As US-Canada tensions mount, Mexico is measured on agreement

In the run-up to the latest North American Free Trade Agreement (NAFTA) renegotiations, friction is high between Canada and the US -- with Ottawa determined not to bow to the Trump administrations demands, while Mexico opts for a more measured approach.

Irritated by countervailing duties imposed on its exports to the US, Canada has called upon the World Trade Organization (WTO) to denounce protectionist trade practices -- which it believes contradict international rules and affect other countries such as China.

"The action of Canada to the WTO is extremely provocative," said Edward Alden, a senior fellow at the Council on Foreign Relations in Washington, given the lurking threat of a US withdrawal from the agreement.

He added the deterioration of Canadian-American relations is "extremely worrying" ahead of the sixth round of talks, which will take place in Montreal between January 23-28.

"The Canadians think the Trump administration only understands strength," he said.

"When people see that you are firm, you get respect," was the take of Canada's international trade minister, Francois-Philippe Champagne.

'Confrontation'

According to Champagne, Canada's approach has always been constructive, and it recognizes the importance of the US, its primary trade partner.

"But I think the American colleagues understand when you stand strong," he added.

Canada is heading into the new round of negotiations with a "spirit of goodwill" and hopes for "a positive outcome," foreign affairs minister Chrystia Freeland insisted Thursday.

But she added all parties must have similar good will, referencing rumors that the US may pull out of the agreement.

The three countries, in theory, have until the end of March to renegotiate NAFTA, which has been in place since 1994.

On Wednesday, however, a Canadian government source reported Ottawa is bracing for the United States to possibly announce sooner that it will pull out of the trade pact.

"Canada is basically showing confrontation. Canada is sending a hard line signal and the Trump administration doesn't like it," said Monica de Bolle, of the Peterson Institute for International Economics.

According to de Bolle, it is no surprise given Canada's position ahead of the first round of talks in August.

"There may be some dramatic moments ahead," Freeland had warned in an address.

"But we are committed to a good deal, not just any deal."

Since then, Canada has not let up on its commitment to defend the interests of its workers and businesses. It has also consistently contested the imposition of tariffs by the US.

But it can afford to stand firm. Canada may be dependent on the American market, but it works both ways -- around 9 million US jobs depend on trade and investment from Canada.

"They are all interdependent," says Monica de Bolle, who believes this dynamic subdues the threat of a US withdrawal.

Untouchable Mexican products

Mexico, which has meanwhile adopted a more flexible position, has repeated its aim to find a win-win agreement -- and says it is ready to make concessions to achieve this.

"We are optimistic on the possibility of reaching a deal that will benefit all three countries," President Enrique Pena Nieto soothingly reiterated Thursday.

The developing economy is starting from behind -- with 80 percent of its exports destined for the US, NAFTA is vital for Mexico.

But while Trump publicly denounces the huge trade deficit with Mexico (over $64 billion), Canada is actually the country on the receiving end of most US trade complaints.

The US Department of Commerce has felt the heat from American firms who feel threatened by Canadian imports -- such as aircraft manufacturer Boeing, which petitioned the government over Canadian Bombardier receiving government subsidies and then selling its C-Series jets below cost in the US.

But in the manufacturing sector, products imported from Mexico are primarily made by US companies based in Mexico.

Despite its low-key approach, however, the stakes are huge for Mexico.

If NAFTA ends, "there is likely to be a significant hit to business confidence, which would weigh on investment and household spending," said consulting firm Capital Economics.

Mexico's central bank warned the same last month, and said the economy was already feeling the pain because of prolonged uncertainty over NAFTA.