“Full And Frank” Discussions

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October 20, 2017

“Full And Frank” Discussions

“Full And Frank” Discussions

 “The participants had a full and frank discussion.”  That’s the time-honoured phrase used by diplomatic briefers required to characterize publicly what went on in a particularly difficult private meeting.  Bitter grievances aired, personal and national motives likely impugned, voices most certainly raised, and in extreme cases, the parentage of some participants questioned by others, but it all gets summarized as a “full and frank” discussion.

Judging by the openly hostile comments of the principals in the news conference at the close of this week’s NAFTA Round 4 in Arlington, Va., “full and frank” barely seems to cover what happened at the bargaining table.  Referring to the latest Washington demands, Canada’s Chrystia Freeland said, “We are seeing proposals that would turn back the clock on 23 years of predictability, openness and collaboration under NAFTA.”  She warned that a deal “cannot be reached with a winner-take-all mindset or an approach that seeks to undermine NAFTA rather than modernize it.”

U.S. Trade Representative Robert Lighthizer then turned on his colleagues from Canada and Mexico: “Frankly I am surprised and disappointed by the resistance to change from our negotiating partners on both fronts.  We have seen no indication that our partners are willing to make any changes that will result in a rebalancing and a reduction in these huge trade deficits. Countries are reluctant to give up unfair advantage.”  Mexico’s economy minister Ildefonso Guajardo was less harsh but warned that all sides would suffer without NAFTA: “We undertook this as a win-win-win negotiation and not to be in a lose-lose-lose situation.  No one wants to end this process empty-handed, and there is no reason for that.”

As described by Bloomberg as “poison pills” or as one wag put it “how to make America grate again,” here are the deal-breaking U.S. proposals:

  • The Americans want a sunset clause for NAFTA that would kill the deal after five years unless all three countries agreed to keep it. Canada and Mexico have rejected this because of the obvious chill it would place on business planning and investment.  What company would invest a billion dollars in a plant based on one set of trade rules and risk having those rules change a couple of years later?
  • On auto content, the U.S. wants at least 50 per cent American content for all cars and trucks and would upgrade the origin tracing of components, plus a minimum of 85 per cent North American content to avoid a tariff. The demands are viewed as impractical by auto makers, parts manufacturers and unions in all three countries, who noted that modern supply chains criss-cross borders many times, that the new rules would increase red tape and that manufacturers would either shift plants offshore or pay the current 2.5 per cent U.S. import tariff.  In a statement, Ontario Premier Kathleen Wynne said “(The auto) industry cannot tolerate such extreme, punitive measures, divorced as they are from the economic reality of an integrated continental auto sector operating in a fiercely competitive global economy.”
  • The U.S. demands that Canada take down its supply management system by fully eliminating tariffs on supply-managed products over a ten-year period. Canada flatly rejected the proposal and the Dairy Farmers of Canada called it “outrageous.”  Speaking of the Americans, Canadian trade minister Francois-Philippe Champagne said, “I don’t know if they are going to change their mind but I can tell you we won’t change our mind.”
  • Under its Buy America policy, the U.S. procurement proposal (introduced at the third round and flushed out in the fourth) involves a complex proportional equation that would limit the amount of Canadian and Mexican access to U.S. government procurement to an equal amount of access for the United States. It has been roundly criticized by both partners and is considered a non-starter by Canada.
  • On dispute resolution, the U.S. wants to kill Chapter 19, or more formally, “Review and Dispute Settlement in Antidumping and Countervailing Duty Matters.” When Canada negotiated the FTA with the U.S. thirty years ago, it insisted on Chapter 19 because Canada did not trust the U.S. court system to objectively review duties imposed by the U.S. government on Canadian imports.  Chapter 19 enables Canada to bypass the U.S. judicial review process to create an independent, binational panel of five arbiters, who can determine whether duties levied by the U.S. have merit based on U.S. domestic laws. The retention of Chapter 19 is non-negotiable for Canada.

So, What Does It All Mean?

Among experienced trade experts and observers, theories abound as to the actual objectives of the current U.S. strategy:

  • Some see it simply as a set of steps designed by the Americans to enable the president to pull the plug on NAFTA claiming the other two sides are not prepared to negotiate.
  • Alternately, the U.S. is playing hardball now to push Canada and/or Mexico to walk away and then claim, “See, we told you these guys were not ready for tough negotiations and now they have quit.”
  • Another view is that the U.S. hard lines are just a negotiating ploy to get Canada’s and Mexico’s attention and to show the Americans are serious.
  • The final and scariest theory is that Lighthizer and the American negotiating team really do not know what the President’s bottom lines are, other than “a YUGE win on NAFTA,” but don’t really know what that might look like, so they are making it up as they go.

There is gathering evidence to support this latter theory.  It starts with Mr. Lighthizer’s recent comment to Republican members of the House Ways & Means Committee that he has “an audience of one” to please—President Trump. Then there are the mounting studies from both Congress and U.S. stakeholders in sector after sector that describe the benefits of NAFTA to the U.S. and count the potential costs of losing it.  A U.S. source close to the talks said this week that the U.S. negotiators’ body language shows that “nobody on the career level at USTR believes in what they are putting forward.”

These reports conjure up an Administration prepared to walk NAFTA off a cliff on the basis on a set of ideological beliefs that have little basis in fact.  Indeed, USTR Lighthizer said yesterday that while withdrawing from NAFTA is something he and the president “think about all the time,” his department has not done “any analysis” of what that might mean for the U.S.  This is scary stuff for the companies and sectors in all three countries that do billions of dollars of business and sustain thousands of jobs through NAFTA every year.

Will Canada And Mexico Cut And Run?

No.  They won’t walk away and make America’s day.  With American sources inside the negotiations describing the U.S. proposals as “bonkers” and “absurd,” neither Canada nor Mexico are prepared to give the Americans satisfaction by pulling the plug on the talks.

Mexican officials insisted this week that they “will try to stick to it until the end, as long as there is not a U.S. withdrawal.”  That said, the Mexicans are not sanguine about the future.  Jorge Guajardo, a former Mexican ambassador to China, said this week, “I think Mexican businesses have moved past NAFTA, knowing it’ll be scrapped.  I had dinner with three Mexican CEO’s last night, big companies, all NAFTA poster boys, they all assumed NAFTA was dead, and they were OK.”

Canada is equally committed to staying at the table come what may.  A Canadian spokesperson told the media this week that its negotiators will keep showing up every day, even if it means sitting silently across the table from their U.S. counterparts. And for the first time this week, foreign minister Freeland indicated that Canada is well into thinking about all possible outcomes: “Our approach to NAFTA…is to hope for the best and prepare for the worst.”

“When Shall We Three Meet Again?”

 Whether it will be “in thunder, lightning or in rain” remains to be seen, but we do know it will be later than expected.  At the close of this week’s Arlington meeting, the parties agreed to move the next meeting back by several weeks to November 17-21 in Mexico City.  The Mexicans also agreed to an overall extension of the timetable to March of 2018.

The Airbus-Bombardier Deal

In a blockbuster deal, Europe’s Airbus this week agreed to acquire a 50.01 per cent stake in Bombardier’s C-Series passenger aircraft.  While no money will change hands, Airbus will provide procurement, sales and marketing, and customer support expertise for the C-Series by leveraging its supply chain and assembly expertise, its international sales force, and customer base.

Airbus has committed to create a C-Series assembly line at its Mobile, Alabama plant to serve the U.S. market. The joint manufacturing arrangement is designed to get around the almost 300 per cent tariff the U.S. department of commerce recently slapped on the C-Series, after Boeing complained that the aircraft had benefitted from unfair Canadian subsidies.  No doubt Boeing will have something up its sleeve to attack this new agreement.

The deal must be bittersweet for Bombardier.  While it confirms the company was right to have confidence in the C-Series and aligns it with a global player, the company loses control of its primary future product.  And although federal Canadian and Quebec officials noted that the C-Series head office will remain in Montreal, and claimed that current manufacturing jobs will remain in Canada, the future of that commitment will be watched closely.