Officials from Canada, Mexico, and the United States are meeting this week in Arlington, Virginia to renegotiate of the North American Free Trade Agreement. The fourth round of talks began on October 11 and are scheduled to conclude on Tuesday, October 17.

The latest round of negotiations have been the most contentious so far with the US officials continuing to push for the inclusion of controversial provisions. One of the most controversial previsions that the Trump administration recently proposed is the inclusion of a “sunset clause.” This provision would require a new treaty to be re-approved by all three countries every five years and is seen as a poison pill to both Canadian and Mexican officials.

Adding to the difficulty of the talks is the mercurial nature of President Donald Trump‘s comments on NAFTA. Less than two months ago, President Trump on Twitter called NAFTA the “worst trade deal ever made.”

During a press conference with Canadian Prime Minister Justin Trudeau on Wednesday, President Trump appeared to take a more moderate stance on NAFTA. When asked if his recent statements that the treaty only needed some little tweaks indicated a change in his position, Trump responded that it did not.

“Well, I don’t think anything changed. We’re negotiating a NAFTA deal. It’s time, after all of these years, and we’ll see what happens. It’s possible we won’t be able to make a deal, and it’s possible that we will. We have a great personal relationship, and we have a relationship now as two countries, I think, that’s as close as ever,” Trump answered.

President Trump’s claim that the relationship between the United States and Canada are “as close as ever” aside, the NAFTA issue is certainly placing a tremendous strain on relationship between Mexico and the United States.

Mexico’s stance

Last week, Mexican Foreign Minister Luis Videgaray discussed NAFTA, immigration, and other issues in a speech before the Senate in Mexico City. In his address, Videgaray asserted that his country is “much larger than the North American Free Trade Agreement.”

The Foreign Minister went on to say that cooperation on other bilateral issues will be affected if the US abandons the 23 year old treaty. “There are things we will not accept. It would not be the end of the world. No one is going to tell Mexico what to do. We have to prepare ourselves to say no and even to leave that treaty,” Videgaray said.

Speaking on the sidelines of the International Monetary Fund and World Bank meetings, Agustin Carstens, the outgoing governor of the Central Bank of Mexico, said that Mexico would face a “short term” economic downturn, but that the economy would become competitive again.

“I hope that NAFTA prevails, but if not, I think we will be resilient, look for other markets and see what the environment is to export to the U.S.,” Carstens said.

Mexico has free and preferential trade agreements with more countries than any other country in the world. Mexico has 10 free trade agreements with 45 countries and 32 Reciprocal Investment Promotion and Protection Agreements with 33 countries.

The United States is Mexico’s largest trading partner. Total imports and exports of goods between the United States and Mexico were $554 billion in 2016. Mexico’s next largest trading partner is China, whose bilateral trade was $75 billion in 2016.

The North American economy without NAFTA

With any significant economic shift, such as a free trade agreement, there are winners and losers. This was the case when NAFTA was signed in 1994.

Manufacturing in the United States was undoubtedly hurt by competition from Mexico, although it has been argued that China’s ascension in the World Trade Organization and as a growing economic power had a larger negative effect on US manufacturing.

In Mexico, small scale agriculture were devastated when protectionist tariffs were removed. Many farmers in Mexico simply could not compete with agricultural products from the US, which benefited from government subsidies and a high degree of mechanization and automation.

After NAFTA went into effect, most tariffs were eliminated immediately. Under the treaty, all other remaining tariffs were to be gradually reduced until they were eliminated completely in 2008.

As the New York Times, the US economy has become deeply intertwined with its neighbors to the north and south over the past two decades. If the United States adopts World Trade Organization level tariffs on Mexican and Canadian goods, consumers in the US would face potentially much higher prices for a variety of goods, including automobiles assembled in both Mexico and Canada.

While in the long term manufacturers and producers may shift production, prices would still be higher than their NAFTA levels due the higher cost of labor in the US and new tariffs on inputs from Canada and Mexico.

If the United States pulls out of NAFTA, both Canada and Mexico would look to boost their trade with other major economic powers. Canada recently signed comprehensive economic trade agreement with the European Union. Additionally, both Canada and Mexico were signatories of the Trans-Pacific Partnership, which may be renegotiated without the United States.

Leaders and officials from Canada, Mexico, and the United States have expressed their desire for NAFTA renegotiations to successfully conclude by the end of the year. After this fourth round, success seems farther away than ever.

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