Redoing the deal: Lessons from the NAFTA renegotiations

As negotiators from Canada, Mexico, and the United States tried to reach an agreement that would satisfy Donald Trump, the White House appeared to be playing a long game.

By on / Dealmaking

During the 2016 presidential campaign, then-candidate Donald Trump blamed the trilateral North American Free Trade Agreement (NAFTA) among Canada, Mexico, and the United States for the U.S. trade deficit with Mexico and lost American manufacturing jobs. Upon taking office, Trump said he was determined to either renegotiate NAFTA or walk away from the pact. Mexican president Enrique Peña Nieto and Canadian prime minister Justin Trudeau persuaded Trump to give renegotiation a chance, according to the Wall Street Journal.

But when talks got underway in August 2017, it soon became clear that the three sides were miles apart on a host of issues, from Canadian dairy policy to wages for Mexican autoworkers to whether the pact should eventually expire. Thwarted by threats, stalemates, and unclear motives, talks among the three countries dragged on for a year, with the parties blowing through one artificial deadline after another.

At our press time in late August, Mexico and the United States had just reached a tentative deal, and Canadian and U.S. government negotiators said they were close to agreement. With the final outcome hanging in the balance, the negotiations thus far have offered a number of lessons for those renegotiating a complicated and contentious contract. We present four of them here.

1. Artificial deadlines were made to be broken.

The NAFTA talks have been marked by supposedly urgent deadlines that the parties disregarded time and again. At first, the leaders said they needed to wrap up talks by the end of 2017, before the July 1, 2018, Mexican election ushered in a new president who might have a new set of demands.

After missing that deadline, the parties reset it for the end of the first quarter of 2018 with the same justification. That date passed without agreement. Next, U.S. House of Representatives speaker Paul Ryan set a May 17 deadline for a new NAFTA deal to be voted on by the current Congress. That deadline also came and went. At this writing, NAFTA negotiators were focused on closing a deal in late August so it could be signed before Mexico’s new president, Andrés Manuel López Obrador, takes office in December.

Anyone who’s worked on a long, complex project knows that it’s hard to take artificial timetables seriously. In this case, the parties may have had incentives to drag things out. The governments of Canada and Mexico, for instance, might have wanted to push talks down the road in the hope that the Trump administration would accept the status quo.

Some speculated that the White House threw roadblocks at the talks in an effort to prolong them. Why? If Trump reached a deal on NAFTA that required him to compromise, as any deal likely would, he risked disappointing members of Congress (from both parties) who were hoping for a broad overhaul of NAFTA and whose votes might be needed to seal any agreement.

If Trump instead tried to pull the United States out of NAFTA, he likely would anger pro-business leaders and voters. Neither scenario was appealing. “A long negotiation in which [Trump] can continue to claim he is fighting for a better deal is by far the best bet,” argues Edward Alden in Politico. “I’m in no rush,” Trump said at an August 16 cabinet meeting about a possible NAFTA deal, according to the Journal.

2. Give to receive.

Along these lines, the Trump administration made several extreme demands during the negotiations while offering few concessions of its own on issues important to the other parties.

To take one example, the United States asked for 40% of cars and 45% of pickup trucks manufactured in Mexico to be made in zones where workers are paid at least $16 per hour, a significant rise from Mexican autoworkers’ average wage of less than $8 per hour in 2017. In a counteroffer, Mexico proposed that only 20% of the auto parts be made in high- wage zones, according to the Journal. The U.S. side continued to press for its initial demand.

Trump also proposed a so-called sunset clause in which NAFTA would expire in five years unless explicitly renewed by its members. This was a nonstarter for Canada and Mexico, which argued that businesses would balk at investing in the changes Trump wanted to make to NAFTA if the deal might be abandoned after five years.

At a press conference in late May, Canadian prime minister Justin Trudeau said that earlier in the month, believing that a NAFTA deal was near, he had suggested to a receptive Trump that they meet with Peña Nieto in Washington, D.C., to try to close the deal. Soon after, U.S. vice president Mike Pence called Trudeau to say the White House would hold the meeting only if Trudeau agreed to the sunset clause. Trudeau said he couldn’t accept the condition, so the meeting was called off.

For negotiators who are trying to reach a mutually beneficial agreement, threats should be used only as a last resort.

“Normally in a negotiation, each side has to have flexibility,” Carla Hills, the lead negotiator for the original NAFTA deal under George H.W. Bush told the Journal. “If the U.S. side has no flexibility on important issues, it’s certainly not going to move forward.”

Ultimately, the White House ended up backing down from its demand for a sunset clause in order to forge an agreement with Mexico. Mexico, for its part, agreed to meet the initial autoworker wage demands from the United States. It took a year, but the two parties were finally ready to agree to a tradeoff. Meanwhile, the news leaked on August 31 that Trump had told Bloomberg News that he wouldn’t make any concessions at all to Canada.

In negotiation, you can try making extreme demands and hope that the other side caves in. But you’re much more likely to make headway by conceding on issues that matter less to you in exchange for what you want most.

3. Use threats as a last rather than first resort.

NAFTA talks came to a standstill in June 2018, when Trump unveiled a number of protectionist U.S. trade measures, including new tariffs on Canadian steel and aluminum imports and a ban on some imported cars.

In response, Canada and Mexico both threatened tariffs on U.S. goods. “Canadians, we’re polite, we’re reasonable, but we will not be pushed around,” Trudeau said at a news conference.

Trump responded in a tweet by calling Trudeau “meek and mild” and added that he had decided not to endorse the communique the G7 had recently negotiated on trade, security, and other issues. The next round of NAFTA meetings was put on hold.

If Trump’s goal was to disrupt or sabotage the NAFTA talks, then threats are an effective way to do so. But for negotiators who are trying to reach a mutually beneficial agreement, threats should be used only as a last resort. As happened here, threats often beget counterthreats. They also break down trust and damage relationships. Again, it’s wise to think about what your counterpart wants that you can offer at a relatively low cost to you, then propose a trade for what you want—a logic of give-and-take.

If all else fails, be sure you are prepared to follow through on any threats you make. Consider Trump’s repeated threat of pulling the United States out of NAFTA. Whether he actually has the authority or the will to do so is unclear. The threat of a U.S. exit brought Canada and Mexico to the negotiating table, but their refusal to accede to at least some of the tough U.S. demands suggests they may have been prepared to call Trump’s bluff.

4. Weaker parties should stick together.

In early June, Larry Kudlow, the director of Trump’s National Economic Council, told Fox News that Trump was “very seriously contemplating a shift in NAFTA negotiations” from trilateral talks to separate bilateral negotiations with Canada and Mexico. Saying that his boss “hates large treaties,” Kudlow added, “I know this is just three countries, but still, oftentimes when you have to compromise with a whole bunch of countries, you get the worst of the deals.”

Then, in mid-July, with negotiations between Canada and the United States still on hold, Trump suggested that the United States was narrowing in on a new bilateral trade deal with Mexico and that talks with Canada could come later.

Canadian and Mexican officials responded to both proposals by reaffirming their commitment to trilateral negotiations. Andrew Leslie, a Canadian trade official, said NAFTA had been a “win-win-win” for all three nations.

Canada and Mexico had clear incentives to stick with trilateral negotiations. In multiparty negotiations, weaker parties can enhance their strength by forming alliances. Clearly, as the largest economy in the world, the United States is by far the strongest of the three NAFTA partners. Left to negotiate on their own, Canada and Mexico were in much weaker bargaining positions relative to that of the United States. This may help to explain why, ultimately, Mexico conceded to the White House’s demands for higher wages for autoworkers—though the concession could be softened by the fact that it will be difficult for the United States to enforce the new labor standards, according to Vox.com.

For stronger parties, a “divide and conquer” strategy can offer advantages when it comes to claiming value. However, the more parties there are in a negotiation, the more opportunities for smart tradeoffs and value creation there are likely to be. The benefits of taking the biggest slice need to be weighed against the potential gains to be made from adding more parties and issues to the mix.

NAFTA basics

A North American free trade zone, first proposed by Ronald Reagan during the 1979 presidential campaign, was negotiated during the George H.W. Bush administration and ratified in 1994, during Bill Clinton’s first term in office. Designed to boost North American trade by eliminating trade and investment barriers, NAFTA gradually eliminated tariffs between Mexico and the United States, following a path previously taken by Canada and the United States.

Most economists believe NAFTA has had an overall positive effect on North American economies. Trade within North America rose from about $290 billion in 1993 to more than $1 trillion in 2016, according to the Council on Foreign Relations. However, labor unions and others have blamed NAFTA for the U.S. trade deficit with Mexico and the loss of U.S. manufacturing jobs to Mexico.

Because trade with Canada and Mexico comprises only a small percentage of the U.S. gross domestic product, NAFTA has had only a modest impact on the U.S. economy, according to a Congressional Research Service review. Yet most economists predict that if the United States were to withdraw from NAFTA, U.S. economic growth would slow, the U.S. global trade deficit would increase, and no net jobs would be created, writes trade expert John Brinkley on Forbes.com.

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