NAFTA 2.0 – Are its days numbered?

  • National Newswatch

PENTAGON CITY, VA – The Trump Administration is taking the gloves off. Were they ever on? President Trump told Fortune that a breakdown and pulling the plug was necessary to fix NAFTA.I was taught that trade negotiations were exercises in good faith. This rule does not apply in the world according to President Trump.Canada's Global Affairs Minister Chrystia Freeland has demonstrated her superb oratorical and communications skills to try to breathe life into the stagnation which has characterized the NAFTA 2.0 negotiations to-date. Given the hair trigger inclinations of Trump and USTR Robert Lighthizer, Canada must project a positive and optimistic perspective.With the second shoe dropping on Bombardier, and the frustration of continuing uncertainty on lumber, the forced optimism is wearing thin. Minister Freeland is characterizing the Trump Administration as the most protectionist since the 1930s. This is overly charitable – Trump, Ross, Navarro and Lighthizer will make Smoot and Hawley look like amateurs.The forced pretenses of collegiality are hollow – and misleading. The deep divisions and frustration which inform the real state of play are due in large part to the aggressive and inflexible approach of Ambassador Lighthizer. He is reflecting Trump's always shifting, unpredictable objectives and his determination to trash the best trade agreement North America has ever seen.It will be more difficult to keep up the appearances.Progress at Round 3 was minimal – a single chapter was agreed, comprised of two paragraphs about creating and maintaining access to a database to inform SMEs about the potential benefits of the agreement. This was the first chapter agreed on or “parked” in the TPP negotiations. The early closing TPP articles were not contentious. There were half a dozen of them. Now we have an agreed text on Competition. Lighthizer seems pleased with this. Looking at the TPP text, it seems relatively easy for Canada to accept, unless Lighthizer wants to extend the long arm of U.S. Competition law into Canada and Mexico. Importing private rights of action complete with treble damages would not be a welcome innovation.Why are the negotiators taking so long to recycle the low hanging fruit into NAFTA 2.0? It isn't easy to be upbeat when you are forced to work in a vacuum without sufficient time between rounds. Not to mention the forced symbolism of working on weekends and holidays. The worker bees seem to be relieved as each day ends, counting the hours and minutes to the end of another session of unpleasant uncertainty.There are delays and frustration because the U.S. has not been specific about its demands. That is about to change. Lighthizer is floating trial balloons about specific non-negotiable demands which have been labelled poison pills by the mainstream media.The absurd trade remedy decisions issued by Wilbur Ross's Commerce Department, not to mention his proposal for 5 year sunsets on trade agreements, do not inspire confidence that a reasonable, balanced deal is near. Indeed, the U.S. provocations of its neighbours, while recognizing our closeness, are the trade negotiator's equivalents to Trump's verbal war with Kim Jong-un. A bit extreme? It depends on whose ox is being gored.NAFTA, TPP and TTIP were designed to go well beyond “meat and potatoes” trade issues like tariff elimination, National Treatment, Technical Barriers and trade remedies in a positive and liberalizing way. The U.S. approach is a claw back on steroids.Lighthizer was a trade remedies lawyer who focused on steel – an industry whose appetite for protection is insatiable. His focus is anti-dumping, countervailing duties and safeguards. He has conducted long-running vendettas against WTO Dispute Settlement and NAFTA Chapter 19 judicial review of anti-dumping and countervailing duty decisions. Now is his opportunity to get even and he seems determined to meet objectives as a public official he could not as a practitioner. Other USTRs recused themselves from dealing with issues they worked on in the private sector. But, in Trump's Washington, recusing is seen as a weakness - just ask Attorney General Jeff Sessions.Lighthizer appears to be determined to drive Canada away from the negotiating table. No doubt Mexico's turn will come. The Mexican Senate has passed a resolution indicating the half dozen bright line issues which will prevent passage of NAFTA 2.0. Mexico cannot ratify NAFTA 2.0 without Senate approval.Secretary Ross' proposed five year sunset clause, scrapping Chapter 19, reduced access to Government Procurement, unbalanced Rules of Origin on automotive products, and special anti-dumping rules for seasonal fruits and vegetables are all drop dead issues for Mexico.U.S. demands are unreasonable and designed to provoke Canada to abandon these negotiations. Will Canada walk away from the negotiation? Not likely. There is no advantage to Canada in playing this game – and nothing to gain. All we would catch is blame. And it would give POTUS a reason to demonize Canada (even more) and accelerate the dismantling of NAFTA.Canada is the target of a massive misinformation campaign driven by the U.S. Administration. There is no shortage of allegations that Canada is stalling and refusing to engage. This is the basest of canards. Lighthizer is trying to please the President – an impossible task – and, as a result, has no mandate.Here in a nutshell is the real state of play:
  • Canada has made it clear that the USA is the demandeur and it is up to Ambassador Lighthizer to define his demands.
  • Canada cannot respond to proposals which Washington has not advanced.
  • Canada will not and should not negotiate with itself.
  • Trump and Lighthizer are increasing the pressure and the reality TV environment.
Agriculture Secretary Sonny Perdue is frustrated with the slow progress. It appears that Perdue believes Trump is trying to improve NAFTA. Talk to Ambassador Bob about the delays, Sonny – he hasn't tabled his demands on dairy yet. And when he does, do not be surprised if U.S. farmers are among the first to feel some pain.The U.S. Chamber of Commerce, along with some 310 state and local chambers, and USTR are fighting in the Press. John Murphy, the U.S. Chamber's senior vice president for international policy, has warned that the business community and agriculture cannot support the extreme and disruptive demands being floated by Lighthizer.Prime Minister Trudeau had a closed session with the House Ways and Means Committee which he reported went well. But there was push back on access to cultural industries. It is important to understand that Trump has supporters in his quest to beggar his neighbours.The business community and foreigners will navigate Congress and Congress is the key. This is why Prime Minister Justin Trudeau met with the House Ways and Means Subcommittee on Trade at the beginning of Round 4.There was no Trump-Trudeau press conference but there was enough exposure for POTUS to suggest that he might be prepared to do a deal with Canada (you have one, Mr. President) and not Mexico. This will not be received well in Mexico where industry groups are said to be recommending that Mexico wait to renegotiate NAFTA until common sense and reasonableness returns to the White House. Would that we could.Lighthizer privately and Wilbur Ross publically have been doing their best to demonize and blame Canada for unfair trading practices (subsidies) and unwillingness to roll over and capitulate to impossible demands. POTUS has said Canada is not a problem. Imagine the fire and vitriol if it was.The U.S. demands floated with the press include:Sunset ClauseWilbur Ross claims there should be a five year sunset on trade agreements. This would make it easier to keep eroding any benefits to NAFTA partners. This is a fate similar to being nibbled to death by ducks. It would be a poison pill to Mexico and should be to Canada as well. It is impossible for investors to plan – or for Canada and Mexico to attract investment. But this is what wily Wilbur wants.Access to Canada's cultural marketsThis one has been relatively quiet but is now getting play from Congress. This is a particularly bitter poison pill for Quebec. Michael Wilson countered similar demands decades ago by indicating he would like to talk about the Jones Act which prevents Canadian-built ships from plying U.S. coastal shipping. Find the weak underbellies and take dead aim.Government Procurement;The U.S. wants to reduce Canadian and Mexican access to its procurement market while trying to increase U.S. access to other NAFTA procurement. That is, harmonize available U.S. procurement with Canada's and Mexico's. This would reduce Canadian and Mexican opportunities by about 90% while maintaining U.S. access. Meantime, Buy America and Hire American carve-outs would continue and likely be expanded. U.S. demands are non-starters for Canada and Mexico. Neither Canada nor Mexico can entertain these demands. Canadian and Mexican counter-demands are ignored. They are inconsistent with Trump's “Buy American - Hire American” mantra.Rules of Origin on automotive productsIt is absolutely absurd to suggest that the NAFTA content rule should increase from 62.5% to 85% combined with a requirement that at least 50% U.S. content in vehicles exported from Canada and Mexico to the U.S. This would effectively double U.S. content in Canadian made automobiles. It is a non-starter.Rules of origin (ROO) are designed to increase the parties' share of FTA trade. I am not aware of any other FTA which requires donor content. Indeed, it would be inconsistent with the WTO Understanding on Rules of Origin. Under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Canada's heavy reliance on U.S. parts was reflected in more flexible ROO and a 100,000 vehicle quota to permit Canada to export non-compliant autos.Increased U.S. Dairy Access to CanadaThe U.S. shopping list on Dairy is expected to be tabled this round. It will be broad and deep, and totally unwarranted given what the U.S. does for its own dairy industry.U.S. demands relating to so-called Diafiltered milk ignore that this product is based on heavily subsidized surplus disposal milk. U.S cheating on trade rules has been “outed” before. The U.S. has dumped and subsidized its way to dairy exports success, since 2006, when it became a net exporter. Since the WTO Agreements entered into force, the U.S. Farm Gate price for milk has never been above its cost of production.Nutrition Programs benefit U.S. farmers and food processors. Government procurement of some $111 billion is closed to Canada and others – it is only available to U.S. producers.Irrigation subsidies provide tens of billions of dollars in cheap water to U.S. farmers and ranchers. Power to run the pumps is also subsidized. The 16 most irrigated states produce 46% of U.S. crops. Rice is one of the most heavily subsidized U.S. crops. It cannot be grown in the U.S. without subsidized irrigation water.The subsidies do not prevent aggressive U.S. export initiatives, notwithstanding that they are arguably production and trade distorting.Did you know that it takes more than 100,000 litres of water to raise a steer? And that alfalfa is one of the largest users of irrigation water in California? And that alfalfa is an important source of feed for dairy cows?Wine in grocery storesCalifornia and other wine-producing states are always ready to challenge Canadian practices. However, the U.S. does not come to this fight with clean hands.United States federal and state taxation marketing and distribution practices with respect to wine and beer were also challenged at the GATT in 1992 in United States – Measures Affecting Alcoholic and Malt Beverages.  The GATT Panel found U.S. regulations in 41 states, one territory and at the Federal level were inconsistent with U.S. obligations under the GATT. The U.S. and its states did nothing to comply with the Panel report. Many of these non-conforming practices still exist. In addition, there have been new measures introduced over the last 20 years. This situation is open to a challenge under the enforceable dispute settlement procedures of the WTO.The wine industry is changing in the United States with ever increasing and more significant volumes sold and delivered directly to consumers from in-state wineries. While out-of-state wineries are guaranteed the right to sell and deliver direct to consumers, this right does not extend to imported wine, nor to foreign wineries.Canadian wineries are denied access to important points of sale in the USA. Further, in several states, unauthorized direct delivery to consumers is considered to be a felony. In Illinois it is a Class 4 felony, in Utah – a third degree felony. Other states imposing felonies in varying degrees include Kentucky, Indiana, Florida, Maryland, North Carolina, Oklahoma, Tennessee, Texas and West Virginia.The Malt Beverages panel found the following U.S. breaches of National Treatment related to denying Canadian wine equivalent access to points of sale:“(f) the application by the state of Iowa of an excise tax at the wholesale level, which applies to all imported wine but not necessarily to all domestic wine which -- unlike imported wine, -- may be sold directly at retail, is inconsistent with Article III:2, first sentence, and is not covered by Article III:8(b);”“(j) the exemption by the states of Alaska (beer and wine), California (beer and wine), Connecticut (beer and wine), Florida (beer and wine), Hawaii (beer and wine), Idaho (beer), Illinois (beer, whether or not the exemption is currently being given effect), Indiana (beer and wine), Iowa (beer and wine), Kansas (beer and wine), Louisiana (beer and wine), Maine (beer and wine), Maryland (beer and wine), Massachusetts (beer and wine), Minnesota (beer and wine), Montana (beer), New Hampshire (beer and wine), Ohio (beer and wine), Oregon (beer and wine), Pennsylvania (beer and wine), Rhode Island (beer and wine), Tennessee (beer), Texas (beer and wine), Utah (beer containing not more than 3.2 per cent alcohol by weight), Virginia (beer), Washington (beer and wine), West Virginia (wine) and Wisconsin (beer and wine) of local producers from state requirements to use wholesalers, which requirements apply in the case of imported beer and wine, is inconsistent with Article III:4 and has not been demonstrated to be justified under Article XX(d);”The U.S. has far more to lose in a new WTO challenge of its alcoholic beverages distribution and taxation rules than the targetted Canadian provinces. Canadian practices were condemned by GATT 25 years ago and are now largely WTO compliant.Moving Forward or Not?Lighthizer's advertised demands are totally outrageous – a 21st century Richard Nixon type “mad man” approach. Perhaps the objective is to back off to still ridiculous positions, in order to appear more compromising and reasonable.Even the potential middle ground is unacceptable. Starting from absurdity is not a reasonable or realistic starting point.Canada cannot agree to capitulate no matter how hard Lighthizer pushes. Canada must not walk away from the negotiations. That would be playing into Trump's agenda.Don't expect to hear much about gender, trade and indigenous peoples, labour mobility or anything else of interest to Canada. This is the Age of the Double Standard. U.S. exports are good (Bigly good) and imports are bad.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