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Trading  | August 28, 2018

In what was the biggest economic news of the day, Donald Trump concluded bilateral trade negotiations with Mexico, a deal which he called the US-Mexico Trade Agreement (profiled previously) and which will replace the trilateral NAFTA which has – for now at least – been scrapped until Canada also comes to the negotiating table and hammers out an agreement with the US (read: concedes), from a position of weakness and virtually no negotiating capital.

There were some odd twists in the announced deal, for example the agreement on the “sunset clause”, which as some pointed out is strange as it is a “trilateral matter” – i.e., one which would involve Canada – and it was unclear how it squares with the U.S.Mexico pledge that their talks were purely on bilateral issues.

Confirming that Trump was engaging in some good old “divide and conquer”, was the announcement from a White House official that, if Canada doesn’t agree to a renegotiated NAFTA, it will go ahead with a two-way deal with Mexico, although another official claimed that splitting up the negotiations is “standard practice and not about squeezing Canada.”

That may not have been exactly true because even though Mexico’s foreign minister Luis Videgaray said it’s necessary for Canada to be part of the deal, he then said that if a trilateral Nafta deal with Canada is impossible, a bilateral agreement between the U.S. and Mexico would also be acceptable.

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At this point the alarm bells went off, and as Globe and Mail correspondent Adrian Morrow said, “it looks like the U.S. and Mexico went far beyond bilateral issues and agreed to a pile of trilateral stuff without Canada.” He also noted that while it was unclear whether any of the negotiated terms were okay with Canada, “it puts enormous pressure on Ottawa to agree or hold up the deal.”

Furthermore, Morrow points out that unless Canada already agreed to these trilateral issues — sunset compromise, IP etc. — via its back-channel with Mexico, “the U.S. and Mexico have just massively cranked up the pressure.

In other words, Mexico just stabbed Canada in the back in order to get a deal with the US on preferential terms to Canada, just as Trump desired, and in vivid demonstration of applied game theory in practice.

Adding pressure on Canada, Morrow quoted Videgaray who said that Mexico’s deal with the U.S. is a “comprehensive” agreement, and warned that if Canada doesn’t reach a deal this week, it will be much harder for Ottawa to negotiate any changes to what’s already been agreed.

Which is a not very subtle ultimatum to Canada to get on board or lose any leverage it may have; and although Videgaray tried to wash his hands and said that Mexico can’t control state of relationship between U.S. and Canada, the message was received loud and clear.

Here Morrow makes two key observations: “because of U.S. trade law, it would be very difficult for the U.S. and Mexico to do a bilateral without Canada at this point,” but confirming the dagger in the back interpretation, “it looks like Mexico is helping Trump turn the pressure up on Canada. They agreed a nearly-complete deal without Canada at the table” something which Videgaray confirmed saying today is a good day for Mexico, U.S. relations. 

Turns out that the art of the deal does work on occasion.

Meanwhile, although it is possible that there’s a secret Canada-Mexico understanding here, if there isn’t, “it’s hard to see this as anything other than Canada getting played”, Morrow wryly observes, and adds that “Mexico is blowing up the Canadian spin that Mexico and the U.S. weren’t agreeing anything Canada needed to be at the table for.”

As a final point, much of what was agreed today was “style over substance”, as the substance of the deal (mostly) doesn’t look that bad for Canada:  Mexico gave up more with its concessions on autos. But as the Canadian journalist cautions, “this is definitely not how Canada would have chosen to negotiate, cut out of talks and now pressured from two sides to agree a deal in a week.”

So what does being stabbed in the back by Mexico mean for Canada? Morrow concludes that Ottawa will “probably spend all of its negotiating capital this week trying to keep Chapter 19, which Mexico has apparently agreed to scrap, nevermind trying to defend on any of the other things it won’t like in the U.S.-Mexico deal.”

Said otherwise, Mexico made some concessions but kept its US market exposure, even as Canada is now cornered and has virtually no leverage or political capital left.

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