This past summer, my colleague at the Chicago Council on Global Affairs, Phil Levy, penned a post in Forbes entitled “How the World is Trying to Tame Trump On Trade.” Phil entertained four strategies on offer to countries and global institutions in responding to the Trump administration’s antagonistic tone toward trade, including:
Rhetoric: Collectively declaring fealty to free trade and against protectionism
Retreat: Scaling back protections afforded to domestic industries
Rerouting: Finding new partners (not the United States) with whom to trade
Retaliation: Targeting specific American sectors in response to US trade policy changes
Several months on, have these strategies been used? Mexico and Canada’s recent conduct during the renegotiation of the North American Free Trade Agreement (NAFTA) provides a useful, real-time example.
Although both Mexico and Canada’s Chambers of Commerce have been vocal about saving the agreement, the trade delegations’ statements have been more measured, rejecting controversial US proposals but not walking out of the negotiations, perhaps with President Trump’s near termination of NAFTA in April top of mind.
Neither Mexico nor Canada have accepted the recent demands tabled by the United States, including the controversial rules-of-origin requirement of 50 percent US-produced content. This is particularly notable as concern with Mexico’s sugar industry and the Canadian dairy and lumber sectors shifted to center stage earlier this year.
While neither country has rerouted trade, both Mexico and Canada have options if the Trump administration ends NAFTA. Canada recently implemented an agreement with the European Union (EU), and has begun exploratory discussions with ASEAN. Mexico, along with its participation in the TPP-11, has signaled that it will import more agricultural goods from Brazil, Argentina, and the EU.
Mexico and Canada have yet to play this card, but given that the US auto industry is highly dependent on tariff free access to its North American neighbors, and 29.3 percent of US agricultural exports are to Canada and Mexico, a withdrawal by the United States could result in neither country exempting hobbled US sectors from pre-NAFTA tariff and trade barriers.
Instead, rather than fully engaging any of the above strategies, the Canadian and Mexican delegations have remained patient, declining to pound their chests in support of free trade or wholly shift to new trading partners. Equally so, they have not acceded to US demands on rules-of-origin percentages, nor intentionally injured US exporters.
In so doing, it seems that Canada and Mexico have employed a different tactic: Restraint. By curbing impulses to react more strongly and provide the Trump administration an excuse to terminate the agreement, Canada and Mexico are showing up and keeping the US-introduced, highly controversial texts in the discussion. Furthermore, if a notice of withdrawal is part of the Trump administration’s game plan to extract a better deal, remaining poised could provide time for the US business community and Congress to exert enough pressure to hold NAFTA together, freeze talks before the Mexican elections, and potentially lessen concerns around the Trump administration’s protectionist position.
These concerns go beyond NAFTA. As the United States has long been the champion of international trade, the ruin of NAFTA could lead to a slippery slope of undermining other trade agreements and, as some have suggested, the integrity of the World Trading Organization itself.
In dealing with the Trump administration on trade, using “Restraint” may be the best initial strategy.