Mexico, still Canada’s NAFTA ally?

While striking a deal without Canada may have seemed like a callous decision for Mexico, there were several political and economic considerations that left the country in a bind, as David Agren reports. 

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September 7, 2018
Flags of the US, Canada and Mexico fly next to each other in Detroit, Michigan, August 29, 2018. REUTERS/Rebecca Cook

In his final state-of-the-nation address earlier this week, Mexican President Enrique Peña Nieto struggled to put a positive spin on six unhappy years in office, marked by record murder rates, rampant corruption and economic underperformance. He found a rare bright spot in the recent deal reached by Mexico with the United States on trade, which secured Mexico’s future access to the US market. 

That deal, agreed to on Aug. 27, omitted Canada, though Peña Nieto held out hope the Canadians would come to an agreement in the negotiations ongoing this week in Washington. 

“We continue promoting a trilateral agreement because we are convinced of the importance of Canada remaining a commercial partner in the treaty,” Peña Nieto said Sept. 3. “North America is more successful when it stays united, when each country brings its strengths to make it the most attractive and competitive region in the world.”

Ever since the deal was struck with the US, officials from both the outgoing and incoming Mexican administrations have offered kind words to Canada. All have expressed support for NAFTA remaining a trilateral deal — including president-elect Andrés Manuel López Obrador, who takes office Dec. 1.

Mexico and Canada had pledged to stick together through NAFTA negotiations. But Mexico’s decision to cast aside Canada can be read as a recognition of complicated domestic political considerations, its even more complicated relations with the United States, and the rough realities of its capital-poor, export-oriented economy.

On the domestic front, Peña Nieto can claim a late accomplishment in his administration. López Obrador, meanwhile, clears a thorny issue off his agenda and can pin future problems with the deal on his predecessor.

The urgency also underscored the sense that a bad deal was better than no deal — even though politicians and the private sector previously tried peddling the idea that they could survive without an agreement with the United States. 

“We were just more desperate. We always needed this,” said Federico Estévez, political science professor at the Autonomous Technological Institute of Mexico.

“The consensus is broad; from business councils, to the actual government, to the incoming government, all the elites agree that we need a treaty, bad as it can be,” he added. “The problem with Canada was it’s not quite as vulnerable as we are, therefore it was willing to delay.”

Canada can afford to play the long game these negotiations, as it did with Mexican support in the original negotiations in the 1990s, according to Estévez. But this time, Mexico came to the table hoping to preserve as much of the existing deal as possible, and appeared willing to concede on many US demands.

“Canada boxed us into a corner because they just wanted to delay…They didn’t seem to understand our plight,” Estévez said. “We’re a capital-poor country. We need capital. Period. That’s our priority. It’s always going to be our first priority.

“It’s not that we don’t care about the other stuff, it’s just far less important,” Estévez added.

"Canada boxed us into a corner because they just wanted to delay…They didn’t seem to understand our plight."

Mexican elites have bet big on NAFTA and economic integration with the United States over the past 25 years, making the prospect of losing access to the US market unthinkable.

NAFTA transformed the Mexican economy, which was once so closed smuggled candy bars were sold as contraband in itinerant markets. Its legacy is mixed. Small farmers suffered, though agricultural exports have hit record levels. Mexicans have taken to the trappings of US culture, which are seen as aspirational. 

Parts of the country such as El Bajío, the dry highlands north and west of Mexico City, boomed, especial as automotive manufacturers moved in. Wages remain stubbornly low, though, partly explaining why López Obrador won most of the staunchly conservative Bajío. Of the wages paid in Aguascalientes — home to two Nissan plants — one-third fail to meet the government standard for wellbeing, up from 26 percent in 2015, writes Viridiana Ríos, a global fellow at the Wilson Center’s Mexico Institute in Washington, in the newspaper Excélsior.

The deal struck by Mexico and the United States runs for 16 years, though the agreement can be reviewed after six years. It also changes rules of origin requirements in the automotive sector with North American-made components increasing from 62.5 percent to 75 percent. At least 40 percent of the work must be done by employees making US$16 per hour.

Analysts vary on whether the agreement will benefit Mexico.

“It’s the best agreement possible,” said Brenda Estefan, a former security attaché at the Mexican embassy in Washington. “They tried to keep as many of the positive parts of NAFTA as they could. It wasn’t so much a ‘modernization,’ as they tried for on other occasions.” 

The automotive sector represents roughly 30 percent of Mexican manufactured exports, which could make the new deal detrimental down the line.

“These new rules really are going to lower the surplus we had in this sector,” said Jonathan Heath, an independent economist and dual Canadian-Mexican citizen. “It strips a little future growth from the country.” 

Mexican NAFTA negotiators consulted closely with big business as it pursued a deal. Surveys suggest private sector satisfaction with the US-Mexico agreement, according to Heath, who points to the country’s business confidence surging. It’s partly due to the deal, but also “very high expectations” for the new government, Heath said.

The rise of López Obrador has spooked Mexico’s political and business elites. But the president-elect has toned down his rhetoric and promised to keep NAFTA.

Analysts say he needs to keep the private sector happy, as past Mexican administrations have started with a withdrawal of private investment, leading to poor GDP growth. Business holds more sway than past years, when state influence over the economy was substantial. 

With the signing of the original NAFTA, “effective control of the economy went to the private sector,” Estévez said.

Somewhat surprisingly, current NAFTA negotiations accelerated after López Obrador won the July 1 election. Even more surprisingly, López Obrador started the transition period with courteous exchanges with Donald Trump. The US president’s relationship with Peña Nieto was rocky at the best of times, even though Peña Nieto boasted in a recent advert that he was right to invite Trump to Mexico City mid-campaign in 2016 because it helped achieve an agreement on trade.

The Trump trip remains controversial for most Mexicans. So does straying from the pledge to stick with Canada in negotiations — at least for some.

“I share that view, that we threw Canada under the bus,” said Carlos Heredia, professor at the Centre for Research and Teaching in Economics. “There will be a price for that. I don’t know when or where it will materialize, but we will pay a price.”