What Does the U.S.-Mexico Trade Deal Mean for Canada?

When U.S. President Trump announced a preliminary trade deal with Mexico recently, he also suggested that the North American Free Trade Agreement (NAFTA) could be scrapped and replaced with a bilateral agreement that would exclude Canada. He went so far as to suggest renaming the agreement the United States-Mexico Trade Agreement. After roughly a year of intensive negotiations, where does this leave Canada and the future of NAFTA?

"This now puts Canada in the hot seat," says Eric Lascelles, Chief Economist at RBC Global Asset Management. "The White House will attempt to cajole Canada into hastily signing onto the U.S.-Mexican deal under the threat of being excluded altogether," he said in his latest weekly economic update.

The Breakthrough Deal

According to early media reports, the preliminary agreement with Mexico, which still requires congressional approval in the U.S., resolved the negotiation impasse with the following key changes:

• A minimum of 75 per cent of the parts in any car sold in North America must be manufactured in the U.S. or Mexico. (This is up from the current 62.5 per cent of parts that must be produced in either Canada, Mexico or the U.S.)
• Between 40 and 45 per cent of auto parts in cars sold in North America must be manufactured by employees making at least US$16 per hour
• The agreement will last for 16 years, but will be reviewed every six years

Is Canada In or Out?

The U.S. chief negotiator, Robert Lighthizer, indicated that he'd like Canada to sign on to the deal by August 31. This could be viewed as a pressure tactic and according to Lascelles, "would appear to be an unreasonable timeline given that the U.S. and Mexico just spent many weeks in negotiations." While some of the items may already be settled to Canada's satisfaction, Lascelles notes that other aspects of the new deal may be unacceptable to Canada, resulting in significant negotiations still required.

Canadian Foreign Affairs Minister Chrystia Freeland left for Washington after the Mexico plan was announced, to resume talks. "We will, as we have done throughout this negotiation, stand up for the Canadian national interest and for Canadian values while looking for areas where we can find a compromise," she told the media before heading into negotiations. Discussions resumed the following day and Freeland said they were "constructive" and would continue.

Despite the recent breakthrough with Mexico and ongoing posturing from all sides, Lascelles and the economics team at RBC Global Asset Management still believe that Canada will be a part of a new NAFTA agreement. "Our base-case scenario remains that Canada will ultimately be included in any new deal," says Lascelles. "The country will likely have to make some concessions – perhaps lowering barriers for the dairy sector and being more flexible about sunset clauses and dispute resolution mechanisms – but can more likely than not find a way to get a deal done."

Win, Lose or Compromise

There are a number of scenarios that could play out, depending on how the negotiators handle the various sticking points and when they choose to dig their heels in. Lascelles's team sees a roughly 60% chance that a new NAFTA deal will arise – giving 45% odds of a "compromise" that sees the current NAFTA deal "weakened, but still functional" and 15% odds that the U.S. will "win" and NAFTA is "defanged" with additional protectionist clauses.