For the first time in five years, the leaders of the United States, Canada and Mexico—President Joseph Biden, Prime Minister Justin Trudeau and President Andrés Manuel López Obrador—will reconvene the North American Leaders Summit (NALS). Launched in 2005 as part of the Security and Prosperity Partnership, a trilateral effort to improve information sharing and cooperation, the first meeting aimed to “discuss ways to strengthen our continent’s common security and enhance our peoples’ common prosperity.” When the three leaders meet on November 18th, however, the context of their discussion will be far different.
The renegotiation of the North American Free Trade Agreement (NAFTA) has left a bad taste in the mouths of our closest trading partners. Its successor, the United States-Mexico-Canada Agreement (USMCA), has run into several implementation challenges, some of which are likely to be brought up in this week’s meeting. All of this is happening at the same time that the Biden administration is laying out its “Build Back Better” agenda, and a key component that seems to be emerging is the continuation of the U.S. protectionist turn, which could seriously hamper cooperation on trade. Unless Biden can reassure Canada and Mexico that he is turning the page on the America First trade policy approach embraced by President Trump and his U.S. Trade Representative Robert Lighthizer, this week’s meeting may be little more than a photo-op.
So what can we expect? The tone of the three announcements for the NALS was surprisingly upbeat, with the United States asserting that the three parties “will reaffirm their strong ties and integration while also charting a new path for collaboration on ending the COVID-19 pandemic and advancing health security; competitiveness and equitable growth, to include climate change; and a regional vision for migration.” Canada’s statement closely tracked that of the United States. The statement from Mexico did not include any mention of climate change, but was blunt in noting that “President López Obrador ruled out addressing the issue of electricity reform during his next visit to Washington.” Undoubtedly, migration is going to be a major topic of discussion in the bilateral between Biden and López Obrador.
In addition to this thorny issue, there are a few trade topics that may make it into discussions. At the top of the list may be disagreement over the implementation of USMCA automotive rules of origin—these are the rules that help determine whether a trading partner can get preferential tariff access through a free trade agreement. Rules of origin (RoO) can require, for instance, a certain percentage of a product to be made within the trade area. At issue right now is the fact that the United States has interpreted the rules in a more stringent way, which could seriously raise costs for automakers—and our most integrated supply chain. Mexico requested consultations under the USMCA’s state-to-state dispute settlement chapter on August 20, 2021, and Canada joined six days later. The dispute has not yet been escalated to an arbitral tribunal, though the formal period for consultations recently passed. Since the USMCA rules are already more stringent than NAFTA, economic analysis has suggested that the new rules will generate rising prices for North American autos and lead to a slight decrease in the sale of small passenger vehicles. This meeting may be an opportunity to avoid a dispute completely if the Biden administration steps away from the Trump administration’s interpretation of the auto content rules.
Autos may also be brought up in the context of electric vehicles, where new Made in America rules are being considered under the budget reconciliation bill. The idea is to give a $12,500 tax credit for purchases of electric vehicles, and, within five years, restricting this tax credit to purchases of electric vehicles that are assembled in the United States. Canada’s Trade Minister, Mary Ng, has already raised concerns on this, noting that “If passed into law, these credits would have a major adverse impact on the future of [electric vehicle] and automotive production in Canada, resulting in the risk of severe economic harm and tens of thousands of job losses in one of Canada’s largest manufacturing sectors. U.S. companies and workers would not be isolated from these impacts.” The auto supply chain is so integrated that such a step could undercut efforts to build a competitive North American market for electric vehicles. Currently, about 50 percent of the content of vehicles assembled in Canada contain U.S. parts, and for Mexico, the share of U.S. content is between 20–30 percent. It should come as no surprise that Trudeau will visit the U.S. Capitol today and gently remind Congress of these facts.
Cooperation on pandemic response is also likely to feature heavily in this week’s discussions. To date, cooperation has been limited, and, at times, even strained. In addition, policies on reopening the borders have been ad hoc, arbitrary, and done with little to no coordination. The result has been a disruption to the lives of many who live in our border communities. Going forward, the three leaders should discuss how to improve our pandemic response policies and find ways to avoid the challenges we faced early in the pandemic—from PPE shortages to other trade delays. One promising area for collaboration could be boosting already-existing capabilities for manufacturing PPE, medical devices, and pharmaceuticals to ensure that these products can be swiftly mobilized to address the needs of the three countries in times of crisis. To this end, the three leaders could commit to reducing regulatory barriers to trade in these products through promoting regulatory cooperation and refraining from imposing restrictions on the export of these products to their countries.
And while AMLO may not want to talk about energy, given his controversial energy reforms, he may not be able to avoid the subject altogether. To date, AMLO’s actions have only been moderately successful at overturning former President Peña Nieto’s liberalization of the energy sector, but they have still created plenty of uncertainty among domestic and foreign investors. The crux of AMLO’s latest proposal — a Constitutional reform on electric energy — is to have an energy sector largely controlled by the state, which he sees as an essential pillar of Mexico’s economic and social development, as well as its sovereignty. Now it may be unlikely that Biden or Trudeau will raise this issue directly, since debate on the reforms in Mexico are delayed because of other legislative priorities, and it’s also unclear if AMLO’s party can muster the two-thirds majority required for the reform to pass. So it might be sensible to take a wait-and-see approach for the moment. However, it is possible that conversations around Mexico’s energy policies will happen, perhaps centered around their environmental impact. To this end, it is worth noting that AMLO hosted Biden’s climate envoy, John Kerry, in Mexico last month and committed to modernizing government-operated refineries and electricity generators to lower their carbon emissions, as well as implementing an array of complementary environmental measures.
What’s not clear is whether the Biden administration will bring up the issue of “green” steel in the context of the environmental policy discussions. This month, the administration rolled back tariffs on steel and aluminum imports from the European Union that were imposed by former President Trump under the guise of national security in exchange for discussions on creating a “carbon club” for steel and aluminum products that would tax these items more heavily from countries that utilize “dirtier” production methods. Aside from the fact that this action is inconsistent with the Section 232 statute from which the president derived authority to impose the tariffs in the first place, it is not obvious how this would even reduce carbon emissions. Meanwhile, the Biden administration is set to engage in similar talks with Japan and South Korea. Canada and Mexico have already agreed during the course of the USMCA negotiations that they would monitor steel transshipment to ensure that cheaper Chinese steel could not “sneak in” to the North American market. Doing anything beyond this, or asking Canada and Mexico to modify their current commitments, would likely do nothing more than further add to the list of trade irritants between the countries.
Now, there are undoubtedly many other topics that could be raised during the meetings this week, but the leaders are likely to focus on those that they are willing to expend significant political capital in such a high-level summit. In the bilateral meetings, Mexico and the United States will surely expend more time discussing migration than trade. But, we are also expecting some kind of announcement by the United States and Mexico from efforts undertaken at the High-Level Economic Dialogue, which serves as a forum to discuss shared strategic and commercial interests. Canada is likely to push for greater cooperation on climate issues, in particular recognizing areas where Canada is uniquely placed to support efforts in greening the economy, such as with critical minerals used for electric vehicle batteries. Trudeau is also sure to bring up efforts by Michigan Governor Gretchen Whitmer to shut down the 70 year old Line 5 pipeline, which “supplies more than half of Michigan’s propane.” Shutting down the pipeline will not only further exacerbate tensions on energy policy with Canada, but it would raise prices for American consumers as well. The Biden administration has so far not taken any action to intervene, but Trudeau may push for a resolution of the issue soon.
With all of this in mind, the North American Leaders Summit will likely present a number of significant obstacles. We have had difficult moments in our trilateral relationship before, but the Biden administration faces the additional challenge of trying to find a way to reinvigorate cooperation with its two neighbors, while at the same time appearing to embrace the Trump administration’s approach to trade. The ball is largely in the United States’ court. If Biden decides to bully our closest trading partners into accepting a more protectionist United States, then we will all be worse off for it. But he can decide to take a different tack. At the first High-Level Economic Dialogue in 2013, then Vice-President Biden delivered a speech in Mexico City where he stated: “[O]ur two economies should look outward together….[T]he United States, Canada, and Mexico have created a trillion-dollar trade relationship. Imagine what we can accomplish if we extend that economic cooperation, as I said, south….”
While 2013 may seem a long time ago, the ideas articulated by Biden in that speech are still true today. Yes, our three countries created something special by liberalizing our trading relationship with NAFTA. But there’s still more that we can do. President Biden can set the right tone by getting back to the basics of North American economic relations, and leveraging our relationship with Canada and Mexico to achieve our common goals through openness and competition. Otherwise, the United States will continue to turn inwards, and the three amigos may just become nothing more than three vecinos.
