OTTAWA — Mexico’s incoming president will introduce new uncertainty to discussions around the North American Free Trade Agreement, analysts say, and could even create Canada-Mexico divisions over U.S. demands on labour issues.
The election of Andrés Manuel López Obrador on July 1 is expected to have a muted response on NAFTA talks in the near term, but the populist leader could push back particularly hard on Washington’s demands to introduce minimum wage standards to Mexico’s auto industry — a move that could have a ripple effect on Canada-Mexico positions on NAFTA, observers say.
“I could see this becoming a wedge between Canada and Mexico,” said Toronto-based Riyaz Dattu, an international trade and investment lawyer at Osler, Hoskin & Harcourt.
U.S. officials were upset with Canada for refusing to take a hard position on Mexican labour issues, instead opting to remain aligned with Mexican negotiators.
Mexico’s global auto exports totalled around $60 billion in 2017, or 15 per cent of its total exports.
The country’s most consequential election in recent memory comes amid potentially devastating U.S. auto tariffs that could plunge all three NAFTA members into a recession, a Scotiabank report warned on Tuesday.
“In what we still view as an unlikely event that the U.S. imposes auto tariffs and the rest of the world responds, a trade war would quickly unfold that would push Canada into recession in the second half of 2019 and into 2020,” Scotiabank analysts wrote in a note. “The U.S. and Mexico would also be pushed into a recession by 2020, but the impact on the U.S. would be the mildest amongst the three ‘amigos’.”
Other uncertainties around Mexican energy reforms and rules-of-origin stipulations will also persist under López Obrador, whose initials have him known as AMLO.
The president-elect, for his part, struck a conciliatory tone during a television show after his election win, saying Mexico would “extend our open hand to look for a relationship of friendship with the U.S.”
He has said Mexico’s current negotiators will remain in place after he takes office.
López Obrador espoused conflicting views on NAFTA during his election campaign, lauding its successes while also criticizing export-driven growth and its failure to improve the lives of Mexico’s poor — a key constituency that voted him into power.
“I wouldn’t say he’s anti-NAFTA but he’s certainly ambivalent,” said DJ Peterson, the founder of Longview Global Advisors based in Los Angeles.
The leader’s protectionist views toward foreign investment and global trade are rooted in a broader discontentment felt by many Mexicans, Peterson said.
A move by U.S. President Donald Trump to scrap NAFTA could actually fuel a pro-AMLO movement in response, in turn driving down the value of the peso and pushing up exports.
“A really aggressive move by the United States could bring this latent nationalism front and centre,” he said.
Canada’s envoy to the U.S., David MacNaughton, warned in February that Mexico’s election could “provide some constraints” in NAFTA talks, and urged negotiators to come to an agreement before the July 1 election.
“It’s not the end of the world — we will continue to negotiate as long as people want to negotiate — but I think it would be better for everyone if we could come to some agreement sooner than that,” MacNaughton told reporters at the time.
Most observers expect negotiations to remain muted in coming months, as the Mexican president-elect prepares to take office in December.
“NAFTA will remain in limbo, with limited advances in negotiations until next year,” Eurasia Group said in a July 1 note. “Talks may continue, but López Obrador will want to bring new issues to the negotiation. In the end, a deal will depend on the U.S., and we don’t expect any flexibility from the Trump administration.”
Canada plans to push ahead with negotiations through the summer. Foreign Affairs Minister Chrystia Freeland has said she spoke with U.S. Trade Representative Robert Lighthizer six times last week and expects NAFTA talks to move into a higher gear this summer, according to a report by the Canadian Press.
On Monday, Prime Minister Justin Trudeau spoke with Lopez Obrador by phone, and the two discussed “mutually beneficial economic and trading relationship between the two countries, and their shared priority of updating the North American Free Trade Agreement for the betterment of their peoples,” Trudeau’s office said in a statement.
Observers are also unclear over López Obrador’s position on Mexican energy reforms, an area in which it competes directly with Canadian oil for market share on the U.S. Gulf Coast. He had initially been critical of former president Enrique Peña Nieto’s plan to open several major Mexican oilfields to foreign investors, but later softened his stance.
Analysts at energy intelligence firm Wood Mackenzie said in a recent research note they expect the Mexican president to “recognise the need for future licensing and private investment throughout the energy value chain” and expect him to maintain much of the energy reforms.
Now that Mexico’s presidential election is done, Ottawa wants negotiations on NAFTA to restart as soon as possible, one government official familiar with the plan said on condition of anonymity.
“Our priority has always been to conclude a mutually beneficial agreement as quickly as possible and that, I think, remains our goal,” said the official, who was not authorized to discuss the matter publicly.
“That’s what we’re going to stay focused on. We’ll see where it goes.”
With files from The Canadian Press