Good, For Whom?

Luis Rubio

Mexican lawyers often say that “a bad deal is better than a good fight.” I imagine that’s what the NAFTA negotiators were thinking when they reached an agreement that does not meet any of the needs, or the reasons why the NAFTA was negotiated in the first place. The best that can now be expected is for the US Congress to reject the agreement and, with that, to leave things as they are. It may well be that, in a Machiavellian jump into the void, that’s what they were actually trying to accomplish.

From what is known of the agreement reached last Monday, there are two elements that are indicative of the concessions Mexico granted. On the one hand, a limit was set on the export of vehicles, the most dynamic industry in the country, thus capping the potential growth of the sector. It can be argued that many more vehicles could be exported outside the framework of the new accord, paying the corresponding tariffs, but it is impossible to ignore the risk that, when the “revision” of the agreement comes in six years, the American interpretation will be that it was an absolute limit, not constrained by the agreement itself. In other words, the negotiators accepted to put the pillar of the Mexican industry at risk.

On the other hand, the heart of the current NAFTA, Chapter 11, was weakened to the point of practically turning it into an irrelevancy. That chapter refers to the resolution of disputes and constitutes the essence of the treaty’s success from the Mexican perspective, for a very simple reason: because it confers certainty to investors that there will be no capricious actions or expropriations without justification, by the Mexican government. The mechanism entails procedures that allow resolving disputes in an environment free of political influence. That chapter was the reason why Mexico proposed the negotiation of what ended being NAFTA in the early 1990s to the United States.

It must be remembered that, in its origin and in its essence, the NAFTA was conceived with political rather than strictly economic objectives. To attract investment, the country required a mechanism that would provide certainty that there would be no constant changes in policy or politicized decision on economic matters so that conditions for investment would be like those of any other place on Earth. For investors, both national and foreign, investing in Mexico could be highly attractive as long as the legal and regulatory framework would be credible and would ensure that the conditions existing at the time of investing would be maintained. The NAFTA, through Chapter 11, makes it possible for economic agents to ignore all political considerations in investment decisions, which is precisely why the NAFTA is so important and so popular. It is, in fact, the only space where the Rule of Law reigns in the country.

What was negotiated in terms of dispute resolution protects services only, thus leaving manufacturing industry hanging out in the open. This suggests that, although the negotiators from the Ministry of the Economy fully understand the heart of the NAFTA and why these issues are so important, the decision to accept the result was not theirs. Rather, that the decision to accept this agreement was the product of political calculations that transcend that of preserving the stability and economic viability of the country.

In addition, something that does not necessarily reflect the preferences of the Mexican government, the way in which this stage of the negotiations was concluded leaves Canada up in the air, facing an ultimatum: it joins the agreement as is or it’s left out in the cold. Just as chapter 11 is crucial for Mexico, Chapter 19, on anti-dumping, is crucial for Canada; Mexico here accepted the elimination of that chapter, thus threatening Canada’s interests, and, with it, the trilateral relationship. Canada now faces a difficult dilemma, since even its ruling coalition could collapse if its government were to accept the terms imposed by the Mexican negotiation.

Everybody knows that this negotiation was forced upon Canada and Mexico by the circumstances and that the mechanism that had been identified to update and upgrade NAFTA without unleashing the negative passions associated with the word NAFTA -the TPP- collapsed the day Trump entered the White House. However, the promise was a NAFTA 2.0. The result ends up being a NAFTA 0.5.

The agreement reached a week ago casts several doubts: first, what Canada will do; second, whether it would be possible to send a bilateral agreement to the US Congress, given that the authorization this body gave the administration was for a trilateral one; third, if there would be enough votes for one (or two) bilateral agreements, given the contrasting interests of the American states on the two borders; fourth, how much damage has been done to the relationship with Canadas: and, fifth, perhaps most importantly, how many changes the Congress will seek to insert into the agreement that was, tentatively, reached this week. It seems clear that the companies deeply engaged in the North American region as manufacturers, starting with the automotive companies, will not remain idle: rather, they will be working with their representatives to ensure that their interests are as protected as those of the companies in the services sector.

The panorama suggests that there are only two possibilities: One is that Mexican negotiators trust that Mexico’s interests will be defended by third parties (US companies with interests in Mexico) through the US Congress (a Machiavellian leap to the void), which could imply that at least what already exists (NAFTA 1.0) remains in place or that what was negotiated is corrected out there. The alternative is that the real objective was to try to rid the outgoing administration of another failure. The great virtue of the NAFTA was its almost apolitical character; what was done here was to politicize it absolutely.
a quick-translation of this article can be found at