By Anna Barrera (Research Associate, Dawson Strategic)
April 28, 2017

Canada and Mexico have had a strong relationship spanning more than 70 years. Their trade relationship grew with the signing of the North American Free Trade Agreement (NAFTA) in 1994 but has decreased in recent years. Within that relationship, the majority of Canada’s trade is with the United States, with $2.4 billion worth of goods and services crossing the Canada-U.S. border every day. While the United States accounts for 64 percent of Canadian overall trade, Mexico accounts for 4 percent. Canada and Mexico are each other’s third largest trading partner, with two-way merchandise trade reaching over CAD$37.8 billion in 2015. There are also a significant number of Canadian companies that have business, trade and investment ties with Mexico. How will this relationship be tested by the renegotiation of NAFTA?

NAFTA was signed as a new and innovative trade agreement, dealing with new topics such as labour, environment and dispute settlement. However, with recent discussions of wanting to renegotiate the agreement on behalf of the United States, the relationship between the three nations has grown tense and worry has settled in as to where Canada’s and Mexico’s, specifically Canada’s, alliance will lie.

Unlike with the U.S., Canada does not have a previous bilateral agreement with Mexico. This is important to consider since, if NAFTA is removed, there is no basis on how trade relations would work, or how they would move forward. Both countries would have to decide to negotiate a whole new deal, stay and follow the basic rules of NAFTA, or simply continue trading under no agreement but follow the rules established by the World Trade Organization (WTO). While the last option sounds like the worst case scenario, it is important to consider that most countries don’t have high duties on their products anymore, and products that do have a higher tax, tend to also have a higher tax even within a trade agreement.

While it might seem that Canada and Mexico would rather focus solely on their independent relation with the United States, the country that divides Canada and Mexico depends heavily on its trade with its neighbours. Mexico and Canada are the U.S. 3rd and 2nd largest goods trading partners, with US$525.1 billion in total goods trade during 2016 and US$575 billion in total goods trade during 2015, respectfully. Therefore, simply withdrawing from the NAFTA might do more harm than good for the United States, meaning that Canada and Mexico will have to stand strong and remind the U.S. of the initial intentions of signing NAFTA in 1994, which was to create a strong, united North American force that would compete together against the world.