NAFTA 2.0: Moving to Closure

  • National Newswatch

The good news is that Canada's Chief Negotiator Steve Verheul and his expert team have been able to re-engage for Canada. Deciding a hockey game with one-on-one shoot outs between the General Managers doesn't fill the rink.The 'packaging' of NAFTA 2.0 will be at least as important as the substance. The devil will be in the detail and experienced negotiators are usually masters of the detail and optics.Where are we at?Unfortunately, Canada is experiencing U.S. exceptionalism at its worst (i.e., the rules apply to everyone except the United States).  The WTO may still be the home of the rules-based system, but it cannot move quickly enough to help Canada.Since we have to focus on making the most out of a bad situation, it's time to park the carping and blame casting. There is serious work to be done in very little time.Currently, meetings of negotiators are happening on a trilateral basis.The 10 to 20 chapters which were ready or nearly ready are being put to bed. This could probably have been done months ago. The outcome will likely bear a strong resemblance to the TPP.  Work on the remaining chapters is ongoing but incomplete – and with lots to go.  However, most are potentially doable by Friday.Senator Marco Rubio has Mexico a bit spooked on their win on horticultural dumping, but that is not likely to change the deal. It will, however, add to the problems when the deal hits Congress.The Mexican steel industry expected complete removal of Section 232 tariffs on steel and aluminum. They are not happy and have rejected voluntary export restraints.Mexico is adopting Chrystia Freeland's line that steel and aluminum are on a different track. The illegal tariffs are “leverage” which shaped the deal. This is spin to avoid talking about 800 pound gorillas.The final package could end up including all 28-30 chapters. Most could have been concluded last year, by borrowing language from the TPP agreement that President Trump saw fit to reject. On most issues, the “landing grounds” will be evident.  The more chapters that can be included, the easier it will be to bury or obscure the areas where damage is done.A deal can be done by Friday. Like the last day of TPP talks in Atlanta, the deal will likely come together in a few hours, early tomorrow morning.Friday, however, is a phony deadline. The real deadline for Canada is September 29. But working to President Trump's timing -- because he needs this “W” -- could improve our negotiating ability.Canada is operating under the extreme duress of auto tariffs. Steel and aluminum tariffs are important but targeting autos and parts could turn Ontario's Golden Triangle into an economic wasteland. The President's repeated threat has forced Canada to the table and will shape the package, though not the logic or merits of the deal.Prime Minister Trudeau says Canada needs a good deal, not just any deal.  Does that mean Canada will walk and risk 25% duties on trade in automobiles and parts? Not bloody likely. Ontario can't accept that type of devastation. Both the PM and Ontario Premier Doug Ford will be very focused on eliminating this threat.There will be much rationalization and packaging of the facts to suggest Canada did not get sandbagged – or is it that Canada knew it was getting sandbagged? In fact, it appears Canada has been betrayed, bamboozled and gob smacked.  So what? – Canada is where it is and needs to get to an acceptable result.Mexico looked after its own problems and issues. Is leaving Canada to fend for itself a betrayal? It really doesn't matter. If there is frustration with the cards Canada has been dealt, all negotiators can do is park it and play catch up.It's a fair question as to whether this is a negotiation or a salvage operation.  Clearly, Canada will be paying to maintain the status quo. As will Mexico. In fact, Mexico has paid the most for the new NAFTA in the automotive rules and wage concessions. Would Canada have been able to secure this movement without Lighthizer's relentless pressure?Dispute SettlementWhere should Canada focus? There has been enough said about dairy and supply management. The U.S. understands these issues. Chapter 19 is sucking a lot of oxygen out of the room.Everyday dispute settlement is covered in NAFTA Chapter 20. Lighthizer does not want a binding process. Canada and Mexico do. The U.S. will never bind against state level actions. The price may be high but any agreement is useless if it cannot be enforced.It appears that Canada is prepared to abandon Chapter 11, Investor State Dispute Settlement. This would be a good move, if true.Meanwhile, CBC's Janyce McGregor has speculated that Canada may be focusing its demands too much on retaining NAFTA's Chapter 19 Judicial Review.Thanks to NAFTA's dispute settlement mechanisms, Canada (and Mexico) are the only countries in the world not forced to rely on U.S. courts for judicial review of trade remedy investigations. This has been worth a great deal to Canadian exporters and provinces. It is heresy for Canadians to question the value of keeping it. Lighthizer claims it dilutes U.S. sovereignty. The fact is that most trade agreements do that – but it is an 'agreed to and paid for' dilution of sovereignty that is usually considered to be beneficial to all parties.It is unfortunate that some decisions have been divided along national lines – that feeds the critics' case. Petitioners' counsel will hate Chapter 19 because the courts in the U.S. (and Canada) are more deferential to investigators and administrators. Respondents do not want to dilute their odds.Defending the interests of softwood lumber exporters has been a Canadian preoccupation since before Confederation – because in Canada the people (via the Crown) are more likely to own the trees than in the U.S., where private holdings predominate.  This week, the battle is between protectionist principles and the price that can be extracted for maintaining the status quo. Some will question the price.Mexico was not prepared to waste any negotiating coin to keep Chapter 19. It is a Canada issue – why should Mexico fight for it and pay for something which end-runs the Mexican court system?Bombardier and Newsprint were not won because of Chapter 19. These decisions are examples of how the U.S. trade remedies system can work before it gets to judicial review.One need only consider the havoc which Lighthizer has wreaked on the World Trade Organization because he does not like the way dispute settlement works. Chapter 19 is just as high on his hit list.CultureCanada is being asked to sign on to an agreement which abandons our cultural protections – this would constitute a big win for Hollywood and the U.S. commercial entertainment business. This is not an issue for Mexico — language provides efficient protection.Will Canada be able to persuade the U.S. to back down on Intellectual Property issues? Perhaps on a few – but not all. Senator Orrin Hatch wants increased pharmaceutical protection. If President Trump hopes to pass this package he will need the good Senator's support.As for the so-called cultural exemption – there is none and there never has been – Canada has an exemption under Article 2005.1 of the CUSTA. Under 2005.2 the U.S. may take measures of equivalent impact or effect/effort for measures sheltered by paragraph 1.Trump will need to give Canada and Mexico their optics.  The most serious bridge still to cross is what to do about:
  • steel and aluminum tariffs;
  • threatened tariffs on autos and parts.
Lighthizer likes a result where U.S. trading partners accept “voluntary” export restraints. These “consenting adults” deals were banned by the WTO Uruguay Round Agreements. Until the most recent Lumber V, Canada accepted voluntary restraints on Softwood Lumber exports as a “least worst” option. The U.S. Lumber Coalition prefers duties, so the Softwood Lumber Agreement died.What do we need, absolutely unconditionally and unequivocally? Removing steel and aluminum tariffs – not replacing them with voluntary export restraints and unconditional exemptions from Section 232 tariffs on cars, light trucks and auto parts.Without reasonable offers by the U.S. on the outstanding issues noted above, there will be insufficient gain for Canada to move heaven and earth just to please POTUS or meet his schedule.   The next 36 hours will be particularly challenging.  We need to forget about reliance on arguments about the need for 'rules-based' system or concepts of right and wrong. President Trump believes 'big' should rule over 'little'.  Canada needs to punch above its economic weight (as we have done in the past) in this (hopefully) closing round.  Fortunately, Canada has its 'A' team at the table.  Now we need to support them by demonstrating we are in their corner.Peter Clark, president of Grey, Clark, Shih and Associates, is one of Canada's leading international trade strategists. His clients in Canada and around the world include governments, corporations and trade associations. He is a frequent media commentator and columnist.  Follow him on Twitter at @jpclark14