The three ring NAFTA 2.0 circus has arrived in Ottawa – at the old City Hall on Green Island.
If the seeds of a trade war are sown over the next week the venue has a history closely tied to Canada’s war efforts and defence for nearly 200 years.
Green Island was named after Patrick Green who quarried stone for the Rideau Canal built as a precaution related to possible war with the U.S . Title to the Island was transferred to the Ordnance Department in 1843. It used the island as a rental property which saw a range of industries built to provide necessities of life including a sawmill, a foundry, a distillery and a brewery.
During World War II and for some years afterward it housed in the wartime “Temporary Buildings” Clarence Decatur Howe’s Department of Munitions and Supply. Close by was Canada’s secret Chemical Weapons lab. C.D., the Minister of Everything, was no doubt housed closer to the Parliament Buildings.
Don’t expect war of any kind to break out over the next few days – but it is comforting to know if it does that the venue should be Canada friendly.
NAFTA 2.0 is badly in need of momentum. In describing the pace, the Canadian Press’s Joan Bryden recalled Lewis Carroll’s White Rabbit “The hurrier I go the behinder I get”. Negotiators on all sides would welcome closure or virtual closure on several low hanging fruit chapters such as:
- Small and Medium Sized business
- e-Commerce/Digital trade
- Agriculture (other than market access)
- Competition Policy
Failing to show real momentum will send the wrong signal. But the focus must be on a good deal and this goal has been evasive.
Ambassador Bob Lighthizer claimed in Mexico City, the negotiators were working at warp speed. But he claims he does not know where the negotiations are headed. Even at “warp speed” Lighthizer is not convinced the negotiations can be finished by year end. I never believed early conclusion was possible. The issues are too complex and U.S. positions keep changing.
The main reason there has not been more progress is lack of precision in the US “asks” and concerns the insatiable, unpredictable and insensitive POTUS will change and increase the stakes. His reputation precedes him. Coping with Trumpian negotiating tactics must be like trying to nail jelly to the wall.
Ambassador Lighthizer hoped to table U.S. versions of all texts by this round. That goal is now being soft pedaled amidst explanations about the need to consult Congress. Not to mention serious pushback from important stakeholders, and neither Canada nor will Mexico buy a pig in a poke.
Negotiations are also being complicated the nutbar initiatives floated by Washington. These initiatives would bring despair to even the coolest, most patient negotiator.
Wilbur Ross whose claim to fame is buying companies in distress, repackaging or disassembling them, can’t resist trying to take the wheel, while Lighthizer insists he is in charge of the NAFTA 2.0 rebalancing. Ross came close to crashing the sugar negotiations with Mexico. Why is softwood lumber taking so long to complete? The Coalition does not appear to give a rodent’s behind for Wilbur.
Secretary Ross is the dean of the “Buffalo Jump” school of trade relations. It is not about negotiation, it is about touting economic suicide for trading partners. Ross fancies himself to be a trade negotiator. At the same time he wants to be liked – which will not endear him to Trump’s closest supporters who want to turn US trade policy on its head.
Undeterred by the pushback or perhaps unconscious of the real world implications of his over the top demands, Secretary Ross is primed to lead NAFTA into greater and deeper folly.
He argues that NAFTA’s automotive Rules of Origin(ROO) need to be scrapped and made more U.S. friendly – all because of a cherry picked study prepared by Ross’s staff for a particular purpose. It focusses on the alleged or estimated US value added in Canadian (and Mexican) exports to the USA.
Numbers in themselves provide a snapshot to make a point. But no seasoned negotiator will or should accept them at face value Remember – there are lies, damn lies and then there are statistics.
The DOC study addresses value added percentages in US imports at a point in time. It ignores the very substantial increase in US dollar values of the US value added.
There is no requirement to have any US value in Canadian exports to the US. There would be none in Agricultural and resource imports.
It does not compare the value of Canadian value added into imports of manufactures into Canada from the USA. It has increased from 2.4 percent to 3.4 percent. US content in US exports to Canada have declined from 83% in 1995 – when NAFTA was still being phased in, to 75.9 percent in 2011.
Canadian value added in automotive imports from the U.S. in 2011 was 4.5 percent. US value added in its automotive imports from Canada was 26.4 percent in 2011. This after a proliferation of FTA’s since 1995, Secretary Ross’s data was seriously cherry picked.
The OECD data may end in 2011, but it should be recognized that North America was recovering from the 2008 economic meltdown and 2011 was an aberrational year in the middle of the recovery.
Mexican content in Canadian manufactured goods imports increased from 1.0 percent in 1995 to 2.3 percent in 2011. Chinese content from 0.5 percent to 2.8 percent over the same period – more than Mexican value added.
Data on trade in basic metals ignores changes in the steel industry since 1995.
There has been a consolidation of ownership in the global steel industry. Secretary Ross was a central figure in that process, buying failed integrated US mills out of bankruptcy before selling off assets and eventually, his interests to Arcelor Mittal.
Imports of iron ore are being replaced by semi-fabricated steel (slabs) from Brazil and other countries.
Canada and the USA are each other’s largest steel suppliers as they abominate the WTO anti-dumping agreement to create a fortress North America in the steel sector. Ross and Lighthizer are very familiar with these efforts.
Steel is duty free under WTO for both Canada and the USA. NAFTA origin certificate are not required and NAFTA makes no difference to steel market access within NAFTA
Experienced, effective negotiators do not accept arguments on a blind faith basis, they push back, test the facts and assumptions. Steve Verheul and his lead negotiators have the necessary skills and are not reluctant to use them.
The five year sunset is election fodder. It is a fantasyland request. No one can plan and invest on such a short time frame. Future Investment to benefit from the North American market will dry up. Uncertainty is the enemy.
If trade agreements can be broken, terminated on a whim, or disassembled at the whim of one party, the other partners will not come back for more. Once bitten, twice shy as they say. If the US insists on this approach, there will be little in NAFTA for Canada.
There must be a high degree of permanence to the balance of rights and obligations in trade agreements. This is why dispute settlement is so important – it is designed to maintain the balance of the agreement and to keep the detailed commitments watertight.
Secretary Ross wants to start with an unbalanced agreement. And it would be rebalanced every five years. These overtures must be firmly rejected once the Trump team can reach a consensus on how the proposal should be worded.
Short term trade agreements have been negotiated in the past – most if not all related to textiles and clothing. I was involved in negotiating dozens of these so called “voluntary export restraint” agreements– when they were GATT legal. I also adjudicated disputes involving the abuses, as a member of the Textiles Surveillance Body. These agreements were invariably rolled over with annual growth provisions. Canada has long since abandoned them. The US has certain TLA’s which exempt Canada from the rules of origin on apparel.
The other short term managed trade Agreements are the serial agreements restricting Canadian Softwood lumber exports.
NAFTA and similar trade agreements are about growing and protecting trade opportunities. They are not about managing and limiting trade.
Canada is still dedicated to completion of the negotiations on schedule. It is too early for pessimism – which would be characterized as obstructionism. So keep smiling, be optimistic no matter how gloomy the mood.
Some limited progress should be possible in Round 3 – perhaps closing a few chapters in the low hanging fruit category. These could include:
- Small- and Medium sized enterprises,
- E-commerce and digital trade,
- Competition issues,
- Transparency and Anti-Corruption,
- Agriculture (other than market access).
I doubt anything difficult will be engaged seriously in this round or even before coming back to Ottawa. Mexican Economy Minister Guajardo believes there are up to 13 chapters which fall into the difficult category.
President Trump the Tweeter in Chief is driving the agenda and the pace, POTUS seems determined to pull the plug on NAFTA because that is the only way he will believe that he has maximized the gains for his core supporters. Ambassador Lighthizer’s mandate is to satisfy the president objectives on NAFTA . President Trump has the attention span of a gnat. His demands are insatiable. If Lighthizer is able to negotiate a “modernized” NAFTA, POTUS will likely reject it because in his view anything negotiable will not be enough.
In his quest for a re-election in 2020, NAFTA, TPP, WTO, KORUS are an alphabet soup of buzzwords which Trump, the over the top carnival barker demonizes and turns into campaign slogans.
If there is benefit for anyone other than the U.S. in the current script it is invisible. Canada and Mexico can and must push back in any way they can. More about this tomorrow.