Trump has leverage over Mexico and Canada as NAFTA talks start

President Donald Trump gestures during a joint news conference with the Finnish President. Trump used the occassion to call the NAFTA agreement with Mexico and Canada one of the worst trade deals in history.
President Donald Trump gestures during a joint news conference with the Finnish President. Trump used the occassion to call the NAFTA agreement with Mexico and Canada one of the worst trade deals in history. AP

Canada and Mexico would like nothing more than to sideline the United States and create a bilateral trade agreement that excludes their suddenly unreliable neighbor.

But they can't create a deal worth the trouble without access to America’s markets, senior officials of both governments concede. And that realization gives a significant advantage to President Donald Trump as he threatens to reopen the bedrock NAFTA partnership.

“Even though it would be easy to reach a bilateral agreement because we have the NAFTA framework, it doesn’t amount to much without the United States,” said Jorge Guajardo, Mexico's former ambassador to China who is familiar with the negotiations. “That is what made NAFTA powerful.”

As negotiators from the United States, Canada and Mexico kick off a second round of talks on Friday in Mexico City, Trump has been amping up the rhetoric against the 23-year-old agreement, threatening to pull out during a rally in Phoenix last week and then again on Monday at the White House.

“NAFTA is one of the worst trade deals ever signed at anytime, anywhere in the world,” Trump declared Monday.

On the record, Mexican and Canadian officials have dismissed this now typical rhetoric as a negotiating tactic: “He’s negotiating in his own particular style,” Mexican Foreign Minister Luis Videgaray told Mexican television.

But officials in Mexico have begun making contingency plans for a future without NAFTA. And it doesn’t look great for their economy, or Canada’s.

While proponents of NAFTA often argue — with evidence — that the United States has much to lose from ending the special trade relationship with Mexico and Canada, those countries would suffer too. Canada relies on the purchasing power of U.S. consumers for a whopping 75 percent of its total exports. American buyers fuel more than 80 percent of Mexico’s total exports.

That’s why Trump’s rhetoric is so unnerving, both north and south of America’s borders. A Canadian official said Ottawa was surprised at how aggressive the White House has gotten so early in the discussion.

“This is more of an 11th hour move that people make,” that official said.

Trump’s complaints about NAFTA sound simple, but they are economically complicated.

The president, who says he wants a “fair deal,” often cites the U.S. trade deficit with Mexico — a measure of how much America’s imports from Mexico exceed its exports to Mexico. In 2016, that trade deficit stood at $63 million.

Economists widely agree that carrying a trade deficit is not inherently a bad thing, especially for a developed economy like the United States. The trade imbalance partly reflects America’s propensity to consume more than other countries, and the money U.S. trading partners make from selling to Americans is often then used to both purchase U.S. exports or to invest on Wall Street or in U.S. bonds. Both are attractive to foreign investors whose home markets are often fraught with risk.

Trump also cites American job losses to Mexico after NAFTA was signed. On this point, he can find more economists who are sympathetic to his view, especially on the left among trade unions and blue-collar voters. Studies funded by groups aligned with unions say NAFTA has led to the loss of more than 800,000 U.S. jobs. Nonpartisan groups, including the Congressional Research Service and the Organization for Economic Cooperation and Development, say NAFTA might have hurt specific U.S. sectors, such as auto manufacturing, but overall had a more modest effect on U.S. jobs.

Guajardo said Washington should avoid thinking the United States has nothing to lose from pulling out of NAFTA. Trump also should not think Mexico and Canada have no leverage in the negotiation, he said.

Canada and Mexico are two of the top three trading partners with the United States and, they are America’s two largest export markets. Indeed, the United States exported more than twice as much to Canada and Mexico individually as it did to China in 2016, according to U.S. government data.

The U.S. Chamber of Commerce reports that about 14 million U.S. jobs depend on trade with Canada and Mexico. More than $1 billion in commerce is conducted daily across the southern and northern borders. Similarly, 9 million American jobs depend on trade and investment with Canada. Adam Austen, a spokesman for the Office of the Minister of Foreign Affairs, said Canada is the No. 1 customer for the majority of United States.

The Mexican government has begun pursuing other free trade agreements. The government is in talks with Brazil and Argentina to import meat. Notably, Mexican President Enrique Peña Nieto is on his way to China – at the same time NAFTA negotiators will meet – to discuss future trade opportunities.

“Obviously, it’s looking for Plan B, Plan C, Plan D and Plan E,” Guajardo said. “It’s now, let’s just move away from the United States.”

The Mexican people are not all huge fans of NAFTA; many officials there blame the agreement for the loss of thousands of farming and retail jobs. Indeed, leftist Andres Manuel Lopez Obrador, who has twice nearly won the presidency, has criticized Mexico's free-trade positions.

Plus, a growing number of Mexican officials are questioning whether it’s worth it to continue to work with a U.S. president who, at best, is regarded as unpleasant and disrespectful — and not only on NAFTA but in his public insistence that Mexico will pay for a border wall despite his private admission that he knows Mexico will not fund the Republican’s campaign promise.

Certainly, the politics of leaving NAFTA would be good for Peña Nieto. But the economic costs are great, said Benjamin Gedan, who was National Security Council director for Latin America during the Obama administration.

For all its talk of diversifying its trade relationships, Gedan said Mexico simply doesn’t have a viable alternative to replacing the U.S. market.

The reality is it would take a decade or more to try to recreate the linkages that Mexico has established through NAFTA, said Gedan who is now a public policy fellow at the Woodrow Wilson Center.

“Everyone is always wondering – ‘the domestic politics would be so great, why doesn’t Pena Nieto just break with Trump dramatically?’” Gedan said. “It’s because he has so much to lose. And as good as it would feel, the economic consequences would be unthinkable.”

That’s not to say that the United States doesn’t have a great amount to lose too, Gedan said.

The effect of ending NAFTA would be felt beyond economics and trade, warned Eric Farnsworth. Mexico and the United States work together on a wide range of security, migration and energy issues. Not only has Mexico been one of the United States’ biggest partners fighting illegal immigration, but NAFTA has helped foster an intelligence-sharing relationship.

In fact, Mexico helped break up a planned assassination of the Saudi ambassador to the United States by the Al Quds Force, a branch of Iran’s Revolutionary Guard Corps, at tony Georgetown, Washington restaurant.

It was Mexico that tipped off U.S. authorities that the Iranians had reached out to a Mexican drug cartel to arrange the killing.

“The idea of that we’re sharing intelligence with each other would have been a ludicrous suggestion before NAFTA,” Farnsworth said. “In fact, it was ludicrous.”

Canadian officials met with Republican governors of several states during the National Governors’ Association meeting in Rhode Island. According to the Canadian foreign ministry official, they heard repeatedly from governors of Wisconsin and Iowa, among others, how important Canada is to their states’ economies.

“When moments of rhetoric heat up, we know that we have allies, Republicans, who can call and say, ‘Listen, NAFTA is so important to my state or my district,’” a foreign ministry official told McClatchy.