeks he has toned down his statements and backed renegotiation rather than withdrawal.  Mexico is strongly in favor of maintaining the NAFTA agreement, and facing the prospect of cancellation of the pact, has embraced the negotiations.

The Mexican government did not present a clearly articulated response to Mr. Trump’s anti-NAFTA statements at first, in part because the new U.S. administration was slow to present formal policy proposals.  In the months since January, however, official response from Mexico City has become more coordinated and is largely being channeled through Foreign Relations Minister Luis Videgaray and Economy Minister Ildefonso Guajardo.  Mr. Videgaray’s public comments overall have been diplomatic in tone, emphasizing less bellicose statements made by U.S. officials and stressing the importance of working together to find win-win outcomes in any negotiations.

Ministers Videgaray and Guajardo are now focusing on a set of fundamental positions in presenting the Mexican government’s approach to a NAFTA reboot.  The first of these is that trade between the three North American countries should remain free, without import tariffs or protectionist policies.  The second is that negotiations must be carried out equally between the three countries, and not bilaterally between the United States individually with each of the other two.  Mexico has reiterated its willingness to renegotiate NAFTA, particularly in areas that have evolved over the past 20 years such as direct foreign investment, intellectual property rights, rules of origin and energy.  Mexican officials have insisted, however, that a renegotiation must produce “win-win” benefits for all sides, or else Mexico also could be willing to abandon the treaty.  Considering Mexico’s deeply vested interest in maintaining free trade, however, threats to pull out of NAFTA are likely no more than a negotiating tactic.  Similarly, Mexico has carried out high profile trade missions to Argentina and Brazil this year, loudly proclaiming its intention to line up alternative sources of staple grains such as yellow corn, soy beans, wheat and rice should the United States insist on introducing tariffs on cross-border trade.  Mexico has threatened to respond to such a move with retaliatory tariffs, but since 95% of its yellow corn imports currently come from the U.S., having to source this critical input from distant South America surely represents an alternative Mexican officials would rather avoid.

Beyond the specifics of a renegotiation, Mexico’s impending presidential and congressional elections are a concern for all sides.  Officials from Mexico as well as the United States have expressed a desire to complete any renegotiation this year to avoid becoming stalled by the campaigns for Mexico’s July 2018 elections.  Less attention has been given to the actual outcome of the election, but if a NAFTA renegotiation were to go beyond 2018, the three sides must consider the possibility that combative leftist Andres Manuel López Obrador could be elected Mexico’s next president.  López Obrador is well known to be much less fond of NAFTA than the current administration and would likely change Mexico’s position on trade substantially.