Power Negotiation

This case study shows how a weaker negotiating partner can successfully use power negotiation to win a good agreement with a stronger negotiating partner.

There are many occasions when a smaller company will want to form a partnership with a larger organization to further their business objectives. There are two hurdles that the smaller company might have to overcome to succeed in the negotiation process. The first problem is to get the larger organization’s attention as they may express little or no interest in the partnership. The second problem revolves around the prickly issue of negotiating from a much weaker power base. There exists the danger that the smaller party’s business goals aren’t overwhelmed by the more powerful negotiating partner during the negotiation process.

Although the following case study entails a similar problem faced by two countries, the lessons learned can be applied to any similar business negotiation model. On October 3, 1987, The Free Trade Agreement (FTA) was signed by representatives of Canada and the United States after two strenuous years of intense negotiations.

Canada could be described as a medium sized economy. Its population is 1/10th the size of the U.S. which is considered an economic superpower in comparison. Canada is economically dependent on the United States. The reason is mainly due to its small domestic market, scattered over a vast geographical locale. More than 75% of its exports go to the U.S. making the U.S. Canada’s prime trading partner. By contrast, the U.S. was exporting less than 20% of its products to Canada.

In the 1970’s, Canada’s economic health rose and fell like the proverbial yo-yo. It was too resource based and needed to add some meat to its manufacturing industry to stabilize the economy. A Royal Commission concluded that Canada’s only means to achieve this stability was to engage in an open free trade partnership with the United States.

The problem was that the United States wasn’t especially interested in such a free trade partnership agreement. The U.S. was in addition also becoming increasingly protectionist during this same time period. The result was that Canada was facing a whole host of penalties and countervailing actions against Canadian goods. Canada clearly needed a plan.

The first step that Canada took was in the form of preparation by developing a succinct plan. A chief negotiator, Simon Reisman, was appointed by the Canadian Prime Minister himself. He established an ad hoc organization called the trade negotiations office (TNO) which reported directly to the Canadian Government Cabinet and had access to highest levels of bureaucracy. It established in no uncertain terms their negotiation goals and objectives which included a strong dispute resolution mechanism that the Canadians felt were vitally important to their success.

In contrast, the United States did not consider the FTA to be especially important and let Canada do all the initial work. The only reason why the U.S. Congress even considered the FTA proposal was that they liked the idea of a bilateral approach to trade and were tired of the previous mechanism that failed to settle a host of trade dispute irritants between the two countries known as GATT. It would also allow freer access to other segments of the Canadian economy. President Ronald Reagan decided to fast track the negotiations and appointed Peter Murphy to represent their interests. The U.S. was also concerned about the growing hegemony of the European economy.

Strong differences in interests and approach dogged the negotiations. The Canadians used every advantage available including the use of Summit meetings between the leaders of both countries to emphasize their concerns at every opportunity. Yet, the political powers in the U.S. dragged their feet to such an extent that the Canadian negotiators walked away from the talks to express their displeasure. This put some heat on the U.S. administrators to the extent that U.S. Treasury Secretary Baker took over the negotiations.

As a consequence, the talks between the two countries were successfully concluded. Several concessions were made by both countries. The U.S. opened up a larger investment segment in the Canadian economy and removed some of the more time consuming trade irritants. The Canadians achieved their main goals of getting freer access to the U.S. economy, while implementing a strong trade dispute resolution method.

The Free Trade Agreement between the two countries created the largest bilateral trade relationship in the world. Canada achieved its objectives because of its detailed planning and the intense focus of its negotiating team despite the asymmetry in power between the two nations.

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