NAFTA 2.0 – Opening Pandora's Box

PENTAGON CITY, VA – Friday the thirteenth has been a bad day for Canadian trade negotiators.POTUS is on a roll – the builder of magnificent (if garish) buildings should never be allowed to play with the wrecking ball or the explosives.In the last few days he has:
  • pulled the U.S. out of the United Nations Scientific and Cultural Organization (UNESCO);
  • tried to put Congress' feet to the fire on Obamacare; and
  • “fixed” the Iran Nuclear Agreement with stricter monitoring and tossed it back to Congress.
POTUS is busy keeping his election promises. Whether or not it makes sense or helps his core supporters.And across the Key Bridge from Washington in cloudy Virginia his minions are trying to deconstruct NAFTA at breakneck speed.The predicted nightmares are becoming reality.
  • The NAFTA 5 year sunset clause provision has been tabled.
  • So have the sweeping U.S. demands on dairy to allow U.S. competitors to review and approve Canadian regulation. The market access demands on dairy products are yet to come – and when they do could include other supply-managed products and wine.
  • The new Automotive Rules of Origin are upon us. The U.S. would want the changes introduced on a fast track. Everything Trump wants is on a fast track – why not phase-in the changes?
The meeting rooms at the Sheraton Bunker, not 20 metres from my desk, announce sessions on Labour (not a pleasant prospect for Mexico) and Intellectual Property. The IP battle features conflicts between the U.S. as owners of IP – and Canada and Mexico as importers and usersThe opening positions – which is what they are – have been extreme. But they were expected. Canada and Mexico can only hope there will be, sometime in the future, a mutually unsatisfactory landing zone.Prime Minister Trudeau's assurances from Mexico City, that Canada will discuss the U.S. proposals and will counter them – is the correct position for Canada.Mexican President Enrique Peña Nieto has indicated that Mexico will not be part of any dramatic walk-out at this round. But that says nothing on the way forward.Mexican contacts are cagey about confirming the next round in Mexico – leaving the impression that the timing and venue are up in the air. Will this round on the edge of magnificent, inspirational Arlington National Cemetery be the last one, or the last for a while?Whether or not there will be a next round in Mexico City is an urgent and burning question.The Mexican business community wants nothing to do with the farcical focus on Trump's whims. They prefer to wait until normalcy returns to the White House.There have been rumours circulating that there could be a six month hiatus in the negotiations. Would this be acceptable to Trump? Is a standstill possible? Not unless Trump really wants to keep NAFTA, which seems unlikely.There is too much uncertainty, and the differences are too deep for a quick completion. Conclusion on the basis of U.S. demands would send the wrong message to Mexican electors, and would force rejection by the Mexican Senate.Congress and business leaders are pushing back against Trump. How much will this move the mind of he whose opinion is the only one that matters? I recall the best wishes from China on his historic election – when Global Times indicated if the U.S. wanted to play hardball on Trade:“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales to China will suffer a setback, and U.S. soybean and maize imports will be halted.”Can the soft touch with China so far be attributed only to its help with North Korea?Canada has already signaled it will not have any truck or trade with Boeing absent a favourable resolution of the investigation of Bombardier's C-Series aircraft. POTUS should not expect to emerge unscathed from his blatant attempt to force unacceptable demands on Canada and Mexico.Mexico is always quick to defend its interests. Diversification is always an option. Tariffs will be reinstated and substitute markets found – but this will be easier said than done. And time consuming.Closing the TPP of Eleven deal will likely be accelerated. The National Pork Producers for one will not be pleased. The U.S. swine herd has hit record levels – and strong demand is essential to clearing the inventory.Granting preferences in Japan to Canada would not help Trump's stock with American hog farmers. Mexico is the largest volume destination for U.S. pork and ranks second to Japan in export value. There are other potential suppliers.Brazil recently supplied large volumes corn to Mexico. It could continue and expand its exports to Mexico. Soybeans too could be on the list for finding friendlier suppliers. The U.S. has been seeking assurances that their dominant supplier position will not be eroded. The assurances will not be worth much once Trump opens the Pandora's Box.The U.S. is the largest suppliers of dairy products to Mexico. Is special tariff free quota access to Mexico for Canadian dairy products out of the question under TPP of Eleven?I am concerned that Mexican irritation with U.S. demands and behaviour could lead to an explosion. Countries avoid trade wars because they are so messy. U.S. farmers and ranchers understand this. They are convenient and very vocal targets.Mexico knows how to pick the soft spots and to turn the screws on the loudest targets. U.S. corn refiners will be concerned about further attacks on High Fructose Corn Sweetener exports.The U.S. is a target rich environment.Generous, some might say obscene, irrigation subsidies permit California and contiguous semi-arid states to produce and export massive volumes of fruits and vegetables. These could be easy targets for a WTO challenge. Turnabout would be fair play for attacks on Mexican strawberry and tomato exports to Florida.U.S. meat packing plants and dairies, among other food processors and many U.S. farming operations cannot operate without undocumented labour. This is unfair competition. Article 3 of ILO Convention 143 (Migrant Workers, Supplementary Program) requires more control than exhibited by the U.S.Prisons are run by corporations who benefit from commercial production by (forced) convict labour. Imports of goods produced by prison labour are prohibited in Canada. Here are a few examples:Colorado produces Buffalo Mozzarella on prison farms.Dairy states Wisconsin and California also have prison dairy farms. Farming may help inmate rehabilitation and in the U.S. prison system the Thirteenth Amendment to the Constitution permits forced servitude of the incarcerated.Prison labour is a form of slavery which if commercialized is condemned by the ILO Convention Concerning Forced or Compulsory Labour. This is one of eight ILO fundamental conventions. The U.S. has not ratified this convention.The Convention excludes (permits) any work or service exacted from any person as a consequence of a conviction in a court of law, provided that the said work or service is carried out under the supervision and control of a public authority and that the said person is not hired to or placed at the disposal of private individuals, companies or associations. Private interests are involved in the management of U.S. prisonsWhy is Bombardier being dealt with in such a high handed manner? Why are the softwood lumber negotiations so slow?Remember, these irritants are under the control and care of Commerce Secretary Wilbur Ross has no incentive to fix the irritants, until Canada is well on its way to “rebalancing” NAFTA. Ross has power that he never enjoyed in the private sector and seems to relish using it.Trade negotiators and policy makers should understand their countries' transgressions and exposure to counter measures. If the U.S. pushes too hard the reaction will not be benign.Drastic actions against its exports could be protested invoking U.S. rights under the WTO. The answer to Washington's complaints should be “see you in court” – the same WTO court which took six years to resolve disputes before Bob Lighthizer ramped up his personal vendetta against the Dispute Settlement Mechanism. Delays will be much longer.As Harvey Logan explained to Butch Cassidy – there are no rules in a knife fight.Let's hope cooler heads keep Pandora's Box tightly closed. Trade wars are for Dummies – they are a real mug's game. No one wins.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

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