The Game of Chicken...and Mexico isn't Blinking

The seventh round of NAFTA modernization negotiations ended yesterday in Mexico City, with significant substantive advances, but amidst the threat that the US could soon impose steel and aluminum tariffs on its trading partners, with no exceptions for its NAFTA partners.  The resignation yesterday of Gary Cohn, US President Donald Trump’s top economic advisor, one of the few mainstream economists in the White House, represents another dangerous sign that the protectionists may have the upper hand. 

Mexico has been steadfast in its insistence that there is a path forward and has concentrated on ensuring that the technical negotiations move forward.  During this round, the regulatory best practices and sanitary measures chapters were closed, as were the annexes related to telecommunications and chemicals.  Our sources anticipate that during the 8th round – scheduled to take place during the second week of April – another series of chapters could be settled, coming close to the half-way mark. 

While the press has been quick to point out that the thorniest issues have yet to be resolved, this is typical in a difficult trade negotiation where the more controversial items are deferred.   A potential silver lining can be found in the fact that Mexico and Canada have held discussions related to the automotive sector and believe that they can reach an agreement that will satisfy some of the US concerns without damaging the regional industry. 

From the Mexican perspective, the most important thing is to keep advancing, so as to raise the cost to the US of leaving the entire agreement behind.  It is also critical for domestic political considerations.  With the presidential election taking place July 1, it behooves the government to keep this ball in the air and to bring things to a close in the late summer.   

That said, if the US does decide to move forward with steel tariffs Mexico will retaliate.  It is unclear exactly what actions the US’s southern neighbor will take, but Mexico has ample experience in defining measures designed to have the maximum political effect in the US.  With this in mind, it increases the likelihood of Mexico targeting US agricultural products, hitting President Trump’s core base of supporters.

Several members of the Republican Party have come out to publicly caution the White House against protectionist measures that could spur a trade war.  In fact, our sources tell us that US Trade Representative Robert Lighthizer is also against the steel tariffs, as he does not see it as a way to extract more concessions from Mexico and Canada, but rather as something that could eventually scuddle the viability of the NAFTA negotiation.  Secretary of Commerce Wilbur Ross and White House Advisor Pedro Navarro, however, have dismissed the idea of a trade war and continue to see trade as a zero-sum game in which the US holds all of the cards. 

Mexico’s negotiating team has made it abundantly clear to USTR Lighthizer that it is unwilling to negotiate bilaterally.  If nothing else, Mexico and Canada are now secured in a friendship backed by the pragmatic seal of real politik

While this ambiguity is unsettling, the view from those close to the negotiation in Mexico is that their strategy is working.  The cost to the Trump Administration of pulling out of NAFTA is rising - which does not mean that the president might not still take drastic measures - but sticking to serious negotiations is providing the most viable insurance against the worst-case scenario:  the demise of NAFTA.

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