Prime Minister Mark Carney, Mexico's President Claudia Sheinbaum, and U.S. President Donald Trump at the Kennedy Center on Dec. 5. For all three partners, one significant issue that will drive how the USMCA negotiations unfold is the question of a trilateral negotiation or separate bilateral processes.MANDEL NGAN/AFP/Getty Images
Andrei Sulzenko was a principal negotiator of the Canada-U.S. Free Trade Agreement.
A mandatory “joint review” of the United States-Mexico-Canada Agreement is scheduled to begin in July. In theory, if all three parties confirm through the review that the agreement should continue, it will remain in force for an additional ten years. However, we already know that the U.S. will press for changes in several important areas, essentially amounting to a renegotiation.
This is especially so given the Supreme Court’s rejection of some of U.S. President Donald Trump’s tariffs last week. Seeking alternative legal avenues for his agenda, Mr. Trump will be more inclined to target the USMCA. It is, after all, precisely the USMCA that had largely shielded Canada from the tariffs struck down by the Supreme Court.
Canada can anticipate that the negotiation process will be fraught because of hardball tactics from the American side – for example, that could include bypassing the niceties of a review and immediately threatening to invoke the agreement’s six-month termination clause, unless key demands are met.
Even short of such brinkmanship, the U.S. is likely to put forward maximalist “shock-and-awe” positions designed to relegate its two largest trading partners to a permanently defensive posture. Indeed, “America First” histrionics may well be ratcheted up further leading to the midterm congressional elections in November.
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American aggressiveness will need to be parried with firmness and resolve, as in the 2018 renegotiation of the North American free-trade agreement with the first Trump administration. Readers may remember that at the time, Mr. Trump called NAFTA “the worst trade deal ever made.” But after it was rebranded as the USMCA, with relatively few adjustments from NAFTA, he deemed it the best trade agreement in the world.
For all three partners, one significant issue that will drive how the negotiations unfold is the question of a trilateral negotiation or separate bilateral processes.
This has an impact on the question of “sore-thumb” issues such as autos, metals, lumber, agriculture and digital services, and it will, in turn, influence the substantive outcome of the talks.
The U.S. has historically favoured bilateral agreements as a way of maximizing leverage. This approach is clearly being contemplated by the U.S. side, based on recent testimony to Congress by the U.S. Trade Representative.
By contrast, Canada has tended toward multilateral negotiations in the past. And, indeed, a decisive motivation in Canada’s parlaying of a proposed U.S.-Mexico bilateral deal in the early nineties into a three-way negotiation was our expectation of better long-term results.
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Although similar outcomes could be achieved through either approach, a trilateral negotiation underscores the potential for hemispheric economic consolidation and expansion, while separate bilateral agreements suggest shorter-term, transactional benefits.
Presumably, Canada will favour a three-way negotiation. Mexico’s position may well be determinative should they prefer a bilateral approach (along with the U.S.) – not an inconceivable position considering their bilateral flirtation with the U.S. during the USMCA negotiations.
As for the question of sore-thumb issues, those between Canada and Mexico are comparatively insignificant. But between Canada and the U.S., the list of such issues is growing. No doubt there is a U.S. hit list for Mexico as well.
Except for the automotive industry, which has become tightly integrated across all three economies, most irritants have a uniquely bilateral dimension. The structural question is whether they should still be included under a trilateral umbrella or separated out as a series of stand-alone bilateral agreements.
Regarding the latter approach, the obvious precedent is the long-standing Canada-U.S. tussle over softwood lumber trade. U.S. protectionism in this sector almost torpedoed the start of the original FTA negotiations, and it still remains in dispute now, 40 years later.
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So, what is the best way forward?
Most elements of continental activity are uncontroversial and endorsed by the business communities in all three countries (U.S. business support for USMCA was unequivocal in recent domestic consultations). Therefore, the architecture and substantive undertakings of the USMCA could remain largely intact, with mutually beneficial improvements at the margin.
In this scenario, sore-thumb issues, except for automotive trade, would be negotiated bilaterally. Since their likely resolution involves some form of managed trade, most often a tariff-rate quota (zero or low tariffs up to a certain import value, followed by higher tariffs or quantitative restrictions above that value), it makes sense not to have them sully the USMCA. Rather, those issues could be hived off as separate undertakings that can be adjusted over time without reopening the broader agreement.
In these circumstances, the best result would be early renewal of the trilateral agreement covering most goods and services, supplemented by separate (mostly bilateral) agreements on politically sensitive issues, with the ensuing potential for liberalization over time and eventual reincorporation into the main agreement.
A less beneficial result, especially for business investment decisions, would be if sore-thumb issues were not quickly resolved, holding up progress on negotiating the broader agreement. That kind of stalemate would likely mean the continuation of turmoil until 2029.