NAFTA 2.0 – Déjà Vu All Over Again

[Publisher's Note: In view of the commencement of NAFTA (re)negotiations, trade expert Peter Clark and his team have scrutinized the negotiating objectives recently published by the United States.  The following provides a comprehensive analysis offered in his unique style.]

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Hundreds of trade negotiators have descended on Washington this week to 'modernize' NAFTA – whether it needs it or not. Tens of millions of jobs in Canada, Mexico and the U.S. depend directly on trade within North America. More than US$1 trillion in annual trade in goods and services is being held for ransom to satisfy irresponsible xenophobic election promises and the beggar thy neighbour initiatives of President Donald J. Trump.The tweaks will be big ones. The U.S. wants a major overhaul and rebalancing. The scope is very ambitious. The schedule is even more ambitious. Neither is likely to be realized.The World Trade Organization's Doha Round started on November 14, 2001 – on the flight home I told then Trade Minister Pierre Pettigrew that the WTO's 2005 end target would not be met. Twelve years later, the Doha Round is still breathing, but nowhere near a conclusion. We were told that the finalization of the Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA) was “just around the corner” for several years. And the Trans-Pacific Partnership TPP) – which promised important access to the Japanese market – and the only chance for an FTA with the U.S. for many – took years to find landing zones.Trade negotiations take years, not months. I would be pleased to see a speedy process with a balanced result by Christmas. Uncertainty is unhealthy. But I cannot join the cheerleaders. The “Tweeter” is wild in this high stakes poker game. And the “Tweeter” is attempting to write the rules – 140 characters at a time.How will the twenty-eight or so negotiating groups develop a balanced agreement before POTUS loses patience with the give and take realities of detail driven multilateral negotiations?There will be some easy parts – any trade agreement is 80-85% boilerplate incorporated from recent FTAs. This is the low-hanging fruit U.S. Commerce Secretary Wilbur Ross likes to reach for. Harmonizing regulations, promoting transparency and predictability in the rules of the game is always useful and generally mutually beneficial.In an effort to build on momentum from harvesting the low-hanging fruit, the more difficult issues will be left for later. Movement on these issues will take time. Indeed, some issues may prove to be non-negotiable. Canada and Mexico should probably refuse even to engage on no go issues like the fate of Chapter Nineteen (Article 1904), judicial review of trade remedy determinations.United States Trade Representative (USTR) Robert Lighthizer's office has signaled that:
  • the U.S. may decide not to pursue some of its objectives (this is a good sign – there had been some suggestion there might be more);
  • the negotiations could slip into Q1 2018. This would be much more realistic than a Christmas deadline. Commerce Secretary Ross has an unfortunate inclination to try to rush negotiations – but USTR Lighthizer has told everyone he, not Ross, is in charge.
The U.S. will likely try to address specific ambitions by beginning with modified TPP texts focusing on what Washington likes, ignoring what it does not and adding other more extreme demands which were not negotiable in the TPP. This seems clear from the Administration's objectives, which were tabled with Congress on July 17.Canada and Mexico cannot afford to allow the U.S. Administration to control the agenda or the negotiating texts. Modernizing NAFTA should begin with the NAFTA text. Canada and Mexico must draft and advance their own proposals. Mutually beneficial parts of other post-NAFTA agreements – like the Korea-U.S. FTA (KORUS), CETA and even proposed language in the Transatlantic Trade and Investment Partnership (TTIP) will be blended into a new and (hopefully) improved model Free Trade Agreement.The negotiations must lead to a balanced result. If POTUS insists on the take, take, take of America First, he should be left to deal with the push back of Congress, U.S. industry and farmers who could be hurt without NAFTA.A balanced and beneficial result will require co-operation at the negotiating table, not confrontation and dramatic exits. Negotiators must work at the negotiating table. Impasses can be addressed through very informal frank and confidential one-on-one Heads of Delegation dinners to explore possible compromises. Negotiators do not need to like each other but they must respect and trust each other.Walking away from the negotiations is, in fact, taking a time out to try to deal with an impasse. Simon Reisman, Chief Negotiator in the Canada-U.S. Free Trade Agreement, was a charismatic former Deputy Minister of Finance, and tough as nails. Prime Minister Brian Mulroney was one of the best labour negotiators in North America.It was important to get President Reagan's attention – and an understanding that Canada needed special treatment in dumping and subsidy investigations. Canada's trade negotiators borrowed from the labour negotiator's handbook and it worked. The tactic worked because it was unexpected; it was a surprise which refocused the U.S. side.The chief negotiators are experienced professionals who will not be impressed with nor inclined to drama. They know that progress will be made across the negotiating tables – there will be more than two dozen of them. Their job is to negotiate – but no deal will be better than a bad deal.The ScopeThe Administration's wish list for NAFTA 2.0, the “Summary of Objectives for the NAFTA Renegotiation” which USTR Lighthizer tabled with Congress several weeks ago is a vague, very broad, boilerplate burdened statement of ambition. Those who expected more focus and direction from the Administration will be disappointed. Many are.A Canadian reading the list of sins by trading partners in the Administration's backgrounder might be surprised to learn that Mexico has such an abusive and restrictive system. Mexicans reading the document would have the same impression of Canada. But the backgrounder is burdened with rhetoric, based on alternative facts, a.k.a. the “Big Lie”.Though the objectives are not as bad as anticipated they do reflect the Trump mantra that NAFTA should be scrapped and rebuilt. Clearly someone is paying attention to the push back against throwing the NAFTA baby out with the bathwater.But is President Trump listening? Why do so many stakeholders and members of the Trump Cabinet need to caution no harm? Because there is a very real risk that President Trump could shoot himself – and hundreds of millions of North Americans – in the feet – one toe at a time.There may be value in vagueness.The lack of specificity in the stated objectives creates a great deal of flexibility for Congress, the Administration and even Canada and Mexico (we hope) to shape the final deal.The risk in setting very specific goals is that it would be easier for POTUS's critics to identify failures. Disappointed supporters, too, would be quick to demand scorched earth responses to the inevitable failures.The Administration's objectives should be viewed as opening positions and will not be the last word. There will be additional “asks” as the negotiations unfold. Some of the more general goals are, in fact, multi-layered and will be peeled back like an onion. All trade negotiations begin with extreme ambition and end with watered down results – or, like the WTO Doha Round, simply do not end.USTR received more than 12,000 comments on NAFTA modernization. We found only 1,458 comments online. The Sierra Club submission comprised 10,221 comments from its members. Each appears to have been counted as a separate submission. This is the only way to explain the 12,000 count. Sierra Club members' main demand is that “the TPP text must not serve as a starting point for NAFTA's re-negotiation.” They will be bitterly disappointed.The U.S objectives borrow heavily on the final text of the TPP. The U.S. will try to recover what was best for the U.S. in the scuttled TPP. Canada and Mexico should not accept this approach. It seems logical and reasonable that NAFTA 2.0 negotiations should begin with the NAFTA text.The TPP final text may not be relevant to the NAFTA partners. The original U.S. TPP demands were diluted by five years of back and forth give and take with the other 11 countries involved in the negotiations. Expect Washington to try claw back to its starting positions in TPP. On de minimis customs entries it appears to have quadrupled its TPP target.Mexico has its own priorities which are being circulated to its legislators. Reuters reports on these objectives here. Mexican negotiators must brief its Senate on its NAFTA 2.0 objectives – only the Mexican Senate can approve the deal.Clearly Mexico is not simply waiting for U.S. demands to develop its own position. Nor will its position be limited to responding to U.S. demands. Mexico has 45 free trade partners and has long known how to advance and defend its interests.Nor is Canada asleep at the switch. Extensive consultations have been ongoing with key stakeholders since late last year. Stakeholders appear to be pleased with the process, as explained in this piece by Dennis Darby of Canadian Manufacturers and Exporters (CME).The CME and its American counterpart National Association of Manufacturers (NAM) appear to be very close in their priorities and approach to NAFTA.On the eve of the first negotiating session, Global Affairs Minister Chrystia Freeland unveiled Canada's objectives. Canada's approach is inclusive, expansive and perhaps provocative. Including climate change, Trade and Gender and Trade and Indigenous Peoples is not only innovative, the U.S may conclude that including these issues is an attempt to shift blame for failure in a negotiation which was never likely to be a slam dunk. Click here for my assessment of Canada's priorities.Canada has no choice but to push back, targeting the soft underbelly of the U.S. position. Then International Trade Minister Michael Wilson deflected demands on cultural industries by asking the U.S. to include the Jones Act in the talks to help the Canadian shipbuilding industry. The Jones Act requires that U.S. coastal trade be carried in American bottoms (U.S.-built ships). It was quickly agreed that the demands cancelled each other.Canada is setting itself up to exploit every possible strength it can muster. Simply responding to the U.S. agenda would be folly.Further harmonization of regulatory regimes will increase NAFTA integration and strengthen supply chains. Improved customs procedures, intelligent, state-of-the-art logistics and infrastructure in addition to extensive computerization will facilitate trade and boost economic activity. Thinning the border, making it less visible, should be easy to achieve – but agreeing on the detail will require time.Improvements in temporary entry for business persons are important to Canada and Mexico. This seriously out of date part of NAFTA is not included among the U.S. objectives. Canada and Mexico have very different objectives from the Buy American, Hire American approach espoused by the United States. Canada and Mexico must insist on discussions to accommodate their interests.Some U.S. objectives are not “low-hanging fruit”. Market Access on dairy, eliminating special Tariff Preference Level (TLA) quotas on wearing apparel, changes in automotive rules of origin, eliminating Chapter Nineteen judicial review for trade remedy cases and subjecting Canada and Mexico to global safeguards. These objectives will not be easy to accommodate. Some may not be negotiable.My experience with negotiations makes me very dubious that the U.S. team will be able to wrap up NAFTA 2.0 in time to put it under President Trump's Christmas tree. Bringing a trade agreement home on time would be a shock and a surprise. But, no matter how difficult the task, Canada must share the optimism – doing otherwise would result in blame being cast northward when the inevitable delays occur.The proposed negotiating schedule envisages seven (or is it nine?) rounds – two to three weeks apart aimed at completing the negotiations by year-end/Q1 2018. I would count on nine rounds – starting with seven is more positive and optimistic but not realistic. Canada's Ambassador to the U.S., David MacNaughton, opines that a year-end finish is possible with maximum co-operation and minimal confrontation. The skeptic in me says that nine may not be enough and Q1 2018 is the most likely end date. And even that is ambitious.Canada and Mexico should not be expected to simply accept the TPP text as the basis for moving forward. The U.S. seeks to salvage U.S. benefits accrued from the TPP negotiations and ignore what Canada and Mexico expected to receive from the other nine TPP participants.President Trump needs a victory. He needs heads on pikes to satisfy his most ardent and loyal followers. Simply salvaging the TPP will not do that.Difficult issues like dairy market access will be left for last, say, from late October which would be Round 5 or 6. Cancelling Canada and Mexico's exclusion from global safeguards actions and terminating NAFTA Chapter Nineteen, regarding judicial review settlement, will be the biggest potential stumbling blocks to modernizing NAFTA – and to a speedy negotiation. Indeed, Canada and Mexico should refuse to engage on any initiatives which do not improve NAFTA.Chapter Nineteen was a last minute compromise which permitted closure of the Canada-U.S. FTA. It was a crucial concession and the Holy Grail for Canada. That it is now used less frequently is a function of increased integration but it is nonetheless an insurance policy to ensure a modicum of security against the excesses and unpredictability of the U.S. dumping and subsidy sleuths and U.S. courts. It cannot become overnight a mere minor detail to be sacrificed to meet unreasonable demands.USTR Lighthizer does not like NAFTA's Chapter Nineteen. Nor does he like the WTO's dispute settlement regime. The Americans are loathe to have their business practices and legislative actions affecting trade judged by impartial panels of experts. Such constraints have never sat well. But, Lighthizer has an instinct for the jugular and will be determined to deliver what President Trump wants. Meanwhile, Mexico and Canada will be dug in. And, their opposition will not be softened by artificial deadlines.The U.S. claims the negotiations must be done sooner rather than later to avoid complications of the Mexican election. The Administration has its own timing concerns. POTUS needs to deliver progress to satisfy his base. Delays in salvaging benefits thrown away with the TPP will be problematic.If the negotiations go beyond the first quarter of 2018, the very contentious U.S. mid-term elections could make closure before 2019 unlikely. Despite everything that has been going on, the Republicans may be alright in the Senate mid-term election. Of the 33 Senate seats to be contested, 25 of the incumbents are Democrats. In 2016 there were 24 Republican incumbents facing the voters. However, the situation is not the same in the House of Representatives, where the Republicans' 23 seat cushion is vulnerable to being significantly reduced.If either the House or Senate were to flip, Congressional prospects for NAFTA 2.0 – particularly a revision which borrows heavily from the widely (but unfairly) demonized TPP – will be eroded.Unless it is extended after a request from the President, Trade Promotion Authority (TPA) expires on July 1, 2018. Extension will be a hard sell to Congress but no country will negotiate with the U.S. without TPA. New York Senator Chuck Schumer, Minority Leader in the Senate, considers the new Democratic Trade Agenda to be tougher than President Trump's. The negotiations will not be popular with either party during the mid-term elections.In some cases, the Administration's objectives seek solutions for problems which do not exist with Canada and Mexico; perhaps this is due to the fact the original TPP objectives were focused on 11 other countries, not limited to the United States' two NAFTA partners.U.S. Stakeholder ViewsStakeholder testimony to a June 27-29 inter-Agency group headed by U.S. chief negotiator John Melle often explained that Canada and Mexico – and NAFTA – are not a problem. There was much more focus on problems with Europe and Asia. But, Washington wants to amend NAFTA so that it can be used as a model for future FTA negotiations.For the many stakeholders who understand and enjoy the benefits of NAFTA, rocking the boat by creating uncertainty in the outcome is irresponsible. Most of the stakeholders testifying to the USTR/USITC hearing appear to favour fixing and updating NAFTA where possible, but not risking the benefits built over more than 20 years by rocking the boat with an overloaded agenda.Many stakeholders sent a clear message that the Administration should 'do no harm' to what is widely considered the biggest, and normally best, trading relationship in the world.The Republican Congress does not support throwing out the NAFTA baby with the bath water. 'Do no harm' has become the mantra of stakeholders in the automotive, manufacturing, services sectors and very broadly in agriculture.Suggesting that NAFTA or the TPP did not benefit the U.S. is patently ridiculous. It is nonsense. The TPP negotiating texts, like NAFTA 25 years ago, were drafted by the U.S. based on its regulatory system and in some cases sought to eliminate perceived unfairness in other systemsThe July 17 manifesto published by the U.S. is not totally extreme. To the extent it seeks to repackage the Trans-Pacific Partnership – a “disaster”, the “worst trade agreement ever” – as NAFTA 2.0, it may be hypocritical but not harmful. It is evidence that in Washington, consistency is the bugbear of small minds.In fact, many of the U.S. priorities were successfully addressed in the TPP. The NAFTA objectives are thus largely an unremorseful attempt to remedy having abandoned the TPP – an agreement much better than the Trump campaign rhetoric suggested it was. In effect, a salvage mission has been launched to revive and recover the TPP – without admitting the Trump Administration's gross folly in walking away. Notwithstanding the submission of the Sierra Club, the draft TPP text will be recycled and packaged as the new and improved NAFTA.There is considerable scope to achieve mutually beneficial progress, to thin the border, to reduce red tape and increase mobility of business professionals. We should not underestimate the potential change from electronic commerce and state of the art computerized manufacturing.But there were exceptions. Heavily subsidized U.S. dairy interests want increased access to the Canadian market. California wineries which can sell and deliver direct to U.S. consumers want better access to grocery stores in Canada. Meanwhile, foreign wineries cannot deliver direct to U.S. consumers (penalties are often felonies).Florida berry and tomato growers want to re-jig anti-dumping laws and Ranchers-Cattlemen Action Legal Fund (R-CALF) considers it can restructure the Country of Origin Labelling scheme condemned by the WTO to make it compliant. Steel producers want better rules of origin (for themselves) and tighter and broader Buy American content rules.Strategic ConsiderationsExperience has proven that the U.S. is, at least in the early stages, more inclined to dictate then to negotiate. Canada and Mexico cannot simply agree to see NAFTA 2.0 shaped and regulated on the U.S. model – at least without Canada and Mexico being able to elect a dozen or so senators to the U.S. Senate to ensure some modicum of fairness and balance.Where is the benefit to Canada or Mexico in buying into the U.S. regulatory system and giving up their own uniqueness? There is a prima facie case for harmonization and eliminating duplication and differences for the sake of being different.Had the TPP not been scuttled by the Trump Administration it would have reshaped the regulatory systems of all three NAFTA parties, in a more balanced agreement involving 12 countries. (If readers are interested in two of our earlier predictions about the fate of NAFTA in a TPP world, click here for a 2012 analysis and here for a piece published in January 2017).The problem with revising NAFTA based on the TPP text is Canada and Mexico will be seriously shortchanged on expected benefits from Japan and other members. Our concessions in the TPP negotiations, and they were substantial, were yielded in anticipation of a Big Bang among 12 countries, including Japan. Those benefits, however, are now lost or in limbo and we must also cope with newly perceived U.S. needs. The U.S. goals are one-sided – an approach akin to milking the neighbour's cow through the fence.How should Canada approach the negotiations? Since we are 'modernizing' NAFTA we should begin with the NAFTA text. True there may be some TPP chapters which can be incorporated as they are, but every chapter must be analyzed for relevance to the three NAFTA parties and for balance.There has been considerable public comment on strategy and tactics – some good, some uninformed, and some skewed by hobbyhorse objectives.I like former Canadian Ambassador to the U.S. Derek Burney's approach. He is no stranger to the Canada – U.S trade negotiations trenches. He has it right in this interview with Steve Chase of The Globe and Mail. Some of the important takeaways from the Burney interview are:
  • Be prepared. There will be “no go” lists. The U.S. will have one. Mexico knows how to draw lines in the sand. Canada should too.
  • Any feelings of complacency are premature.
  • S. objectives are a snapshot. The movie version could be like the unravelling of a large pungent onion.
  • President Trump is a “wild card”. A very charitable and ambassadorial comment, Derek. We do owe deference to the office of the POTUS.
  • Push back on extreme demands – for example on dairy – try to unravel the obscene U.S. domestic farm support.
As a former ambassador, Burney knows about working the Hill and State Governors. Current Ambassador David MacNaughton and his first rate team are well-prepared and have collected all the data needed for lobbying and relationship-building.Canada has friends and should use them. When I was waiting in the studio for a recent interview at Bloomberg TV, Nebraska Governor Pete Ricketts, in Canada to attract investment, was wrapping up his interview. I don't recall this type of involvement during the Canada-U.S FTA and NAFTA negotiations.Derek Burney's bottom line is that 'no deal is better than a bad deal'. This is very sound advice. It will apply to more than one NAFTA 2.0 issue. Burney knows about going to the brink and closing borders. The Canada-U.S. beer wars occurred on his Ambassadorial watch.L. Ian MacDonald also provides a helpful overview. However, he cites Meredith Lilly, Simon Reisman Chair at Carleton University, suggesting that Canada should placate Trump with a few quick victories. Academics and think tankers have different perspectives than negotiators and practitioners.Accepting U.S. demands too easily will reduce the value of concessions. A negotiator learns very early that every opponent is like Oliver Twist – with an insatiable appetite for concessions. Negotiators know that giving in too quickly will signal to your opponent that they did not ask for enough and they will discount the value of the concession.Reading the “Art of the Deal” suggests President Trump would not only ask for more, he would see these conciliatory offers as weaknesses. Then we would be meat in the shark tank.I am often asked in interviews what I would offer to the U.S. to prime the pump or help to get something important in return. I duck – I refuse to throw fellow Canadians under the bus. I don't begrudge anyone their right to earn a living. And to get maximum value for any concession I would focus on U.S. demands, how hard the push, the domestic interest, and who is the relevant Congressperson and Senator.Agreeing that the de minimis transaction should be increased from $20 Canadian in Canada and US$50 in Mexico to US$800 may be popular with some consumers, but there are other issues at stake – like domestic retail jobs and sales tax revenue.In the TPP, the U.S. started with a US$200 target and couldn't sell that number. There is probably a value at which it costs more to collect the duty than the revenue. But, if we're going to see it changed, let's be sure we get full value for the concession.I am not concerned that Canada's Chief Negotiator Steve Verheul will be overly generous or make premature concessions. He knows the game from having played it for years against very seasoned European negotiators (on CETA) and at the WTO.Analyzing the U.S. Objectives Published on July 17Trade negotiations are about detail. A NAFTA 2.0 based on the demand lists from each country will be much more detailed than the current version. My team and I have examined the U.S. objectives and other potential issues in detail and, as usual, the devil is in the details.The following includes our views about the United States' NAFTA 2.0 objectives.  As negotiations proceed, some objectives may be dropped, and others may be added. But, this is the current agenda.In the section that follows, the portions in red are the U.S. objectives (including the headings), as extracted from the July 17 paper entitled "Summary of Objectives for the NAFTA Renegotiation". Everything else is our analysis.Trade in Goods:Trade in Goods is addressed in PART TWO of NAFTA. Tariff elimination is essentially done within NAFTA. Re-negotiating NAFTA is not likely to bring any jobs back to the U.S.There may be useful changes in other provisions in Chapter Three of the final text of the TPP.Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.This is a solid traditional boilerplate opening. This document could not begin any other way. Canada has a deficit with the U.S. on trade in goods and services.There are relatively few tariffs remaining in NAFTA trade.[1] Commerce Secretary Wilbur Ross admits that deficits are not always bad, for example, if the deficit is due to energy imports, and the trade is not tainted by unfairness. By this standard, deficit reduction does not apply to either Canada or Mexico.Tariff reduction will not be a central element of the re-negotiation. However, rules of origin which inhibit utilization of preferences and de minimis rules will feature importantly in the negotiations.Industrial GoodsMaintain existing reciprocal duty-free market access for industrial goods and strengthen disciplines to address non-tariff barriers that constrain U.S. exports to NAFTA countries.The “do no harm” advocates have the Administration's ear. Virtually all the stakeholders testifying to USTR/USITC adopted this line other than the 10,221 Sierra Club members who wanted little to do with TPP or NAFTA in any form.The pushback from Congress, business, farmers and ranchers about threats to tear up trade agreements confirms that many U.S. stakeholders understand that a bird in the hand is worth many in the bush. The U.S. Constitution is built on checks and balances. Congressional pushback has derailed the BAT (border adjustment tax) initiative. Hopefully it will safeguard NAFTA.Maintain existing duty-free access to NAFTA country markets for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities.Are Canada's Tariff Preference Level (TPL) exclusions from “yarn forward” rules of origin on the chopping block? The National Council of Textile Organization (NCTO) have asked for elimination of the TPLs[2] for Canada and Mexico. These preferential quotas which permit the use of non-NAFTA yarns and fabrics in apparel exports involve some 80 million square metre equivalents valued at more than US$500 million. This will only benefit low-wage non-NAFTA countries. It will not mean that there will be more textile and apparel jobs in the United States.In 2007, the NCTO proposed the expansion of the third country dumping provisions in NAFTA. That initiative has been reborn in the current U.S. objectives.Promote greater regulatory compatibility with respect to key goods sectors to reduce burdens associated with unnecessary differences in regulation, including through regulatory cooperation where appropriate.Harmonization means do it the American way. How will the negotiators judge whose regulation is unnecessary? The building of lists should begin soon. The U.S. will be quick to identify its targets.Agricultural GoodsMaintain existing reciprocal duty-free market access for agricultural goods.USTR (and USDA) heard from organizations representing many farmers and ranchers. Their clear message was don't rock the boat– “do no harm”. U.S. farmers and ranchers do well from selling to their NAFTA neighbours. NAFTA has been the principal reason for growth in trade over the last 20 years. Canada is generally the largest or second largest market for U.S. exporters, even for dairy.The many beneficiaries of the largely open NAFTA market know a good thing when they have one. American farmers and ranchers are also sensitive to their exposure as prime targets for possible retaliation in trade disputes. From their perspective, “do no harm” is more than sound advice – it is a matter of survival.Stakeholders made useful suggestions for improving NAFTA – like introducing a de minimis provision into the rules of origin for products in Chapters 1 to 24 of the Harmonized Tariff system. This will enable more exports to qualify for NAFTA preferential rates.Expand competitive market opportunities for U.S. agricultural goods in NAFTA countr

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