[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 Scope
The 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 Views
Stakeholder 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 systems
The 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 Considerations
Experience 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 17
Trade 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 Goods
Maintain 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 Goods
Maintain 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 countries, substantially equivalent to the competitive opportunities afforded foreign exports into the U.S. market, by reducing or eliminating remaining tariffs.
Politico describes how much U.S. agriculture lost when President Trump unceremoniously threw it on the trash heap. By scuttling the deal at least for now, POTUS has also denied Canadian farmers and ranchers important access to Japan, access which the E.U. and Australia will enjoy at our expense.
Many U.S. farm groups have been betrayed by their President, a President their votes put in the White House.
Canada and Mexico must avoid giving the U.S. TPP concessions – which were justified by promised access to the Japanese market.
Is the TPP of 11 countries a real option – or is Japan keeping this option open to prevent Washington coming back for all of the TPP concessions (and more) in a bilateral negotiation?
There are relatively few tariffs on agricultural products remaining in Mexico. Both Canada and the USA have WTO Tariff Rate Quotas (TRQs) on agricultural under the WTO. Are the U.S. sugar and cotton regimes on the trading block? Sugar containing products is important to sugar beet growers in southern Alberta. There is no mention of eliminating U.S. domestic support to its farmers in the TPP text. There is no mention in the July 17 Manifesto. Deep pockets USDA support must be addressed and controlled in the quest for open markets. WTO rules are important but they are designed to leave major loopholes for U.S. farmers and ranchers.
Don’t hold your breath for elimination of tariffs on sensitive U.S. products or domestic support. The U.S. continues to hide behind lack of progress in the WTO on domestic support. I am inclined to agree with the U.S. that domestic farm support negotiations in the WTO are unlikely to be productive, particularly when the U.S. refuses to engage.
Phase out or elimination of the many U.S. cheese quotas appears to be a non-starter. Smaller scale U.S. dairy farmers are having difficulties covering their production costs and have been in this situation for years. So much for the family farm. The U.S. Senate Appropriations Committee just recently enriched benefits for dairy farmers and ranchers, and made the risk management programs easier to access. Rep. Mike Conaway (R-Texas), Chairman of the House Agriculture Committee, has signaled his intention to save the U.S. dairy farmer in the 2018 Farm Bill.
Seek to eliminate non-tariff barriers to U.S. agricultural exports including discriminatory barriers, restrictive administration of tariff rate quotas, other unjustified measures that unfairly limit access to markets for U.S. goods, such as cross subsidization, price discrimination, and price undercutting.
There is no substance or merit to U.S. demands and Canada should not permit re-negotiations through bully tactics and false claims.[3]
Does U.S. want to prevent Canadian farmers from reducing milk prices to compete with subsidized imports into Canada? Should Canadian farmers not enjoy the right to do the same things done for and by U.S. farmers under the Milk Marketing Orders?
U.S. dairy farmers have access to class 3 milk and class 4 milk[4] at very low prices – well below USDA’s published cost of production. Below cost farm gate prices are set by government formulae. Class 4 is a surplus removal class which is processed and exported to Canada to be used in cheese making. USDA regulations do not permit this product (so-called diafiltered milk) to be used in cheese making in the U.S.
The U.S. wants to treat Canadian farmers as if they are dumping in their own market. The WTO panel in Canada – Dairy focused on special classes of milk which were available only for processing for export. At that time milk classes available for processing for both domestic and export sale were not challenged because they were neither contingent on exports – nor on import replacement.
Don’t expect a WTO challenge. The U.S. would likely lose – and its own below-cost surplus disposal milk , which goes by design primarily to processing for export, could be exposed to WTO challenge, which the E.U., Japan New Zealand and others would likely join.
U.S. horticultural producers, primarily in Florida, of strawberries, blueberries and tomatoes and asparagus in California are cutting back their plantings because of Mexican competition. Florida farmers have asked that the anti-dumping rules defining industry should be changed to make them easier to use for perishable, seasonal products.
Mexico has its own problems with imports driven by USDA’s deep pockets. In the first decade after NAFTA, Mexico lost over 900,000 farming jobs. During this time subsidized exports of U.S. corn quadrupled, while Mexican corn prices fell 66%.[5]
Mexico recently shifted some of its corn purchases to Brazil. There are good reasons why U.S. farmers and ranchers urge the Administration to “do no harm”.
Provide reasonable adjustment periods for U. S. import sensitive agricultural products, engaging in close consultation with Congress on such products before initiating tariff reduction negotiations.
The United States urges Canada and Mexico to eliminate their TRQs but admits it will take the U.S. a very long time – to eliminate its own restrictions on dairy products, sugar, sugar-containing products and cotton. How long? Proposed U.S. TPP phasing on auto tariffs for Japan was 25 to 30 years. The U.S. could have enjoyed additional access to Canada’s markets for supply managed products under TPP but POTUS scuttled the deal which would have been very popular with and beneficial to many U.S. stakeholders.
Re-packaging the comatose TPP as NAFTA 2.0 may be possible, but this must be on mutually satisfactory terms. Why should Canada and Mexico bail out the Trump Administration from its hasty, ill-considered mistake? Canada’s TPP concessions for dairy and poultry products were offered in a TPP of 12 including Japan. Benefits to Canadian exporters of beef, pork and canola would have paid for Canada’s TPP concessions on supply-managed products. Not only has POTUS trashing of the TPP denied TPP benefits to Canadian farmers and ranchers, the E.U. and Australia will enjoy preferences which will erode current Canadian positions in the Japanese market.
Promote greater regulatory compatibility to reduce burdens associated with unnecessary differences in regulation, including through regulatory cooperation where appropriate.
U.S. concerns about grading of wheat are shared by Canadian wheat farmers. Limiting U.S. wheat to feed grade appears to be an unnecessary irritant. This could be an excellent example of low-hanging fruit.
Testimony of U.S. stakeholders to the USTR/USITC suggests that there may be mutually beneficial improvements to be enjoyed in NAFTA 2.0. Compatibility does not mean that the U.S. will accept Canadian or Mexican regulations, nor that there will be a mutually acceptable middle ground. Do Canadians need hormones in our milk?
If we buy into the envisaged harmonization and cross border integration how many Senators will Canada and Mexico be able to send to Washington? I would hope at least a dozen each.
Sanitary and Phytosanitary Measures (SPS):
As a major exporter of agricultural and food products, it is in Canada’s interest to support strong disciplines on Sanitary and Phytosanitary Measures. Canada was not in the U.S. crosshairs on this issue in the TPP. NAFTA Chapter Seven B was substantially expanded in Chapter 7 of the TPP final text. There are WTO Plus rules on SPS in the TPP. The U.S. seems to want to repackage the TPP text into NAFTA 2.0. The U.S.’s proposed improvements include:
Provide for enforceable SPS obligations that build upon WTO rights and obligations, including with respect to science based measures, good regulatory practice, import checks, equivalence, and regionalization, making clear that each country can set for itself the level of protection it believes to be appropriate to protect food safety, and plant and animal health in a manner consistent with its international obligations.
These issues are addressed in the TPP Chapter 7 text. Article 7.18 provides that SPS disputes would be subject to Chapter 28 dispute settlement. TPP Chapter 28 tries to focus on co-operation and consultation.
Given Congress’ inclination to presume the U.S. has a regulatory exclusion – the international equivalent of “What is good for General Bullmoose is good for America.”[6] The rules must be airtight. Canada should ensure the SPS rules are objective and enforceable. SPS measures should be science based and transparent. Canadian negotiators should ensure that sub-national governments are subject to the same disciplines as federal governments Dispute settlement must be objective, expeditious and binding. TPP Chapter 28 and NAFTA Chapter Twenty are not.
TPP Chapter 28 Dispute Settlement is not binding as it should be – certainly not as binding as the WTO. Chapter 28 leaves too much scope for the larger players (read U.S.) to make monetary payments instead of modifying/eliminating practices and regulations which are inconsistent with the agreement.
Current NAFTA Chapter Twenty dispute settlement, like TPP Chapter 7, is not truly independent and objective. Unlike the WTO, nationals of the parties involved may be members of the dispute settlement panels.
Establish a mechanism to resolve expeditiously unwarranted barriers that block the export of U.S. food and agricultural products.
Fast Track response mechanisms were envisaged in TPP – fast track consultations for perishable goods make sense, particularly for parties which share borders.
TPP Article 28.5.4(a) provides for expedited consultation for perishable goods in 7 days. U.S. stakeholders want a 3 day trigger. This would also benefit Canada assuming we can accept the more rapid response.
Establish new and enforceable rules to ensure that science-based SPS measures are developed and implemented in a transparent, predictable, and non-discriminatory manner.
There were important gains in the SPS segment of the TPP negotiations. Perhaps not as much as Canada would like – because of the very loose SPS actions in Oceania. Canada does not use SPS measures to inhibit trade. Stronger rules, and speedy notification and relief are as important to Canadian farmers and ranchers as they are in other NAFTA parties. The science based objective is designed to avoid defences based on the “precautionary principle”.
Many of the U.S. “asks” are based on trying to establish rules anticipating accession of other parties to NAFTA or for use other FTAs planned to replace the TPP. Canada should adopt an independent approach wherever possible. Canada and Mexico should not accept that the U.S. will always be dictating terms and conditions.
Improve communication, consultation, and cooperation between governments to share information and work together on SPS issues in a transparent manner, including on new technologies.
Article 7.17 – The goal is envisaged in the TPP (Cooperative Technical Consultations). Canada should have no problem accepting it.
Provide for a mechanism for improved dialogue and cooperation to address SPS issues and facilitate trade where appropriate and possible.
This objective is also included in the TPP text. Security of Access and protection from arbitrary non-tariff measures are important to Canada and to Mexico. Canada should be able to support this objective.
Customs, Trade Facilitation, and Rules of Origin:
Transparent, objective customer administration is essential to trade facilitation and maximizing benefits from trade agreements. Most of the U.S. objectives have has already been negotiated in TPP. Washington threw TPP away and is mounting a salvage and rescue operation. Customs facilitation is Chapter Five of NAFTA Customs issues and Trade Facilitation are addressed in Chapter 5 of the TPP final text. Rules of Origin are also addressed in TPP Chapter 5.
In the past, minor changes and modifications to Rules of Origin (ROO) issues have been addressed by consultations among NAFTA parties. The most important ROO focus in the NAFTA 2.0 negotiations will be on automotive products and parts. The current 62.5% content threshold is the highest NAFTA requirement for any product. There are suggestions that the automotive unions in the U.S. want to increase this even further, to say 70% or more. This could have a very chilling, disastrous effect.
The American Iron and Steel Institute (AISI)[7] wants steel in auto parts to be traceable, i.e., it will not count towards NAFTA content unless it originates in a NAFTA party. This will require additional costly product segregation and record-keeping.
The American Line Pipe Producers Association (ALPPA)[8] also wants NAFTA steel to be melted and poured in a NAFTA country. This will mean inflexibility and higher costs for auto parts producers and vehicle assemblers. The overkill in this approach has been compared to ordering a medium double double at Timmy’s and being served a large latte – by government decree.
The melted and poured standard will have an adverse impact on Canadian imports of semi-finished steel from Brazil which were $92 million in 2016. We would expect much of this trade would have been transfers between ArcelorMittal Brazil and ArcelorMittal, Dofasco.
Most Canadian tubular steel manufacturers are not integrated from steelmaking. They rely on imported plate and hot-rolled sheet skelp. In Canada, tubular steel products are made from imports of flat-rolled steel skelp which is excluded from trade remedy actions. The USW does not support this change.[9]
The U.S. imports more than 3 million tonnes of semi-finished steel, mostly slabs and mostly from Brazil.
Customs and Trade Facilitation:
Build on and set high standards for implementation of WTO agreements involving trade facilitation and customs valuation.
Canada played a leading role in the trade facilitation negotiations in the WTO. These improvements have benefitted, particularly, developing countries. Removal of artificial regulatory barriers should benefit all.
TPP Article 5.3 (Advance Rulings) and Article 5.5 (Review and Appeal) address customs valuation. This objective is not a problem with Canada. This does not appear to be a problem related to Canada nor should it be difficult to accept. Canada’s custom valuation regime, which is consistent with the WTO Agreements, is rarely used – but is important for related party transactions. What is not mentioned here, but should be, is that transfer pricing rules for income tax purposes may be at odds with customs valuation and trade remedy rules. The left hand does not know what the right hand is doing. Neither cares. This issue should be addressed.
Increase transparency by ensuring that all customs laws, regulations, and procedures are published on the Internet as well as designating points of contact for questions from traders.
This objective initiative can be met by incorporating TPP (Article 5.11) into NAFTA 2.0. Canada, as a country heavily dependent on trade, will benefit from objective rules and fair and transparent customs procedures. Canada’s own procedures are transparent; there are administrative manuals, publicly available practice memoranda and several levels of appeal and judicial review.
Some U.S. stakeholders are concerned that Canada does not publish its rulings on tariff classification and other Customs matters. CBSA tends to consider these matters to be confidential to importers. Canada should consider the benefits of more transparent dissemination of information. At a minimum, protection of rulings, which could have general application, should not be automatic.
Ensure that, to the greatest extent possible, shipments are released immediately after determining compliance with applicable laws and regulations and provide for new disciplines on timing of release, automation, and use of guarantees.
Having consistent and efficient rules is important for all NAFTA members. This could be low-hanging fruit – and the TPP language may be a good start. Canada has an efficient customs entry and logistics system. Release of goods in this manner is addressed in TPP Article 5.10. Express shipments are addressed in TPP Article 5.7.
After 9-11 customs authorities shifted focus to border security, reducing budgets for customs clearance.
Goods are often released by the Canada Border Services Agency quickly – even pre-cleared before arrival. The paperwork may be subject to post-inspection review, analysis and verification. U.S. Customs will still focus on compliance with laws and regulations. Revenue considerations are not the only justification for effective scrutiny.
Is the U.S. prepared to eliminate its practice of suspension of liquidation – which keeps importers in suspense about their obligations for extended time?
Provide for streamlined and expedited customs treatment for express delivery shipments, including for shipments above any de minimis threshold. Provide for a de minimis shipment value comparable to the U.S. de minimis shipment value of $800.
As noted above, express shipments are addressed in TPP Article 5.7. Article 5.7.1(f) discusses the need to have reasonable de minimis entry level but does not indicate a threshold amount. The U.S. experienced considerable pushback from other TPP members on this issue.
After the TPP Leesburg Round, the U.S. proposal was focussed on imports of US$200 or less. It was not a popular request among other parties in part because of implications for revenue from VAT and the importance of customs duties as a revenue source. U.S. stakeholders have rejected the possibility of raising the duty threshold without increasing the limit for HST.[10]
The leap from US$200 to US$800 is perplexing. The relative impact would be less for the U.S. than for Canada. Only 36% of American’s hold passports. The number for Canada is 60%.[11]
It has been suggested that granting early gifts could placate the Trump Administration. This is wishful thinking. Easy concessions will be devalued, and seen as a sign of weakness. Indeed, the U.S. line is Canadian consumers deserve greater duty free access so we need not expect compensation for making politically attractive change.
Origin of the goods is not an issue for tourist exemptions. It could be for mail/courier shipments. Could Canada, or should Canada, have different de minimis levels for the U.S. and Mexico, and for its other trading partners?
The Trump Administration is very sensitive to the demands of FedEx, UPS,[12] Amazon, et. al. on this question. The current Canadian $20 limit is a personal exemption. The US$800 tourist exemption in Canada used to be available only after a week’s absence. Now it is available for trips longer than 48 hours.
The requested change benefits cross-border shoppers – and have the devastating impact on brick and mortar retailers who are already under attack from the increasing popularity of e-commerce. This is an important issue for Canadian retailers and workers.
At some level, the cost of processing numerous small shipments exceeds the potential revenue. The rapidly growing importance of e-commerce and a population increasingly accustomed to online shopping, CBSA may become hard pressed to deal with the increasing volume.
Scanning baggage has simplified customs clearance of baggage on voyages from several points in the U.S. to final destinations inside Canada. Computerized terminals are replacing personal interviews for returning Canadians at many airports. But Customs’ surveillance is not limited to Aunt Martha’s Christmas present and banned sausages from back home. There are serious security and contraband issues which CBSA cannot ignore.
Canada has accepted U.S. demands to increase its tourist exemptions several times, – harmonizing with U.S. for trips of 48 hours or more. The US$800 “ask” is simply the latest request. This would be popular with general public who may not be concerned about the fate of those who make the traditional (old fashioned?) retail system work.
The Retail Council of Canada is very opposed to increasing both the tourist exemption and express package exemption. Bricks and mortar retailers are experiencing fatal competition from on line competitors. There were 5,077 closures in the U.S. in 2015, followed by 2,056 in 2016. Credit Suisse expects that 8,600 brick and mortar stores will close in 2017.
What is happening to larger stores, the mall anchors? Sears doubts it can survive. JC Penney has closed 138 stores – more to come. Macy’s is closing 68 locations.[13]
Ensure that NAFTA countries administer customs penalties in an impartial and transparent manner, and avoid conflicts of interest in the administration of penalties.
This should be low-hanging fruit for Canada. NAFTA 2.0 should also include very strong anti-corruption requirements. Canada does not need to be forced to fight corruption. But in other countries such requirements can provide cover for much needed reforms. TPP Article 5.8 (Penalties), Clause 4 prohibits setting remuneration of customs officials as a fixed portion or a percentage of penalties or duties assessed or collected. This was not an issue for Canada or Mexico. Is the U.S. positioning to re-sell NAFTA 2.0 to other countries?
Provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and formalities; enhanced harmonization of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of importation.
There was considerable progress on these issues in the TPP negotiations. Including these objectives in NAFTA 2.0 will benefit Canadian manufacturers and exporters. Customs Authorities are even without NAFTA obligations being forced to modernize by the sheer volume and increasing complexities of international trade. Extensive modernization and automation has occurred in Canada. More will follow.
Provide for both administrative and judicial appeal of customs decisions.
This is consistent with CBSA’s current administrative practice. This is a normal function of government and effective operation of the legal system.
Provide for electronic payment of duties, taxes, fees, and charges imposed on or in connection with importation or exportation.
CBSA fully implemented electronic payment, effective June 25, 2017. No country should expect payment for acting in its own interest.
Provide for the use of risk management systems for customs control and post-clearance audit procedures to ensure compliance with customs and related laws.
This issue is addressed in TTP Article 5.9. Neither CBSA nor its NAFTA counterparts can physically inspect every importation. A surprisingly small percentage of imports are actually subject to physical inspection. The use of increasingly sophisticated scanning equipment, highly trained drug, money and food sniffing dogs, and profiling high risk imports and importers are changing the mechanics of Customs clearance. Arguably, it is more efficient than the old system.
Provide for disciplines on the use of customs brokers, preshipment inspection, and the use of reusable containers.
Customs brokers are licensed and regulated in Canada. From time to time they may make mistakes and they must carry liability insurance – but what does the U.S. want? Why are re-usable containers a problem – surely not the 20 ft and 40 ft kind? This seems to be a customs administration practice – a normal function of operation. This issue appears to have been addressed in TPP, Article 5.8.
Establish a committee for Parties to share information and cooperate on trade priorities with a view to resolving inconsistent treatment of commercial goods.
This appears to be a useful initiative to co-operate in making the border thinner. It should not be a vehicle to deal with individual importer problems. There was major progress on this initiative in TPP (see Article 5.2). Co-operation and co-ordination will be helpful if it is open and objective, and not just another tool for making America great (again). I was anticipating a much greater focus on enforcement at the border.
Rules of Origin:
The focus should be moving forward from the existing rules of origin (ROO) in NAFTA, and on making the rules easier to meet.
Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.
This is a signal to the automotive industry that the NAFTA content rules may be about to change. One U.S. commentator suggested that if compliance with ROOs is too difficult the users will simply ignore the NAFTA preference and pay the MFN duty. U.S. MFN duties on automotive products, machinery and equipment are not high, <3%. And substantial volumes of NAFTA trade continue to move over MFN rates. ALPPA requested that NAFTA 2.0 should mandate that NAFTA content require the use of (melted and poured) North American steel.
Automotive industry stakeholders appearing before the USITC/USTR interagency hearings had a different view. They tend to source NAFTA made steel except for specialty types not available locally. My experience has been that the just-in time nature of contracts for auto parts and stampings dictates local sourcing.
USTR was told that Chinese parts used in Mexican and U.S. built autos sold in the U.S. were about 6%. North American content in Mexican built cars is 60% and in Canada is 85%.
U.S. Chief Negotiator John Melle’s inquiries and suggestions to stakeholders that surely the agreement on ROOs done 25 years ago could be improved did not get the answer he expected. The answer – to paraphrase – was the original negotiators got it right – the rules are not broken and trying to fix what is not broken could be very damaging. Mexico is on the right track. They will not go to the wall on rules of origin when duties are minimal; indeed, are often marginal in comparison with exchange rate movements.
Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America.
It is not clear if this simply repeats the previous objective. It is not possible to increase WTO bound MFN rates to make preferential rates more attractive than they already are in NAFTA. Indeed, stakeholders wanted higher de minimis levels and termination of restrictions on drawback on imported inputs. Increasing the NAFTA content levels would be an incentive. Converting tariff shift ROOs (which determine substantial transformation) to percentage content requirements would have a similar effect. However, I expect resistance from U.S. exporters because tighter ROOs would reduce their flexibility and their ability to qualify for NAFTA preferences.
Trade negotiations are about detail. The detail is encountered day to day by stakeholders who value NAFTA and know what needs to be done to make it more efficient.
Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.
Canada and Mexico have little to gain and much to lose by engaging on this initiative. Canada and Mexico benefit from exclusions in Tariff Liberalization allocations for up to 80 million square metre equivalents worth more than US$350 million annually.
Textiles and Apparel Special Rules of Origin are in Chapter 4 of the TPP. Changing textile and apparel rules of origin should concern Canadian apparel manufacturers. Most of their trade in the higher value added products moves under exclusions from the “yarn forward” ROOs. “Yarn Forward” is a derogation from substantial transformation of non-qualifying fabric into a garment. The U.S. rule requires that the qualifying fabric to be cut and sewn into a garment must be woven or knitted from yarn of a party.
Promote cooperation with NAFTA countries to ensure that goods that meet the rules of origin receive NAFTA benefits, prevent duty evasion, and combat customs offences.
Canada has already taken legislative steps to address circumvention and evasion of anti-dumping and countervailing duty orders. Chapter 3 of TPP contains very detailed provisions about claiming and entitlement to preferences. There is little evidence of cheating by Canada. I expect that the U.S. will try to reinforce the rules and procedures to ensure compliance. As a practical matter, without endorsing cheating or fraud, if the compliance becomes too difficult and financially burdensome, parties may decide simply to pay the MFN duty. Manufacturers and exporters are inclined to avoid detailed reporting burdens and the uncertainties of intensified compliance procedures and audits.
Technical Barriers to Trade (TBT):
Technical Barriers to Trade are addressed in PART THREE, Chapter Nine of NAFTA. All NAFTA parties are bound by WTO rules which function well. Canada should not and will not be limited by the TPP Chapter 8 text to defend its rights. There are useful elements of CETA which should address Canadian concerns in this part of the NAFTA 2.0 negotiation.
Require NAFTA countries to apply decisions and recommendations adopted by the WTO TBT Committee that apply, inter alia, to standards, conformity assessment, transparency, and other areas.
Each of these issues is addressed in the TPP text. Requiring NAFTA members to accept WTO decisions (which they may have participated in) seems a bit redundant. Does this mean that the U.S. will accept WTO DSU decisions condemning its practices, instead of running out the clock for six years or more as it has done in recent disputes? Canada (U.S. – Country of Origin Labelling) and Mexico (U.S. – Tuna/Dolphin) have used the WTO to challenge U.S. regulatory practices and win. Technical barriers and labelling are an increasingly important problem. Canada needs to go beyond WTO – and to limit respondents’ ability to buy its way out of non-compliance.
The U.S. has argued for regulatory exclusions in recent cases. In Clove Cigarettes[14] the U.S. declined to remedy its inconsistent practices and provided compensation on auto parts tariffs to Indonesia.
Include strong provisions on transparency and public consultation that require the NAFTA countries to publish drafts of technical regulations and conformity assessment procedures, allow stakeholders in other countries to provide comments on those drafts, and require authorities to address significant issues raised by stakeholders and explain how the final measure achieves the stated objectives.
Canada should be able to accept in NAFTA 2.0, the language of TPP Article 8.7 language. Canada already operates in a consistent manner. Canada regularly publishes in the Canada Gazette a regulatory agenda of prospective regulations inviting comments in an open consultation process. The U.S. follows similar practices with the Federal Register.
Canada was prepared to accept the TPP TBT obligations.
Ensure national treatment of conformity assessment bodies without conditions or limitations and encourage the use of international conformity assessment recognition arrangements to facilitate the acceptance of conformity assessment results.
This goal is addressed in TPP Article 8.6 and CETA Article 4.5. Canada should be able to insist on its own standards which reflect local conditions. For example, specifications for oil and gas pipelines operating in cold or extreme conditions in Canada must be different than for pipelines operating in the mid- to southern USA or Mexico.
Establish an active TBT Chapter Committee that will discuss bilateral and third party specific trade concerns, coordination of regional and multilateral activities, regulatory cooperation, and implementing Good Regulatory Practices.
This goal was addressed in the TPP. See Article 8.11. The issues are also addressed in a number of other articles.
Good Regulatory Practices:
Obtain commitments that can facilitate market access and promote greater compatibility among U.S., Canadian, and Mexican regulations, including by:
- Ensuring transparency and accountability in the development, implementation, and review of regulations, including by publication of proposed regulations;
Good Regulatory Practices are addressed in Chapter 25 of the TPP final text (Regulatory Practices) which could have very important implications for Canada and Mexico. There is strong support for this objective from by the U.S. National Association of Manufacturers (NAM) and the Canadian Manufacturers and Exporters (CME). See here for CME views on Canadian preparations.
Canada has advance notice and a consultation process in its regulatory system. These goals are addressed in Article 25.6 of the TPP final text.
- Providing meaningful opportunities for public comment in the development of regulations;
- Promoting the use of impact assessments and other methods of ensuring regulations are evidence-based and current, as well as avoiding unnecessary redundancies; and
- Applying other good regulatory practices.
Proposed Canadian regulations are published in the Canada Gazette for comment and analysis.
I expect the U.S. will prefer to use its own standards as the basis for harmonization. Centralized standards development in the E.U. (which may be more democratic) has at times created friction among member states.
There have been extensive consultations since the implementation of the Canada-U.S. FTA aimed at achieving regulatory coherence. We might ask do Canadians and Mexicans want regulatory systems designed and approved in Washington? Harmonization which reflects all parties’ needs is desirable. Harmonization will not be easy to negotiate quickly. But the parties should adopt a co-operative approach.
Trade in Services, Including Telecommunications and Financial Services:
Trade in Services:
The U.S. has a significant surplus in trade in services with Canada. The Trade in Services Negotiations (TISA) when revived and concluded will go well beyond Chapter Twelve of NAFTA.
Global Affairs Canada has this to say about TISA:[15]
“Canada holds a significant interest in the TISA negotiations, as it represents an opportunity to address market access issues (e.g. limits on the number of service suppliers or transactions, discrimination against foreign service suppliers, etc.) with many important trading partners. The TISA will promote the use of good regulatory practices, based on objective and transparent criteria, which supports the interests and competitiveness of Canadian service suppliers. Combined, these objectives aim to provide benefits to Canadian consumers by stimulating healthy competition in the Canadian marketplace and by improving businesses opportunities for a wide range of Canadian companies, both small and large.
The TISA is also supportive of Canada’s progressive approach to trade as it has the potential to contribute to greater innovation in the services industry and to support inclusive growth through the benefits that could flow to small-and-medium-sized services suppliers, including those in the environmental services sector. To help promote more inclusive participation, Canada has proposed an innovative provision to ensure that measures relating to licencing and qualification requirements and procedures do not discriminate on the basis of gender.
In the context of the TISA market access negotiations, Canada is pursuing improved commitments from all TISA Parties to address Canadian interests in key sectors, including:
- Professional services (legal, architectural, engineering)
- Environmental services
- Information and communication technology (ICT) services
- Financial services
Additionally, Canada is a strong advocate for increased transparency in trade in services. It is seeking commitments from all Parties to publish proposed laws and regulations in advance and to provide interested parties with an opportunity to comment on such proposed laws and regulations. Canada is also pursuing rules for domestic regulation to ensure transparency and objectivity for licensing and qualification requirements for certain services, while respecting and retaining each Party’s right to regulate in the public interest”
Canada should accept nothing less in NAFTA 2.0.
The scope of U.S. demands is broad. No doubt all parties will have reservations and exclusions related to, for example, health care and certain professional services which must be practiced in a particular (local) working environment.
Secure commitments from NAFTA countries to provide fair and open conditions for services trade, including through:
- Rules that apply to all services sectors, including rules that prohibit:
- Discrimination against foreign services suppliers;
- Restrictions on the number of services suppliers in the market; and
- Requirements that cross-border services suppliers first establish a local presence,
- Specialized sectoral disciplines, including rules to help level the playing field for U.S. delivery services suppliers in the NAFTA countries; and
- Where any exceptions from core disciplines are needed, the negotiation, on a negative list basis, of the narrowest possible exceptions with the least possible impact on U.S. firms.
Chapter 10 of the TPP final text appears to go a long way in this direction. The U.S. efforts to prevent data localization were resisted by a number of countries.
The U.S. here asks for all services sectors to be covered which is the normal formulation of such a goal – then accepts reality and recognizes the potential existence of a negative list.
It is not clear what is missing from TPP Chapter 10. Annex 10B is about Express Delivery Services.
The U.S. could re-dedicate itself to TISA negotiations – this would help its services sector. All of its Services objectives appear to be addressed.
Improve the transparency and predictability of the regulatory procedures in the NAFTA countries.
The U.S. means improve transparency in the other NAFTA countries.
Is this a real issue for Canada and Mexico or is the U.S. simply building a model FTA to impose the highest possible standards on future targets?
Telecommunications:
Improved access of telecommunications services was one of the most important priorities for the U.S. in the TPP negotiations. Should the TPP final text be used as a possible starting point? Is there a good reason not to begin with NAFTA?
It is interesting how the perpetual U.S. complaints about simultaneous substitution of commercials have been abandoned to support NFL (and Bell Media) demands to prevent the direct showing of the U.S. Super Bowl in Canada complete with U.S. commercials. I consider the commercials are a show in themselves.
Promote competitive supply of telecommunications services by facilitating market entry through transparent regulation and an independent regulator.
Secure commitments to provide reasonable network access for telecommunications suppliers through interconnection and access to physical facilities and scarce resources.
Establish provisions protecting telecommunications services suppliers’ choice of technology.
This will likely be a time consuming negotiation for Canada – and for the U.S., in trying to secure concessions from Canada.
Financial Services:
Financial services are addressed in considerable detail Chapter 11 of the TPP final text.
Expand competitive market opportunities for United States financial service suppliers to obtain fairer and more open conditions of financial services trade.
The U.S. financial services system appears to be undergoing a de-regulation under the Trump Administration and not for the better.[16] The industry wants to go back to the unsupervised playtime of the Bush II period. The U.S. will want to start with the TPP results and go beyond them.
Canada has both offensive and defensive interests in the Financial Services negotiations. Its positioning in TISA was closely aligned with the U.S. on many issues. Leaked texts are available on WIKILEAKS. It should be possible to find a middle ground on most U.S. objectives. It is not clear that this can be done as quickly as the U.S. would like.
Improve transparency and predictability in their respective financial services regulatory procedures.
TPP Article 11.13 addresses transparency in Financial Services. I do not see Canada needing to go further than the TPP text. The TPP text should be the outer limits of discussions.
Ensure that the NAFTA countries refrain from imposing measures in the financial services sector that restrict cross-border data flows or that require the use or installation of local computing facilities.
Article 2A of the first Financial Services Annex of the General Agreement on Trade in Services addresses cross border data flows indirectly.
Financial Services companies must be able to operate and this requires cross border data flows. TPP Article 14.13 is relevant. Data localization is a sensitive issue. I suspect compliance can be managed in ways which are minimally intrusive. I doubt Canada will ever be willing to go beyond this to meet U.S. demands.
A paper produced by USTR here outlines U.S. concerns about cross border data flows. The U.S. wants to eliminate any GATS override of more liberal disciplines on new services like e‑commerce.
Canada should consider retail irritants which discriminate against the use of Canadian Financial services. On Financial Services, Canada should perhaps insist that the ability to use credit cards not be limited to U.S. issued cards with a ZIP code in the billing address.
Temporary Entry to Business Persons
This issue is not mentioned in the Administration’s July 17 objectives. This is not surprising because improvements in access will be a priority for Canada and Mexico. Both countries have said as much.
The lists of preferences benefitting from special and speedy access is woefully out of date:
- for service providers in the oil patch;
- for professionals in computer and high tech industries;
- for evolving service industries.
So the U.S. has not expressed any interest in expanding and updating the list of professionals. Is this a negotiating ploy – or is it underlining the importance of President Trump’s Hire American promises?
Because this is not an admitted U.S. objective, it is not an issue on their “ask” list. Clearly, Canada and Mexico must raise the issue, becoming demandeurs, which will raise the price of accommodation. Very clever, but no one should be surprised.
The Interagency hearings were told that U.S. stakeholders want improvements in access and updated lists.[17]
Canada and Mexico will be aware of U.S. stakeholder and industry demands. Canadian stakeholders seeking improved access for business persons and professionals have counterpart associations and competitors with similar interests. Canada will use this knowledge to achieve balance in this segment of the negotiations.
Negotiations are about facts and about detail. Canada is doing its homework and due diligence while solidifying support in the U.S. To suggest that Canada is focusing a “charm offensive” is simplistic, wrong and misleading. Canada must discover where its support is.
The combination of knowledge, experience and mastery of the facts will help Canada in dealing with a potentially sensitive political issue.
If President Trump insists that inflexible “Hire American” policies should be applied in NAFTA 2.0, any reasonable and realistic agreement will be out of reach.
Digital Trade in Goods and Services and Cross-Border Data Flows:
Electronic commerce is new issue to NAFTA which is addressed in the very detailed (18 articles) Chapter 14 of the TPP final text. While cross border data flows and data localization are not a concern, the U.S. continues to press to eliminate any ability to impose localization requirements.
The U.S. wants to maximize the benefits of NAFTA for its services providers and e-commerce. The USTR non-tariff barrier inventory issued April 1, 2017, notes:
“Data Localization
The Canadian federal government is consolidating information and communication technology (ICT) services across 63 Canadian federal government email systems under a single platform. The tender for this project cited national security as a reason for requiring the contracted company to keep data in Canada. This requirement effectively precludes U.S.-based “cloud” computing suppliers from participating in the procurement process, unless they replicate data storage and processing facilities in Canada. The public sector represents approximately one third of the Canadian economy and is a major consumer of U.S. services, particularly in the information and communication technology sector. The requirement, therefore, is likely to have significant impact on U.S. exports of a wide array of products and services.
British Columbia and Nova Scotia each have laws that mandate that personal information in the custody of a public body must be stored and accessed only in Canada unless one of a few limited exceptions applies. These laws prevent public bodies, such as primary and secondary schools, universities, hospitals, government-owned utilities, and public agencies, from using U.S. services when there is a possibility that personal information would be stored in or accessed from the United States.”
Secure commitments not to impose customs duties on digital products (e.g., software, music, video, e-books).
Canada and Mexico have already agreed not to impose customs duties on electronic transmissions including content transmitted between a person of one party and a person of another party. The U.S. wants to build a model FTA text which can be imposed on other candidates. Should Canada and Mexico help? Is the U.S. prepared to pay for the co-operation?
Ensure non-discriminatory treatment of digital products transmitted electronically and guarantee that these products will not face government-sanctioned discrimination based on the nationality or territory in which the product is produced.
TPP Article 14.4 is about National Treatment of digital products (other than broadcasting). If it is acceptable to Canada and Mexico in the context of NAFTA, this text should suffice. Are streaming services broadcasting? Is it likely that Canadian regulations may include these activities?
Why do Canadians need to use a VPN to access the Netflix U.S. catalogue?
Why can Sirius deny users in Canada access to special limited time promotions? Is it discrimination or are we being protected by cultural mavens from the 24-hour Elvis channel or round the clock Willie’s Roadhouse?
Shouldn’t free trade mean all of the content is available to all NAFTA residents at similar prices? Dumping of goods can be disciplined – shouldn’t reverse dumping of services (gouging of Canadians) also be disciplined? Canadians would benefit if there was a clear ban on any discriminatory treatment of Canadians for access to our market.
Establish rules to ensure that NAFTA countries do not impose measures that restrict cross- border data flows and do not require the use or installation of local computing facilities.
There were extensive negotiations on this issue in the TPP Please see Article 14.13. The final TPP text did not go as far as this U.S. objective envisages. The U.S. was pushed back considerably from its initial demands. The parties at the table in NAFTA 2.0 are different than they were in the TPP. TPP progress and problems will be important in assessing of the way forward in NAFTA 2.0.
Establish rules to prevent governments from mandating the disclosure of computer source code.
U.S. stakeholders are strongly opposed to giving up their source codes. Blackberry and others have been forced by commercial realities to provide source codes to foreign Governments. TPP Article 14.14 contains rules about source code which would appear to address this “ask”.
This is a serious concern. USTR has initiated a Section 301 investigation of China’s forced technology transfer policies. Common cause may lead to tight obligations which can be used in future expansion of NAFTA or in other FTAs.
Investment:
NAFTA Chapter Eleven, which includes Investor State Dispute Settlement (ISDS), needs an overhaul.
Investment is addressed in Chapter 9 of the TPP final text. It was one of the most controversial chapters of the TPP.
Rather than building off TPP Chapter 9, Canada should insist on incorporating important changes included in Chapter 8 of the Canada-E.U. Comprehensive Economic and Trade Agreement (CETA).
Establish rules that reduce or eliminate barriers to U.S. investment in all sectors in the NAFTA countries.
Treatment of U.S. investors in Canada has steadily improved since CUSTA entered into force.
Total elimination of carve outs and restrictions is not likely to occur in any NAFTA country. While exemption thresholds may be increased, Investment Canada is not going anywhere. The U.S. has its own exclusions, restrictions and reviews of foreign investment. There are also limits in CETA Article 4.5.
Secure for U.S. investors in the NAFTA countries important rights consistent with U.S. legal principles and practice, while ensuring that NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors.
There was considerable pushback from the other 11 parties in the TPP negotiations on this issue. The U.S. is likely to want more than the TPP compliance text. Should foreign investors get better than National Treatment? Many Canadians would like to ensure that ISDS does not provide foreigners with greater rights than are available to Canadians.
There is pressure, usually from the Left, and civil society urging elimination of Chapter Eleven. Business groups strongly support its retention and want no change inability to sue for damages.
This paper is not about the internal debate about ISDS – it is in NAFTA – and CETA Canadians need to focus on how to make the system work better.
There have been suggestions from the U.S. that the model BIT (Bilateral Investment Treaty) should replace NAFTA Chapter Eleven ISDS. The BIT is a made in American agreement. Canada has nearly 90 Foreign Investment Protection Agreements (FIPAs). NAFTA provides essentially the same rights and obligations.
I believe that from Canada’s perspective, negotiations on ISDS should begin with the existing Chapter Eleven, incorporating reforms included in CETA Chapter 8.
Intellectual Property:
The trade related aspects Intellectual Property rights are addressed in NAFTA Chapter Seventeen. The NAFTA text is updated by Chapter 18 of the TPP final text. TPP Chapter 18 is a “monster” chapter comprised of 83 articles. Notwithstanding the detail, the IP chapter involved many compromises by the U.S. from its original TPP positions.
Regulation and enhancements of protection of IP rights were a major U.S. objective in the TPP. The aggressive U.S. initiatives were vigorously resisted by many other participants. U.S. demands on data protection on Biologic pharmaceuticals was one of the last issues settled – by capitulation on the part of the U.S. without Congressional agreement. It was settled in Atlanta – but the compromise was never embraced by Congress.
U.S. negotiators at the final session in Atlanta needed to close in order not to lose an opportunity to ratify the TPP on President Obama’s watch. As time ran out, other parties, aware of U.S. deadlines, dug in and resisted a deal on U.S. terms. Legacy concerns won out over Congressional priorities – and Congress was not pleased.
Congressional approval of the TPP did not happen in part because Senator Orrin Hatch (R ‑ Utah) did not get what he wanted on biologics. Given his position as Chair of the Senate Finance Committee, Senator Hatch’s demands will be revived and prioritized. Canada was not a problem at Atlanta based on the emerging consensus. But we fall short of the 12 years sought by Senator Hatch.
Canada would not consider 12 years during the TPP. How can Canada accept the Hatch position now? There are clear and burdensome implications for health care and Pharmacare. It will not happen before 2018 and why should Senator Hatch clear the track for a deal which ignores what he wants?
Promote adequate and effective protection of intellectual property rights, including through the following:
- Ensure accelerated and full implementation of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), particularly with respect to meeting enforcement obligations under TRIPS.
Arguably Canada is compliant with its WTO obligations and with what the TPP text envisages but the U.S. continues to press for more than made it into the Atlanta text.
- Ensure provisions governing intellectual property rights reflect a standard of protection similar to that found in U.S. law.
Canada has a right to maintain its own system of rights, penalties and enforcement consistent with its WTO and NAFTA rights and obligations.
The U.S. concern on the issue relating to Canada in the 2017 Non-Tariff Measures Inventory include:
- patent utility standards;
- process and transparency of the Geographic Indicators system (including CETA commitments).
Neither of these objectives is likely to be attainable in NAFTA 2.0. Former Canadian Ambassador to the U.S., Derek Burney, advises Canada to develop a no-go list and to table it early. These issues should be on that list.
- Provide strong protection and enforcement for new and emerging technologies and new methods of transmitting and distributing products embodying intellectual property, including in a manner that facilitates legitimate digital trade.
The U.S. interests are important owners and exporters of IP. Users and licensees may have a different view of protecting IP rights. It is difficult to apply obligations to as yet unconceived industries and products. Perhaps the answer is to establish provisions for expanding scope on an expedited basis.
Regulating electronically transmitted goods is difficult – this makes it difficult to tax electronic goods. But it also makes these products vulnerable to borrowing or sharing.
At the same time, it is important to recognize that while exhaustion of rights[18] does limit protection, theft of IP is theft.
- Prevent or eliminate discrimination with respect to matters affecting the availability, acquisition, scope, maintenance, use, and enforcement of intellectual property rights.
It is not clear whether this means MFN discrimination, or National Treatment or between NAFTA members? As a general principle, subject to cultural exemptions, Canada should not be defending discrimination.
- Ensure standards of protection and enforcement that keep pace with technological developments, and in particular ensure that rightholders have the legal and technological means to control the use of their works through the Internet and other global communication media, and to prevent the unauthorized use of their works.
This is addressed in TPP Article 18. Canada has not adopted the “notice and takedown” requirements favoured by the U.S.
Does this U.S. objective mean establish mechanisms for the rightholder to use, such as digital locks or actually initiate protective measures like seizing fake Louis Vuitton purses at Customs? USTR noted in its latest non-tariff barriers inventory that European luxury goods producers have included new and more effective disciplines in CETA Article 20.
- Provide strong standards enforcement of intellectual property rights, including by requiring accessible, expeditious, and effective civil, administrative, and criminal enforcement mechanisms.
U.S. demands for criminalization of breaches of IP rights were a difficult issue in the TPP negotiations. Canada is less inclined to fill jails than our Southern neighbours. In the U.S. some states treat breaches of direct to consumers wine shipment rules[19] as felonies equivalent to stalking or aggravated assault. While this may be continuation of enforcement of revenue rules against Moonshiners, it does not fit the e-commerce distribution model. Different strokes and attitudes for different folks.
The provisions of TPP Article 18.77 – Criminal Procedures and Penalties are extensive. They are draconian and appear to attempt to establish a parallel between counterfeit, labels for apparel and accessories and counterfeit currency.
USTR reported in its 2017 non-tariff measures inventory that Canada had introduced some legislation to enhance enforcement – but still fell short on intercepting and seizing in-transit counterfeit merchandise:
“On IPR enforcement, Canada’s Parliament passed the Combating Counterfeit Products Act on December 9, 2014, but the United States is disappointed that Canada did not amend this legislation to allow for inspection of in-transit counterfeit trademark goods and pirated copyright goods entering Canada destined for the United States.”[20]
Does this mean that Canada will not respond to tips from U.S. interests or officials – or that it does not inspect in transit shipments to U.S. standards?
- Prevent or eliminate government involvement in the violation of intellectual property rights, including cybertheft and piracy.
Does the U.S. need to address this objective with Canada or Mexico in a trade Agreement? The U.S. is playing to its stakeholders in the grandstand. I have not been able to locate any evidence of GOC or GOM involvement in such activities.
Do Canada and Mexico need to be concerned that they might need this protection against the NAFTA member in the middle? That is a serious stretch.
More likely this is simply another extra-NAFTA provision which the U.S. is trying to build into NAFTA 2.0 as a model.
Given the litigious nature of U.S. society, Canada should be wary of creating unnecessary obligations, no matter how remote the risk of challenge. These risks have been increased by the new realities of post-2016 Presidential election America.
Secure fair, equitable, and nondiscriminatory market access opportunities for United States persons that rely upon intellectual property protection.
Owners of IP and users have different perspectives of what is fair and equitable. South American TPP participants resisted these IP demands.
Respect the Declaration on the TRIPS Agreement and Public Health, adopted by the World Trade Organization at the Fourth Ministerial Conference at Doha, Qatar on November 14, 2001, and to ensure that trade agreements foster innovation and promote access to medicines.
We must assume WTO members live up to their WTO obligations and undertakings. Canada is a party to the Doha Declaration. There is no evidence Canada is not respecting its WTO obligations. Does the last clause suggest taking on obligations to enhance the ability of U.S. Big Pharma to exploit its IP rights beyond what is provided in the various agreements covering trade among the parties? Is this related to data protection on biologics? To Canadian standards on utility? This seems like motherhood and apple pie – but it may not be low-hanging fruit.
Prevent the undermining of market access for U.S. products through the improper use of a country’s system for protecting or recognizing geographical indications, including failing to ensure transparency and procedural fairness and protecting generic terms.
U.S. stakeholders object to Canada’s accepting E.U. Geographic Indicators and prohibiting their use in Canada by non-qualifying product. This is aimed at undermining the CETA agreements on protection of E.U. Geographic against third parties. The U.S. concerns cited by the U.S. Dairy Export Council (USDEC) and the National Milk Producers Federation (NMPF) include Gorgonzola, Parmesan and Asiago.[21] All are geographic designations. The CETA agreement on GIs is WTO consistent unless and until it is challenged and condemned at the WTO. If U.S. badgering on GIs were to be accepted, Canada would have problems with a large and growing trading partner because of the unwarranted demands of its largest trading partner.
The possibility this objective will be reached is quite remote.
Transparency:
U.S. goals include:
- Commit each Party to provide levels of transparency, participation, and accountability in the development of regulations and other government decisions that are comparable to those under U.S. law with respect to federal statutes and regulations. In particular, seek commitments:
- To promptly publish laws, regulations, administrative rulings of general application, and other procedures that affect trade and investment;
- To provide adequate opportunities for stakeholder comment on measures before they are adopted and finalized; and
- To provide a sufficient period of time between final publication of measures and their entry into force.
Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for United States products.
The U.S. asks Canada and Mexico to avoid discrimination against the U.S. and in the same breath seeks preferential treatment. The last point requires clarification and analysis to determine what is likely to emerge in the negotiations.
Canadian stakeholders also have export interests which will benefit from increasing transparency.
Transparency is addressed extensively in Chapter 26 of the TPP final text. There is also an Annex on Transparency and Procedural Fairness for Pharmaceutical Products and Medical Devices.
Canada’s regulatory system and approval process is open and transparent including publication of proposed regulations in the Canada Gazette for transparent review and consideration of public comments.
State-Owned and Controlled Enterprises:
This is a traditional “hobby-horse” issue for the U.S. which has few SOEs engaged in commercial activities.
- Define SOEs on the basis of government ownership or government control through ownership interests, including situations of control through minority shareholding.
- Retain the ability to support SOEs engaged in providing domestic public services.
- Ensure that SOEs accord non-discriminatory treatment with respect to purchase and sale of goods and services.
- Ensure that SOEs act in accordance with commercial considerations with respect to such purchases and sales.
- Ensure that strong subsidy disciplines apply to SOEs, beyond the disciplines set out in the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).
- Require that SOEs not cause harm to another Party through provision of subsidies.
- Require that SOEs not cause harm to the domestic industry of another Party via subsidized SOE investment.
- Ensure impartial regulation of SOEs, designated monopolies, and private companies.
- Provide jurisdiction to courts over the commercial activities of foreign SOEs (i.e., limited sovereign immunity).
- Allow Parties to request information related to the level of government ownership and control of a given enterprise, and the extent of government
- Develop fact-finding mechanism based on Annex 5 of the WTO SCM Agreement to help overcome the evidentiary problems associated with litigation on SOEs.
The U.S. goals are extensive, but repetitive.
Negotiations on this subject during the TPP were difficult. Several parties pushed back on what they considered to be extreme U.S. demands, particularly Singapore with respect to its Sovereign Wealth Fund Temasek. The TPP final text reflects considerable degree of U.S. compromise, which I expect it may try to claw back to recover in the NAFTA 2.0 negotiations.
SOE issues are addressed in Chapter 17 of the TPP final text.
There are detailed rules in the WTO agreement (Article XXVII GATT 1994), repeated in Chapter 15 of NAFTA. Chapter Fifteen is minimalist and permissive.
There are very few SOEs at the U.S. Federal level which would be affected by the proposed rules. While the U.S. was very active in the TPP negotiations, it was not prepared to make commitments on its own SOEs at the sub-national level. The concern was the State-Owned Bank of North Dakota.
The TPP text on SOEs does not mention sub-national governments. Although excluded in the text, there are provisions in Annex 17-C that envisages revisiting the chapter’s application to sub-national SOEs, within five years of the date of entry into force.
U.S. objectives for SOEs should concern provincial liquor boards or provincial marketing boards – if not now, say, in 5 years.
The proposed disciplines for subsidies to SOEs go beyond WTO obligations unless the subsidies:
- are designed to replace or inhibit imports; or
- stimulate exports.
Because subsidized imports which cause material injury may be disciplined under Part V of the WTO Subsidies and Countervailing Measures Agreement, the ban on such subsidies appears to be redundant.
The potential impact on Canada would be much different if the U.S. has included SOEs of sub-national governments in this chapter.
WTO rules do not prevent or condemn subsidies which have not caused or threatened material injury to domestic production in an export market. The U.S. demands are over-reaching. It confuses what may be a subsidy with reasons for disciplining a practice.
Should an SOE be unprofitable, arguably a subsidy occurs, and exports from the SOE may be disciplined if found to be injurious in a CVD investigation.
The U.S. appears to have two objectives: a) it is trying to prevent its NAFTA trading partners from owning commercial enterprises. That this goes well beyond Canada, or Mexico’s obligations under the WTO will not deter the U.S. from pressing the demand; and b) trying to establish a precedent for possible FTAs with China and Vietnam.
Competition Policy:
- Maintain rules that prohibit anticompetitive business conduct, as well as fraudulent and deceptive commercial activities that harm consumers.
- Establish or affirm basic rules for procedural fairness on competition law enforcement.
- Promote cooperation on competition enforcement-related matters.
Competition Policy is addressed in roughly these terms in Article 1501 of NAFTA. The articles in Chapter 16 of the TPP final text are more detailed and extensive.
Canada’s competition policy regime meets or exceeds the U.S. objectives for the Competition Policy chapter. Discussions on competition policy will largely be mutually beneficial and could perhaps be low-hanging fruit.
Labor:
U.S. and international unions are determined to reduce the wage gap between Mexico and the U.S. and to impose U.S. standards and labour practices on Mexico. Mexican unions support this position. The USW position is “The Canadian government should reject U.S. efforts to model NAFTA labour standards on the TPP”.[22]
Bring the labor provisions into the core of the Agreement rather than in a side
Require NAFTA countries to adopt and maintain in their laws and practices the internationally recognized core labor standards as recognized in the ILO Declaration, including:
- Freedom of association and the effective recognition of the right to collective bargaining;
- Elimination of all forms of forced or compulsory labor;
- Effective abolition of child labor and a prohibition on the worst forms of child labor; and
- Elimination of discrimination in respect of employment and occupation.
Require NAFTA countries to have laws governing acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.
Establish rules that will ensure that NAFTA countries do not waive or derogate from their labor laws implementing internationally recognized core labor standards in a manner affecting trade or investment between the parties.
Establish rules that will ensure that NAFTA countries do not fail to effectively enforce their labor laws implementing internationally recognized core labor standards and acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health laws through a sustained or recurring course of action in a matter affecting trade or investment between the parties.
Require that NAFTA countries take initiatives to prohibit trade in goods produced by forced labor, regardless of whether the source country is a NAFTA country.
Provide access to fair, equitable, and transparent administrative and judicial proceedings.
Ensure that these labor obligations are subject to the same dispute settlement mechanism that applies to other enforceable obligations of the Agreement.
Establish a means for stakeholder participation, including through public advisory committees, as well as a process for the public to raise concerns directly with NAFTA governments if they believe a NAFTA country is not meeting its labor commitments.
Establish or maintain a senior-level Labor Committee, which will meet regularly to oversee implementation of labor commitments, and include a mechanism for cooperation and coordination on labor issues, including opportunities for stakeholder input in identifying areas of cooperation.
Labour issues were addressed in a side letter in NAFTA. U.S. pressures sought to bring Labour issues into the TPP as an operative provision in Chapter Nineteen of the TPP final text. The TPP addresses labour issues in a manner consistent with the U.S. objectives.
The USW position on Labour is that Canadian negotiators should “prioritize enforceable and binding labour rights and standards”.[23]Union targeting of Mexican practices raises serious allegations. Rep. Sander Levin (D – MI) has targeted alleged “sweetheart” agreements governing employees of Mexican automotive plants.
Moving Labour from a side letter to the body of the agreement could be time consuming.
Canada prohibits imports of the products of prison labour. The U.S. also bans imports produced by forced labour. It is rather surprising that there is no specific provision in the Canadian Customs Tariff banning imports of the products of child labour. Signing ILO Conventions is important. Purchasing banned products from countries who either do not sign or do not enforce the conventions should not be permitted. There would be popular support for banning imports of the products of forced labour and child labour.
This chapter as written in TPP places no limitations or obligations on U.S. 28 right to work states[24] which attract manufacturing investment through laws which do not encourage unionization. TPP Chapter 19 covers all of the U.S. goals on Labour. I would expect that because of Congressional and union pressures Mexico will be targeted in a much more focussed way than Canada.
U.S. agricultural processors[25] using undocumented foreign workers who do not benefit from union wages or the type of working conditions the U.S. seeks to discipline provide advantages over their Canadian competitors. Turning a blind eye to these abuses is a de facto subsidy to U.S. farmers, ranchers and processors. The Trump Administration has promised better controls over illegal immigration and undocumented workers which do not appear to have materialized.
My view is that without illegal immigrant workers and very inexpensive irrigation water,[26] much of U.S. agriculture would be uncompetitive. These benefits from absence of effective administration skew competitiveness in North American agriculture and agribusiness seriously in favour of the U.S. I do not expect any progress on this issue, nor on U.S. domestic farm subsidies.
Environment:
The U.S. NAFTA 2.0 objectives on the Environment include:
Bring the environment provisions into the core of the Agreement rather than in a side agreement.
Establish strong and enforceable environment obligations that are subject to the same dispute settlement mechanism that applies to other enforceable obligation of the Agreement.
Establish rules that will ensure that NAFTA countries do not to waive or derogate from the protections afforded in their environmental laws for the purpose of encouraging trade or investment.
Establish rules that will ensure that NAFTA countries do not fail to effectively enforce their environment laws through a sustained or recurring course of action in a matter affecting trade or investment between the parties.
Require NAFTA countries to adopt and maintain measures implementing their obligations under select Multilateral Environment Agreements (MEAs) to which the NAFTA countries are full parties, including the Convention on International Trade in Endangered Species of Wild Fauna and Flora.
Establish a means for stakeholder participation, including commitments for public advisory committees, and a process for the public to raise concerns directly with its government if they believe it is not meeting its environment commitments.
Require NAFTA countries to ensure access to fair, equitable and transparent administrative and judicial proceedings for enforcing their environmental laws, and provide appropriate sanctions or remedies for violations of their environmental laws.
Provide for a framework for conducting, reviewing, and evaluating cooperative activities that support implementation of the environment commitments, and for public participation in these activities.
Establish or maintain a senior-level Environment Committee, which will meet regularly to oversee implementation of environment commitments, with opportunities for public participation in the process.
Combat illegal fishing, unreported, and unregulated (IUU) including by implementing port state measures and supporting increased monitoring and surveillance.
Establish rules to prohibit harmful fisheries subsidies, such as those that contribute to overfishing and IUU fishing, and pursue transparency in fisheries subsidies programs.
Promote sustainable fisheries management and long-term conservation of marine species, including sharks, sea turtles, seabirds and marine mammals.
Protect and conserve flora and fauna and ecosystems, including through action by countries to combat wildlife trafficking, including timber trafficking.
The NAFTA included a toothless side letter on the Environment. It was an afterthought widely believed to have been aimed at Mexico. Environmental issues are addressed in the 23 articles of Chapter 20 of the TPP final text.
Minister Chrystia Freeland considers that there should be an important focus on Environmental issues in NAFTA 2.0. Moving the Environment from a NAFTA side letter to the text of the agreement, as was contemplated in the TPP negotiations, is an improvement. But the obligations contemplated by the U.S. are still underwhelming. It is perplexing that neither the TPP Environment Chapter nor the July 17 objectives mention climate change.
The real focus of U.S. demand is to ensure that Mexico carries the same environmental regulatory burden as U.S. manufacturers, farmers and ranchers. Accepting the limited U.S. objectives on the Environment will not create difficulties for Canada. However, the absence of disciplines relating to climate change, CO2 emissions controls in the Environment Chapter does pose problems for Canada.
The U.S. decision to walk away from the Paris Accord and its failure to tax carbon emissions[27] creates a subsidy which advantages U.S. industry. Why should Canada not seek the right to impose countervailing duties or border taxes to offset arbitrary and discriminatory U.S. advantages? The U.S. Administration will expect Canada, and Mexico, to ignore the de facto subsidies created by the absence of regulation.
The proposed TPP article on MEAs (Article 20.4) does not mention the Paris Climate Change Accord. The discriminatory impact of U.S. refusal to recognize and address this internationally agreed threat to the global environment is ignored. Canada should insist that the Paris Accord be included in the MEA list.
Anti-Corruption:
The U.S. July 17 Anti-Corruption goals include:
Secure provisions committing each Party to criminalize government corruption, to take steps to discourage corruption, and to provide adequate penalties and enforcement tools in the event of prosecution of persons suspected of engaging in corrupt activities. In particular by:
- Requiring the adoption or maintenance of requirements for companies to maintain accurate books and records, which facilitate the detection and tracing of corrupt payments;
- Encouraging the establishment codes of conduct to encourage high ethical standards among public officials; and
- Requiring parties to disallow the deduction of corrupt payments for income tax purposes.
Anti-corruption can involve bribery or otherwise corrupting government officials, and corrupt commercial practices designed to influence commercial decisions.
Don’t spend too much time policing our collective halo. Jack Mintz discusses how to discipline corporations without crippling them.
Bribery and corruption is widespread. It is difficult to succeed in some markets without paying off decision makers.
The U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Officials Act provide disciplines for broadly defined efforts to corrupt – including agreements to offer bribes and indirect inducements.
We have encountered situations where Canadian companies lost contracts to foreign competitors who did not have to cope with the same legal constraints and disciplines.
Mexico has introduced anti-corruption legislation. Strong NAFTA prohibition will help Mexico to fund proper enforcement. Often the disciplines of international agreements are necessary to effect reform.
This Chapter, too, could be low-hanging fruit – and a useful addition to an FTA template.
Trade Remedies:
Trade Remedies, Anti-dumping and Countervailing Duties are important in NAFTA relations. The frequency of investigations has declined sharply since the entry into use of the Canada-U.S. Free Trade Agreement, but there are still important disputes. Chapter Nineteen could be crucial to Canada in:
- The latest round of Softwood Lumber investigations (Lumber V);
- Boeing challenge of potential imports of Bombardier’s e-Series passenger aircraft.
Mexico has just initiated a wide-ranging investigation of Styrene Butadiene Rubber from a number of countries, principally the USA.
Preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws.
The standard provision on trade remedies in FTAs is that nothing in the agreement affects a party’s right to use them.
In NAFTA Article 1902, Retention of Domestic Antidumping Law and Countervailing Duty Law, the parties agreed that:
- Each Party reserves the right to apply its antidumping law and countervailing duty law to goods imported from the territory of any other Party. Antidumping law and countervailing duty law include, as appropriate for each Party, relevant statutes, legislative history, regulations, administrative practice and judicial precedents.
Indeed, in NAFTA this is essentially all that is said about trade remedies – other than on judicial review in the Chapter Nineteen context.
The NAFTA steel industries are aligned in their efforts to deal with global excess capacity – and to use trade remedies to create a Fortress North America for steel. Trade remedies and enforcement are becoming an increasingly important tool for dealing with import competition. U.S. and Canadian steel companies have foregone cross border dumping complaints for principal products for more than a decade.
Eliminate the NAFTA global safeguard exclusion so that it does not restrict the ability of the United States to apply measures in future investigations.
Until recently, there had been very few global safeguard actions. The exclusion in NAFTA was carried over from the Canada-U.S. FTA. This exclusion only applies if criteria set out in NAFTA Article 802 are met, i.e., that imports from the party are significant and contribute importantly to the serious injury. This exclusion at times got out ahead of the WTO rules and jurisprudence on safeguards. In the Appellate Body safeguards review of steel safeguards[28] it was determined that the U.S. steel safeguard was non-compliant because it excluded imports from countries with the U.S. had free trade agreements (Canada, Mexico, Israel and Jordan), but failed to exclude those imports when it made its Causation determination.
The NAFTA exclusion is like insurance on market access. Canada and Mexico should not engage in negotiations on change. This is an insurance policy that must not be surrendered.
Recently, the U.S. has been examining the use of National Security (Section 232 of the Trade Act of 1974) in order to address situations of global oversupply. Arguably back on NAFTA Section 232 cannot be to impose restrictions on Canadian exports to the USA for National Security Reasons.
NAFTA Article 2102 strictly limits the Scope for applying National Security measures to:
“Subject to Articles 607 (Energy – National Security Measures) and 1018 (Government Procurement Exceptions), nothing in this Agreement shall be construed:
(a) to require any Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests;
(b) to prevent any Party from taking any actions that it considers necessary for the protection of its essential security interests
(i) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods, materials, services and technology undertaken directly or indirectly for the purpose of supplying a military or other security establishment,
(ii) taken in time of war or other emergency in international relations, or
(iii) relating to the implementation of national policies or international agreements respecting the non-proliferation of nuclear weapons or other nuclear explosive devices; or
(c) to prevent any Party from taking action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”
Canada and Mexico should seek a similar exemption from the Application of Section 232 as well as confirmation that National Security Measures may only be involved in the circumstances envisaged in the situations foreseen in NAFTA Article 2102.
Eliminate the Chapter Nineteen dispute settlement mechanism.
This could be a deal breaker.
PM Trudeau has stated unequivocally that there must be some form of dispute settlement in the NAFTA. There will be a general dispute settlement chapter – but it would not apply to the application trade remedies which would be addressed by U.S., Canadian and Mexican courts.
NAFTA has:
- Investor state dispute settlement in Chapter Eleven; and
- General Dispute Settlement relating to most issues covered by NAFTA in Chapter Twenty.
Chapter Nineteen addresses the application of the trade remedy (anti-dumping and countervailing duty) laws of the parties.
Article 1904 establishes a mechanism to provide an alternative to judicial review by domestic courts of final determinations in anti-dumping duty cases; with review by independent binational panels.
It is described as dispute settlement, broadly speaking this is correct – in fact, Article 1904 is about judicial review of the application of domestic law.
Securing better insulation from U.S. trade remedy laws was a “walk away” issue for Simon Reisman in the Canada-U.S. FTA negotiations. Securing better insulation from U.S. trade remedy laws was a “walk away” issue for Simon Reisman in the Canada-U.S. FTA negotiations. In fact, Mr. Reisman did not walk away over a demand for Chapter Nineteen dispute settlement. Canada’s big ask in CUSTA was for exclusion from U.S. trade remedy law – both anti-dumping and countervailing duty investigations. This was not possible, particularly on subsidies. Chapter Nineteen was the compromise which brought Canada back to the table and closed the deal.
Chapter Nineteen provides for judicial review of the application of domestic law.
The Judges of the U.S. Court of International Trade and Canada’s Federal Court of Appeal were replaced by practitioners and academics familiar with the issues. Article 1904 review was more interventionist than judicial review in the regular court system in both Canada and the U.S.
Conformity with WTO Anti-dumping and Subsidies and Countervailing Measures Agreements must be addressed through WTO Dispute Settlement.
Terminating Chapter Nineteen would be a major concession to the U.S. Lumber Coalition and other important users of anti-dumping and countervailing duties. Do not be surprised if the U.S. Lumber Coalition insists on this as a condition for accepting a new Softwood Lumber Agreement.
Chapter Nineteen is like an insurance policy. It has been important to Canadian exporters of softwood lumber, beef cattle and live swine. It may soon become very important to Bombardier.
I am perplexed by chatter suggesting giving up or trading away Chapter Nineteen. No one in a key negotiating position or with even a smidgen of institutional memory will suggest this is a reasonable or responsible option. Too few remember the fractious Reagan-Trudeau relationship. But credible commentators like Professor Robert Wolfe of Queens University have floated the idea. Is it academic comment or trial balloon? Red lines will be drawn, but never say never.
Expect more debate about why or whether Canada needs Chapter Nineteen. Ambassador Lighthizer is determined to kill it – with the support of important U.S. stakeholders. Experienced negotiators and commercial policy officials understand that the pressure to kill Chapter Nineteen underlines the importance of keeping it.
The United Steel Workers want to keep Chapter Nineteen and eliminate Chapter Eleven.[29]
This is a personal issue for Ambassador Lighthizer – he may well use it to drive down the costs of other more meaningful concessions. As for the Lumber Coalition, when Canada secures a new Softwood Lumber Agreement, there will be a clear restriction on Canada’s ability to seek judicial review, or WTO dispute settlement. This was one of the underpinnings of the 2006 Softwood Lumber Agreement. Neutralizing Chapter Nineteen has the same impact as killing it for the period of the Agreement.
Chapter Nineteen is judicial review of the application of U.S. law. That law has been amended substantially since the investigation in Lumber IV. The changes have been focussed on tightening, not liberalizing. Past experience may not be a good indicator of future results.
Mexico wants to bolster the dispute resolution mechanisms of NAFTA. Mexico’s Congress has backed a non-binding motion urging the government to reject the Trump administration’s proposal to scrap Chapter Nineteen.[30]
Seek a separate domestic industry provision for perishable and seasonal products in AD/CVD proceedings.
The U.S. stakeholders pushing different rules for perishable products in NAFTA 2.0 are horticultural producers, primarily in Florida. California is a bigger producer of strawberries, but the crop ripens later than in Florida and Mexico. The problem relates to seasonality – with seasonal overlaps for the crops at issue. The competition is regional – and the very rigid rules for defining industry in Article 4 of the Anti-Dumping Agreement are too inflexible for the farmers to cope.
This may open up possible opportunities for Canadian farmers and ranchers who are precluded from seeking protection against dumped or subsidized imports of processed foods, i.e., dairy farmers and milk, beef cattle and hog producers with respect to beef.
I believe that the definition of industry in Article 4 of the WTO Anti-dumping Agreement (ADA) is unfair to farmers and ranchers. Clearly, the definition was designed for manufacturing industries, at a time when agriculture was largely outside the disciplines of the General Agreement on Tariffs and Trade (GATT).
In effect, farm products which must be processed for commercial sale and distribution are like goods produced by the processor, not the farmers. The producers of agricultural products (which are mostly perishable – not certain how to deal with livestock) are left without protection unless the processors initiate or support the petition. Chicken farmers may not have standing once the birds are slaughtered and packaged for the retail shelf.
It is not clear what the U.S. wants in this context. It has problems from time to time with dumping into Canada of apples and potatoes. We believe the issue is more likely with Mexico on tomatoes.
U.S. grape growers filed a petition against imports of wine. It was not successful.
Balance will not be easy to find – but if any trade issue requires modernization, it is this one.
Exclude state-owned enterprises as part of the domestic industry in AD/CVD proceedings.
It is easy for the U.S. to try to deny rights to the types of business it does not use. State-owned enterprises can be injured too. There is no basis in the WTO Agreements to deny SOEs protection against unfair and injurious imports. There is principle – and then there is practicality. What is an SOE? How is it defined? How many does Canada have which are involved in international trade? How many does Mexico have? China has many – is this initiative aimed at China?
This U.S. objective may be designed to build a precedent into a basic FTA format. It may be a throw away. I would want the U.S. to make a case for including this provision in the text – other than its dislike of government ownership.
Facilitate the ability to impose measures based on third country dumping.
In 2006, the U.S. National Council of Textile Organizations (NCTO) proposed the expansion of third country dumping provisions in NAFTA.
The U.S. may want to develop a more extensive mandatory provision in a new standard format for FTAs. It is less expensive to try to persuade others to protect U.S. export markets than to engage in time consuming, very expensive, and often uncertain, WTO dispute settlement.
There are Third Country dumping provisions in the WTO ADA (Article 14) and NAFTA (Article 317). It appears that the U.S. would like to make such procedures more binding on the authorities of the importing country. In the real world, importing countries will limit trade remedy actions to those which protect their own domestic producers. There is little point in increasing costs to domestic consumers without any value or benefit to local manufacturing industry.
There have been relatively few third country dumping investigations. New Zealand has conducted four third country dumping investigations, each at the request of Australia. There were no duties imposed on any of these cases. In 1996, Canada asked the U.S. to conduct an investigation into imports of Sodium Azide into the U.S. from Japan. The U.S. did initiate – and concluded the investigation with a Suspension Agreement.
Under WTO rules, in a third country dumping investigation, injury must be proven to the total production of the requesting country – not only its exports to the third country. This may seem counterintuitive but this is a derogation from a derogation. One should not expect it to be easy to use. The U.S. market for many products is 10 to 12 times larger than the Canadian market – and even larger multiples of exports to Canada.
Promote cooperation among the trade remedies administrators of the NAFTA countries, particularly with regards to the sharing of information that would improve the ability of administrators to effectively monitor and address trade remedies violations, such as through self-initiation.
Welcome to Fortress North America. In fact, there is already significant if informal co-operation between CBSA and the U.S. Department of Commerce. Co-operation between the USITC and Canadian International Trade Tribunal (CITT), independent finders of fact, would be likely inappropriate.[31] Formalizing the consultation process and publicizing it will create concerns among targets, a.k.a. respondents, about possible sharing confidential information across borders.
Strengthen existing procedures and create new procedures to address AD/CVD duty evasion, including the ability to conduct AD/CVD verification visits.
Canada increased its ability to deal with these issues in Bill C-44 which received Royal Assent on June 22, 2017. These changes are expected to enter into force soon.
Establish transparency and due process obligations reflected in U.S. AD/CVD laws, regulations, and practice.
CBSA’s transparency in AD/CVD investigations is not as good as applied by the U.S. Department of Commerce. DOC provides much more detail on the conduct of its investigations. In part, this is due to the ridiculously short preliminary investigation period in Canada – 90 days, rarely extended to 135 as compared to 140 days, often extended to 190 days under U.S. law.
The short leash on CBSA’s initial investigation was established after heavy lobbying by the Canadian steel industry at hearings of the Mackasey Committee to implement the Tokyo Round Anti- Dumping Agreement.[32] Lack of time precludes CBSA from issuing anything more than an estimate at the Preliminary Determination. We should not expect increased transparency from CBSA as long as the existing totally inadequate timeframes are maintained.
Injury inquiries conducted by the Canadian International Trade Tribunal are open and adversarial. The CITT provides full disclosure of all confidential information to independent counsel under confidentiality undertakings, and ensures a full airing of the issues at a public hearing which usually lasts five days.
Establish an early warning import monitoring system for agreed sensitive products from non- NAFTA countries.
The Export and Import Permits Act enables Canada to use import licensing for monitoring purposes. Canada has monitored imports of steel for more than 20 years; indeed, its monitoring system was in place before NAFTA. The system is not perfect, but it works reasonably well. The data, updated weekly, is available on the Global Affairs website.
Government Procurement:
Increase opportunities for U.S. firms to sell U.S. products and services into the NAFTA countries.
Government Procurement is probably the most important issue for Canada and Mexico in the NAFTA 2.0 negotiations. Canada and Mexico must not be disadvantaged by Buy American, Hire American policies.
U.S. objectives are focused on U.S. export interests as well as expanding the scope of preferential carve outs. How about Canadian and Mexican interests? The U.S. demand seems to be over the top. Larry Herman called it “outrageous” in recent public comments.[33] Could it be otherwise in the Trump world of Buy American, Hire American?
Canada is a signatory to the WTO Government Procurement Agreement – and NAFTA Chapter Ten and special Canada – U.S. Government Procurement arrangements. Canada must press hard to secure access well beyond existing access to the U.S. government procurement market. Too much procurement is excluded under a variety of set asides or buy American programs.
Government Procurement is addressed in Chapter 15 of the TPP final text. To the extent it is an improvement over NAFTA Chapter Ten, it may be a useful starting point.
Canada has fair and open procurement enforced by easy to access reviews undertaken by the Canadian International Trade Tribunal.
USTR has expressed concern about Canada invoking national security to prevent its foreign bids to provide Canadian’s government wide telephone system. Complaints about National Security from the U.S. are perplexing.
On the other hand large volumes of U.S. procurement are protected by Buy America and Buy American rules, exclusion of state level procurement and various small business minority and gender set asides. Even the billions of dollars expended under various USDA nutrition programs, are reserved for U.S. farmers, ranchers and local processors.
Is exclusion of foreigners from the start a “fair procedure”?
Establish fair, transparent, predictable, and non-discriminatory rules to govern government procurement in the NAFTA countries, including rules mirroring existing U.S. government procurement practices such as:
- Publishing information on government procurement opportunities in a timely manner;
- Ensuring sufficient time for suppliers to obtain tender documentation and submit bids;
- Ensuring that procurement will be handled under fair procedures;
- Ensuring that contracts will be awarded based solely on the evaluation criteria specified in the notices and tender documentation; and
- Providing impartial administrative or judicial review authority to review challenges or complaints.
The U.S. demands are very broad – and specifically exclude access to foreigners to the procurement opportunities which are most important to Canada (and Mexico). For example:
Exclude sub-federal coverage (state and local governments) from the commitments being negotiated. Keep in place domestic preferential purchasing programs such as:
- Preference programs for small businesses, women and minority owned businesses (which includes Native Americans), service-disabled veterans, and distressed areas;
- “Buy America” requirements on Federal assistance to state and local projects, transportation services, food assistance, and farm support; and
What is left after these special cases are exhausted? These goals may not be real – and Canada and Mexico may be able to negotiate carve-outs – but this will likely be at great cost. Food assistance and farm support – mostly under the Commodity Credit Corporation – is believed to be worth over US$50 billion.
And there are additional carve-outs:
- Key Department of Defense procurement.
Maintain broad exceptions for government procurement regarding:
- National security;
- Measures necessary to protect public morals, order, or safety;
- Protecting human, animal, or plant life or health; and
- Protecting intellectual property.
Maintain ability to provide for labor, environmental, and other criteria to be included in contracting requirements.
Acceptance of the U.S. extremely mercantilist position on Government Procurement would be a major setback for Canada. Taxpayers in most countries are not pleased about their taxes being used to pay for imports. But in the U.S., catering to this mercantilist view is an extreme sport.
Canada and Mexico need to make major gains on procurement and establish assured access to these lucrative markets. This will not be a speedy process – unless the U.S. rejects their demands out of hand or is not prepared to grant more than marginally improved access.
Once again, I would caution that no deal is better than a bad deal. This does not mean that it makes sense to walk away from the Government Procurement negotiations. It might be argued that Canada is no worse off without better access than it now has. I disagree. I believe that in the current mood south of the border, failure to secure and improve access to government procurement would be a major setback for Canada and for Mexico.
Small- and Medium-Sized Enterprises:
There was an SME Chapter in the TPP (Number 24). Canada had no problems with it. SMEs was one of the first chapters concluded during the TPP negotiations. These provisions are essentially along the lines of the U.S. asks. It should not be difficult to reach consensus. This low-hanging fruit will be important in selling the deal to SMEs.
Secure commitment by NAFTA countries to provide information resources to help small businesses navigate FTA requirements for exporting to the NAFTA markets.
Cooperate on SME issues of mutual interest.
Establish an SME Committee to ensure that the needs of SMEs are considered as the Agreement is implemented in order for SMEs to benefit from new commercial opportunities.
Energy:
Energy was not addressed in the TPP final text. The concessions made by Canada in the CUSTA were an important contribution to that agreement and were carried into NAFTA Chapter Six.
Preserve and strengthen investment, market access, and state-owned enterprise disciplines benefitting energy production and transmission and support North American energy security and independence, while promoting continuing energy market-opening reforms.
The Energy Chapter in the Canada – U.S. Free Trade Agreement (Chapter 8) provided major benefits to the U.S. It was expanded in NAFTA Chapter Six. Given the evolution of a more favourable U.S. supply situation, rebalancing of the Energy Chapter may be difficult in NAFTA 2.0. Mexico has identified strengthening regional energy security as a prime objective in the NAFTA 2.0 re-negotiations.
A joint paper from the American Petroleum Institute (API), the Canadian Association of Petroleum Producers (CAPP) and Asociación Méxicana de Empresas de Hidrocarburos (AMEXHI) says NAFTA works and urges negotiators and governments to do no harm.
We can’t repeat that enough.
Their key positions are:
- maintain duty free tariffs and immediately remove immediately all remaining tariffs on any goods used in oil and natural gas exploration, production and refining.
- national treatment for foreign investors in domestic markets[34]
- maintain strong investor protections and ISDS – with improvements in expropriation rules and speedier proceedings
- co-existence clauses which would automatically incorporate better treatment in other agreements into NAFTA
- incorporation of WTO Trade Related Aspects of Intellectual Property Rights (TRIPS)
- support NAFTA rules of origin that are clear and that promote competitiveness…. API, AMEXHI and CAPP advocate for a robust regime in NAFTA for rules of origin so that the countries can further strengthen the duty-free trade of oil and natural gas across North America. The rules of origin priorities of the member companies of the three associations are:
- Open cross-border data flows. API, AMEXHI and CAPP support NAFTA provisions for open cross-border data flows, without any restrictions.
- Mobility of infrastructure and personnel. API, AMEXHI, and CAPP advocate that NAFTA include provisions that would allow for the mobility of infrastructure, such as drilling rigs and vessels, and personnel, including for emergency response, across U.S.‑Mexico borders (e.g., a “One Gulf of Mexico” policy) and U.S.‑Canada borders (e.g., in the Arctic and Atlantic Maritimes). API, AMEXHI and CAPP advocate for a NAFTA Visa Program to provide access for skilled energy professionals.
- Certificates of Origin. API, AMEXHI and CAPP support a NAFTA regime for certificates of origin that reflects the evolution of energy markets since NAFTA was negotiated.
- Diluent. API, AMEXHI and CAPP support a product-specific rule in NAFTA for diluent (light products added to heavy crude oil or bitumen) in cross-border pipeline transportation of crude oil. Oil producers often blend bitumen and heavy crude with condensates or other light hydrocarbons to transport the oil by pipeline.
- advocate that NAFTA include full duty drawback provisions for Mexican, U.S. and Canadian manufacturers to obtain a refund (or “drawback”) of duties, taxes and fees that were paid on imported goods used in that manufacturing effort.
- support trade remedy measures in NAFTA that are consistent with Article VI of GATT
- support NAFTA provisions that preserve regulatory autonomy – including mutual recognition of Mexican, U.S. and Canadian regulatory regimes for oil and natural gas – and establish a regulatory cooperation process for energy.[35]
Dispute Settlement:
Dispute Settlement is addressed in Chapter 28 of the TPP final text and is parallel to Chapter 20 of NAFTA. It addresses all issues other than trade remedies and Investor State Dispute Settlement which is NAFTA Chapter Eleven and TPP Chapter 9. We expect ISDS will have its own chapter in NAFTA 2.0.
Encourage the early identification and settlement of disputes through consultation and other mechanisms.
WTO, CETA and NAFTA require consultations as a first step. Resolving disputes through consultations is not easy. My experience has been that most countries need to be forced to change. We have no evidence to suggest that the U.S. would actually be satisfied to consult to fix problems related to its own practices without exhausting and dragging out the litigation. Am I too skeptical – or do I have a long memory?
TPP Article 28.4 confirms the Parties’ right to choose the appropriate dispute settlement forum. If the issue can also be addressed at both the WTO and NAFTA, because the WTO is binding it is, in my view, the preferable forum.
Establish a dispute settlement mechanism that is effective, timely, and in which panel determinations are based on the provisions of the Agreement and the submissions of the parties and are provided in a reasoned manner.
Amb. Lighthizer has been a long time vocal critic of “rogue” WTO panels and of the Appellate Body. He claims they are renegotiating the WTO agreements by going beyond the texts of the WTO agreements, most notably the Anti-Dumping Agreement.
Current problems with NAFTA Dispute Settlement are:
- extensive delays and stalling in establishing panels;
- the composition of the U.S. roster which is dominated by former U.S. officials;
- the non-binding nature of the process.
Establish a dispute settlement process that is transparent by:
- Requiring that parties’ submissions be made publicly available;
Increased transparency is desirable. Canada will release public versions of WTO DSU submissions on request. The U.S. posts its filings on the USTR website more or less automatically. Mexico does not publish or declassify its dispute settlement filings.
- Requiring that hearings be open to the public;
Many WTO dispute settlement hearings are open to the public either from the public gallery or on CCTV. I have monitored NAFTA Chapter Eleven and Nineteen proceedings on CCTV. The wording needed to implement this objective can be borrowed from TPP Article 28.13(b).
- Requiring that final determinations by a panel be made publicly available; and
There is full transparency in dispute settlement under Chapters Nineteen and Twenty of NAFTA and in the WTO DSU. This issue is addressed in TPP Article 28.18.
- Ensuring that non-governmental entities have the right to request making written submissions to a panel.
The WTO DSU will permit filing of Amicus briefs. There have also been Amicus submissions to NAFTA Chapter Eleven arbitration panels (Methanex). Article 28.13(e) of TPP envisages that NGOs may make amicus submissions. This point will be easy to address but it will be part of a more complex package.
Have provisions that encourage compliance with the obligations of the Agreement.
This is addressed in TPP Article 28.19. I am concerned that Article 28.20 leaves too much room for providing cash settlements which can perpetuate breaches of the Agreement.
General Provisions:
Exceptions and General Provisions both fall under TPP Chapter 29.
Include general exceptions that allow for the protection of legitimate U.S. domestic objectives, including the protection of health or safety and essential security, among others.
Exclusions are normal in FTAs. NAFTA Article 2101 was about exclusions. This “objective” is not a surprise. TPP Chapter 29 includes the general exceptions of GATT Article XX and clarifies Article XX(b) and XX(g). There are parallel references to the GATS – General Agreement on Trade in Services.
Currency:
Currency manipulation is addressed in the TPP final text but without real teeth.
Through an appropriate mechanism, ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.
Arguably, the U.S. when introducing its stimulus programs was very much aware of the benefits of a cheap U.S. dollar. Disciplining the perceived abuses of currency manipulation is an important goal for many Trump supporters. The problem may be one of perception more than reality. It will be very difficult for any party to invoke this provision against the U.S. This is a big vs little game, not one guided by right and wrong.
Japan’s presence at the TPP negotiating table, in the face of constant sniping from the Detroit Three about Japan’s effective devaluation costing U.S. producers US$8,000.00 per car, prevented negotiation of a more meaningful TPP currency manipulation text.
The Trump Administration wants to be able to do what the Obama Administration could not. The optics will be important, even if it is a template for future negotiations. Canada should be able to support the U.S. in shaping better rules on currency manipulation- it would satisfy the automotive industry and unions and Ontario politicians.
Co-operating to establish disciplines on currency manipulations is risky. There are Canadian stakeholders onside with their U.S. counterparts promoting this objective. However it could create a Hydra which would bite Canada – we are more likely to be a target than the archer. Perhaps more important Japan will not be pleased if Canada supports U.S. efforts. If it happens let Ambassador Lighthizer take the credit.
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
[1] The U.S. maintains some agricultural safeguards. Canada and the U.S. maintain WTO approved Tariff Rate Quotas.
[2] http://www.apparel.ca/tpl_management.html
[3] NAFTA Secretariat File No. CDA-95-2008-01
[4] Class 4 milk is used to produce so called diafiltered milk exports.
[5]See Wise, Tim A., Tufts University, (http://money.cnn.com/2017/02/09/news/economy/nafta-farming-mexico-us-corn-jobs/index.html) and Mexican farmer’s daughter: NAFTA destroyed us
[6] Capp, Al, Li’l Abner
[7] AISI, NAFTA Modernization Consultation Submission to USTR, June, 12, 2017
[8] John Stupp, American Line Pipe Producers Association, USTR NAFTA Modernization Consultation Hearing Transcript, lines page 373, June 27, 2017
[9] USW, NAFTA Modernization Consultation Submission to the Government of Canada, July 18, 2017
[10] “Possible Compromise on de minimis levels in NAFTA falling flat with key U.S. industry”, Inside U.S. Trade, August 10, 2017
[11] “Off the Grid, Why Americans Don’t Travel Abroad”, Paste, April 14, 2016
[12] UPS challenged the Government of Canada/Canada Post under NAFTA Chapter Eleven. UPS lost.
[13] “Stores are closing at an epic pace”, CNN Money, April 22, 2017
[14] WTO DS-406
[15] http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/services/tisa-acs.aspx?lang=eng
[16] Dodd-Frank’s days could be numbered if the Financial Choice Act, which has passed the House, becomes law.
[17] USTR NAFTA Modernization Consultation Hearing Transcripts, June 27 to 29, 2017, Testimony of: Northof41, Pacific Northwest Economic Region (PNWER), University of Buffalo/Woodrow Wilson Center, Ohio-Canada Business Association
[18] Resource Book on TRIPS and Development, pg. 93, http://policydialogue.org/files/events/UNCTAD_Resource_Book_TRIPS_and_Dev.pdf
“The doctrine of exhaustion addresses the point at which the IPR holder’s control over the good or service ceases. This termination of control is critical to the functioning of any market economy because it permits the free transfer of goods and services. Without an exhaustion doctrine, the original IPR holder would perpetually exercise control over the sale, transfer or use of a good or service embodying an IPR, and would control economic life. An IPR is typically exhausted by the “first sale” (U.S. doctrine) or “placing on the market” of the good or service embodying it.”
[19] Winery or brewery direct to the consumer
[20] United States Trade Representative, 2017 National Trade Estimate Report on Foreign Trade Barriers, https://ustr.gov/sites/default/files/files/reports/2017/NTE/2017%20NTE.pdf
[21] http://www.usdec.org/newsroom/news-releases/news-releases/news-release-06/12/2017
[22] USW, NAFTA Modernization Consultation Submission to the Government of Canada, July 18, 2017
[23] USW, NAFTA Modernization Consultation Submission to the Government of Canada, July 18, 2017
[24] http://www.nrtw.org/right-to-work-states/: Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan (Private/Public), Mississippi, Missouri, Nebraska, Nevada, North Carolina, North Dakota, Oklahoma |South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, Wyoming
[25] For example, in dairy processing and meat packing
[26] Subsidized irrigation water benefits 46% of U.S. crops.
[27] There are controls in California, Hawaii, Minnesota and Washington.
https://www.c2es.org/us-states-regions/key-legislation
[28] WTO DS248 – DS254 AB/R, paras 450-454
[29] USW, NAFTA Modernization Consultation Submission to the Government of Canada, July 18, 2017
[30] “Mexico sets out NAFTA goals ahead of re-negotiation talks: document”, Reuters, August 1, 2017
[31] The CITT has the powers of a Superior Court of Record.
[32] House of Commons Report on the Special Import Measures Act, by the Sub-Committee on Import Policy of the Standing Committee on Finance, Trade and Economic Affairs, June 1982
[33] “’Buy America’ policies to loom large as Canada gets ready for NAFTA talks”, Financial Post, Joanna Smith, July 30, 2017
[34].“North American oil and gas groups band together for NAFTA talks”, World Trade Online, August 3, 2017
“In 2014, the Mexican government initiated a series of reforms that opened up its energy sector to private investment.
“After Mexico’s Energy Reform, NAFTA itself enabled much of the investment attraction, infrastructure development and a more intensive commercial exchange,” said AMEXHI president Alberto de la Fuente. “The synergy between NAFTA and the Energy Reform in Mexico is essential to attract investments, develop integrated value chains and increase North America’s economic competitiveness.”
[35] http://www.api.org/~/media/Files/News/Letters-Comments/2017/APIAMEXHICAPPJointPositionPaperonNAFTAV1002Aug2017.pdf