Trudeau stakes Canada's trade policy on NAFTA's resiliency

You couldn't see them on the television feed, but there were some knowing smiles as Prime Minister Justin Trudeau spoke at Centro University in Mexico City on Wednesday.

"Like all friends, we'll have our disagreements from time to time," he said, as a few sympathetic laughs rippled across the audience of about 200 private sector and foreign policy leaders assembled to hear a keynote speech from the Canadian PM.

"Tell me about it," Mexico's businesspeople might have been thinking.

For the second time during his three-day visit to Mexico City, Trudeau thanked Mexico's corporate community for standing with his government during the renegotiation of the North American trade agreement on which both their economies rely.

Last fall, Mexico lost its second economy (trade) minister in less than a year. Andrés Manuel López Obrador continues to blow hot and cold on the integration of the North American economy generally and Mexico's future participation in NAFTA specifically.

The Mexican president has pushed nationalist energy and agriculture policies, despite being warned that they violate the terms of the revised NAFTA. At the same time, he's seized the potential for his (relatively) low-wage jurisdiction to become a powerful player as America focuses on competing with China.

U.S. President Joe Biden's administration can't win that competition without the collaboration of its regional partners. But the expansion of NAFTA into new areas — with the addition of chapters on labour, environment and the digital economy and the decision to stop carving out the contentious dairy sector — has racked up 17 disputes over the last two years alone.

With Mexico hosting the tenth edition of the North American Leaders' Summit, the talks could have gone down like a strong margarita: cold, salty and hangover-inducing. Instead, the sun shone and the partners smiled their way to a regional relationship that's proving resilient.

There's tension in the neighbourhood. And yet, bigger crises — Russia's invasion of Ukraine disrupting global energy and food supplies, Chinese trade aggression and pandemic outbreaks choking supply chains, climate change causing environmental disasters — seem to have everyone focused on the urgent need to get along.

Warming up to another populist

It wasn't easy. Trudeau needed all of his patience for what was only his second in-person encounter with the Mexican president, who has rarely travelled abroad since taking office in 2018.

Canadian reporters got a taste of what the Mexican president apparently is like in private — when he took over 27 minutes to answer just one reporter's question at the closing news conference.

Meredith Lilly, a professor in international economic policy at Carleton University who worked as former prime minister Stephen Harper's trade adviser and attended the 2014 leaders' summit with him in Mexico, said that while this is normally an economic summit, this year's version seemed to be about things other than trade — like climate change mitigation and diversity.

"The leaders clearly got along very well. There was lots of joking and expressions of warmth that are difficult to fake," she said.

But the leaders were all trying to achieve different things, she added. The format felt to her like three bilaterals that were "uncomfortably smashed together."

While critical minerals is a shared priority, "I don't know that it required the appearance of leaders there to continue to advance that file," Lilly said.

López Obrador has been compared to Donald Trump. He's a Latin American strongman whose left-wing nationalism is dominating Mexican domestic politics at the moment.

Still, Justin Trudeau pushed back when CBC News suggested the Mexican president is a trade sceptic who isn't reading the global room.

"The conversations we had over the past few days were very much focused on the opportunity a more integrated North American trading system will have in leveraging our advantages and taking on the world and replacing other sources of manufactured goods or minerals from around the world that are obviously becoming less reliable," Trudeau said.

Neither China nor Russia was called out by name, but it was clear what Trudeau meant.

Energy dispute cooling?

Trudeau said López Obrador was "extremely positive" and "enthusiastic" about the increase in trade and Canadian investment and said he was "optimistic" about his "commitment to work constructively with Canadian companies."

A senior government official told CBC News that, following these talks, the three nations' energy dispute — Canadian and American investors in the electricity, oil and mining sectors facing policy discrimination in favour of Mexican state-owned firms — likely will be resolved without resorting to arbitration under Chapter 31 of the new NAFTA. No details were offered about the solutions being considered.

"I'm not sure that we could have expected more from Prime Minister Trudeau on this [energy] issue in particular, given his own views on the issue and policies around energy development at home in Canada," said Lilly. "Advocating for energy companies is frankly off-brand for him.

"When foreign leaders come to Canada and raise concerns about Canada's management of its own pipeline capacity and its own LNG capacity, I don't think he enjoys those interventions. So I doubt much political capital was spent on this issue."

Canada has spent more diplomatic capital trying to make sure it doesn't get shut out of the North American car industry, particularly as it shifts to electric vehicle (EV) and battery production.

Because of a leak, everyone knew heading into this summit that Biden's administration had failed to convince a NAFTA panel that its more strict interpretation of how to calculate North American content for tariff-free vehicles was what the three countries specified when NAFTA was revised.

In a "but their emails" moment, Mexico and Canada submitted correspondence to the panel proving that American negotiators agreed to one thing and trade officials argued for something else during implementation.

Whistling past negative panel findings

In keeping with an agreement between the three countries, the panel's report wasn't released until after Biden left Mexico — and after Trudeau's final press conference with reporters as well.

"I think that can't have been an accident," Lilly said, suggesting it would have been better to leave the auto dispute with a lower profile so that the three leaders weren't pressured to wear it during their summit.

"An important part of dispute settlement is accepting the rulings even when you lose. That's a lot for the Americans to deal with because they typically don't lose panels and they don't like losing panels."

The automotive industry wanted a more flexible calculation. That's why Mexico and Canada went to bat for them — they believed it was in their national interests to enable carmakers to use at least some offshore suppliers in order to remain cost-competitive.

"I think it's actually quite important that the Americans tread carefully," Lilly said. "Given that the ruling is clear, I think they should just accept this and move on."

Flavio Volpe, the head of Canada's Automotive Parts Manufacturers Association, told CBC News he's confident the U.S. will comply.

"They have a series of other disputes that they are raising and want to raise with Canada and Mexico," he said. "If they were to fight this one, or ignore it, then the other ones which are big priorities for them and other industries would be on softer footing."

Many of the sources of international trade friction under NAFTA aren't about tariffs. Recent fights between the U.S. and Mexico are about American efforts to equalize labour standards — a huge political priority for both Democrats and Republicans in Washington.

Migratory trade instincts

Trump also seemed like a trade sceptic at first, said Elizabeth Trujillo, a professor at the University of Houston's law centre who specializes in global law and Americas policy. And yet, the revised North American deal he insisted on wasn't just about inward-looking protectionism — it also gave the U.S. dispute resolution tools that now help to influence and direct the evolution of trade with its regional partners. 

Leaders like Trump and López Obrador can be "contradictory," Trujillo said.

"On the surface, it seems that [López Obrador] is not the most open to free trade and is much more protectionist than other Mexican presidents ... and he's done policies that have proven that," she said, citing restrictions on foreign investments in renewable energy as an example.

"On the other hand, I think that [he] is very much aware of the need for Mexico to be part of a North American economic powerhouse. You have supply chains that are very much integrated in the region. You can't just undo those," she added, citing Mexico's potential role in manufacturing more semi-conductors on this side of the Pacific.

"The mere fact that he hosted this summit shows an openness to having these conversations," Trujillo said, calling this trilateral summit "refreshing" after a period when bilateral U.S.–Mexico issues seemed to dominate.

The pandemic already has shifted the focus away from multilateralism, she said. "These things are like pendulums — we've moved away from globalization and we went to nationalism, and now we're inching back toward regionalism. And some of these issues around environment and energy are better dealt with regionally, at least initially."

Canadian Liberals have shown ideological flexibility in trade policy as well — Trudeau included.

When European social democrats threatened not to ratify the Comprehensive Economic and Trade Agreement (CETA), Liberals emphasized Canada's progressive values to win them over. Ottawa kept emphasizing "progressive" trade policy with Pacific Rim partners — and even insisted on that word being inserted into the name of the Trans-Pacific Partnership after the U.S. pulled out in 2017.

Faced with the populism of first Trump and now López Obrador, Canada has rallied advocates in the business community to articulate the stakes in billion-dollar terms and point out how trade agreements can help middle-class workers and protect jobs in the face of other global competitors.

"Trade, by being mutually beneficial, gives each party a stake in the well-being of the other," Trudeau told his university audience Wednesday, quoting former Mexican president Ernesto Zedillo — a leader with a more right-wing, globalist bent than the current office holder.

Mexican presidents only serve one six-year term. The future of the White House after 2024 is equally uncertain.

Canada can't control who moves into its neighbourhood next, but this summit delivered the common ground Trudeau needs.