NAFTA’s Future: Sometimes a No-Deal Is Better Than a Bad Deal

By Julio Espinoza, Staff Writer 

The moment we saw former President Obama flying away from Washington D.C., we knew that a whole batch of public servants believing in liberal democracy would be gone from D.C. and that America would become more self-centered and isolated. One of the saddest moments in American modern history took place last Friday, January 20th, and the country is undergoing the first changes promised by the Trump Administration. Just when we thought we had finally transitioned to an era of liberal democracy and peace, nationalism and protectionism are back in Washington D.C. President Trump is about to fulfill two of the most popular promises of his campaign: building the wall on the southern border and renegotiating/exiting NAFTA.

On January 23rd Mexico President Peña Nieto made a much-needed foreign policy statement to signal strength and confidence to the Mexican public and markets. In an attempt to rally the public and private sector, the president, along with the Senate president and the Cabinet, made it clear that Mexico will stick to its traditional foreign policy principles of sovereignty and rule of law, and will negotiate on an equal basis with the U.S. He also made clear that Mexico rejects the wall and that the immigration flows to the U.S. are not Mexico’s fault, but part of a global trend, a trans-sovereign problem that needs cooperation. While Mexico opposes the wall, it is open for more cross-border infrastructure that improves commerce.

NAFTA: a marriage of convenience. Courtesy of The Pioneer Business Review.
NAFTA: a marriage of convenience. Courtesy of The Pioneer Business Review.

President Peña Nieto highlighted a few strategic goals for the top Mexican negotiators: a win-win negotiation result, furthering the North American economic integration and negotiating all topics in one package. The President of Mexico is implying that times have changed and that Mexico has leverage to redefine and advance the economic integration rules from a pragmatic point of view that includes not only trade, investment and tourism, but also immigration (free movement of labor), security (joint efforts to defeat organized crime), and other topics that were not originally included in NAFTA.

It seemed that Mexico City started preparations to face the Trump Administration’s challenges during the last quarter of 2016. Both the new foreign minister and the new Mexico ambassador to the U.S. do not come from a foreign policy background, but from a finance background. Mexico’s Minister of Economy, equivalent to the U.S. Trade Representative, has made it clear that Mexico will not accept a bad deal and could leave NAFTA itself. After all, Mexico probably has more experience negotiating and upgrading free trade agreements and investment protection agreements than the U.S. Mexico has 12 FTA’s with 46 countries and 32 investment protection agreements encompassing the European Union and Japan. Mexican top officials are very seasoned in international trade, finance and economics, and their foreign policy has changed dramatically to mirror that of Japan: a peace-loving country with a strong commitment to global trade.

For many Mexicans NAFTA was also a bad deal; it was not only Americans who lost jobs and income after the NAFTA entry into force in 1994. Mexico is more than happy to revisit NAFTA and upgrade it so it can catch up to a more advanced mechanism that would also include new issues like e-commerce, energy, macroeconomic stabilization measures, trade quotas, respect of human rights, and cooperation in higher education, science-technology, joint ventures and know-how transfer. Otherwise, if a successful negotiation is impossible or difficult to achieve, President Peña Nieto has instructed his Cabinet to start strengthening Mexico’s relations in Latin America, Europe and Asia Pacific. Regarding the TPP, in case of an impasse, the President of Mexico has asked to be ready to negotiate bilateral trade agreements with the country economies of Asia-Pacific. Mexico already has a comprehensive, last generation, FTA with Japan that they would like to replicate with China.

January 23rd 2017 Statement on Mexican Foreign Policy and the future of the U.S.-Mexico relationship. Courtesy of AFP.
January 23rd 2017 Statement on Mexican Foreign Policy and the future of the U.S.-Mexico relationship. Courtesy of AFP.

As the U.S. and Mexico discuss on the future of NAFTA, Arizona and the other bordering states will be paying close attention to the outcomes because of the open interest in retaining the trade, investment, and tourism flows with Mexico. As a country, we are also paying close attention because any changes in NAFTA will be felt in the 5 million jobs that the free trade area creates on our side of the border and on the competitiveness of our industrial clusters in high-end manufacturing products (aerospace, electronics, medical devices, automobile).

It is clear that Mexico is ready to renegotiate or leave NAFTA in order to transition to an innovation-based economy. While it is hard to predict the outcome of the redefinition of the U.S-Mexico relationship, we can expect a tough negotiation because Mexico has leverage on the U.S. We can also expect a pragmatic and short-term renegotiation as Mexico will avoid any impasse that would signal a lack of confidence in the peso. We might be facing the last year of NAFTA, but perhaps for good, as there could be a better choice for both countries. Sometimes a no-deal is better than a bad deal.

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