Andrei Sulzenko was a principal negotiator of the Canada-U.S. Free Trade Agreement
The July 1 date for the mandated review of the United States-Mexico-Canada Agreement draws nearer.
On the surface, it may look bleak for Canada and Mexico, who are under the alleged “holds all the cards” leverage of the U.S.
The USMCA is the only trade deal negotiated by the U.S. that has such a mandatory review provision. In this regard, it is safe to assume that on July 1, there will not be a trilateral consensus to merely extend the USMCA for another sixteen years. The U.S. administration has made that clear.
Although the review adds a level of uncertainty bordering on apprehension, its main short-term impact is to start a clock that potentially runs out in 2036. This means that the parties begin formally negotiating changes on July 1, and continue the process at least annually after that in a Groundhog Day recurring cycle, until there is agreement on changes or the USMCA self-destructs in ten years.
As a result of these provisions, the forthcoming negotiations are likely to be much less exciting than currently anticipated, for one simple reason: Canada and Mexico can, and should, take their time, theoretically up to a decade, in negotiating a mutually beneficial set of changes. The current U.S. administration’s timeline, by contrast, is much shorter, effectively ending in about two years.
By the time the three parties meet in July, Canada and Mexico will have fine-tuned their respective “best alternative to a negotiated agreement” positions, a negotiating primer term synonymous with the concept that no deal is better than a bad deal. In other words, the fallout from no deal will be mainly to continue the economic damage to all three economies initiated by the U.S. administration but not inflict much additional harm.
For the U.S., Canadian and Mexican recalcitrance in making concessions will result in a lot of huffing and puffing, but short of formally abrogating the agreement, there is little the administration can do beyond initiating additional specious national security actions, such as those currently in place for Canadian steel and aluminum products. The American courts have considerably narrowed the scope for broader forms of tariff adventurism.
Although it is highly likely that a frustrated President will threaten to give six-months’ notice of withdrawal, or even declare it in a Truth Social post, the “nuclear” option is simply not credible.
Many in Congress will argue that the President alone cannot withdraw from the USMCA, which would result in immediate blowback and emergency lawsuits. But more importantly, some 30 American states have Canada as their biggest foreign trading partner, while Mexico is the top trading partner for 10 American states.
In an election year, already fraught for Republican House members and about a third of Senate seats, another self-inflicted economic wound would be a loser at the ballot box. Therefore, that gambit will likely become another TACO (Trump Always Chickens Out) moment.
These considerations suggest a counter-intuitive proposition: In the short term, the U.S. needs a political win, a.k.a. a negotiated outcome, more than Canada or Mexico.
Sound familiar? There is an uncanny parallel to the situation in which the U.S. finds itself in the stand-off with Iran, with the pressure increasingly on the conflict instigator to come to a solution that can be parlayed as a success.
To put a point on it, six months before the Congressional midterm elections, most economic indicators in the U.S. are trending in the wrong direction. The only major indicator still defying gravity is the stock market, a fickle, emotion-driven companion.
There will, therefore, be great pressure on the U.S. administration for success on the economic front. A win in this case, will not be the zero-sum kind to which President Donald Trump aspires. It will be a win-win-win outcome because Canada and Mexico hold the cards that really matter: the ability to say no to a one-sided deal or deals, with asymmetric consequences – another policy failure for the Trump administration and a relatively benign incremental impact for Canada and Mexico.
Clearly it is in the interests of all three parties to come to a negotiated outcome in the near term compared to protracted talks or a punt down the road. Although continuing uncertainty would negatively affect all continental business decision-making, over the longer term it would fall disproportionately on Canada and Mexico relative to the much larger U.S. economy.
But in the short term that is not what matters most. In a Trumpian world, the only thing that matters is who has leverage; and for the U.S. the putative lever is not really attached to anything.