Ottawa NAFTA Round: Still working on “bread and butter”

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September 29, 2017

Ottawa NAFTA Round: Still working on “bread and butter”

Advance billing for the third NAFTA negotiation this week was that following the preliminaries in Washington and Mexico City, the Ottawa Round would see the start of real bargaining.  Instead, the negotiators found themselves still focused on the easier and relatively non-contentious topics, in the absence of fully-developed U.S. positions on several of their biggest asks.  As this week’s talks started, Canadian foreign minister Chrystia Freeland insisted that solving the “bread and butter” questions in the early stages is completely normal in a trade negotiation, and that there will be lots of time to tackle the tougher issues later.

Still, observers continued to speculate about the absence of specifics from the Americans, on such subjects as auto content, dispute resolution and investor-state relations.  Jerry Dias, President of Unifor, said it was all part of an American plan to wait until the last minute before dropping a set of non-negotiable positions on the table to jam the other parties.  Others suggested that the U.S. team is struggling to mediate among the many voices in Congress and among stakeholder groups attempting to influence the U.S. negotiating positions.  Some key congressional players were clearly miffed this week that due to the tight timelines in the talks, USTR had tabled proposals that they had either not yet seen or not yet signed off on.

On auto content, Commerce Secretary Wilbur Ross penned an op-ed in the Washington Post as the Ottawa talks started, arguing that modern electronics and new components—often sourced from non-NAFTA countries—have undermined the current 62.5 per cent rules of origin requirement.  While Ross is rumoured to want changes that would push the overall U.S. content to 70 per cent or more, he needs to keep a careful balance—if U.S. demands become too expensive for automakers, they could move more manufacturing offshore.  And behind the auto content question looms President Trump’s all-consuming concern about the U.S. trade deficit.

Another key issue where the Americans are holding back is a proposal to include in the agreement a five-year sunset clause that would link the new deal’s potential termination to the U.S. trade deficit. The speculation is that the Trump Administration delayed due to strong negative reaction to the idea from the key leaders on the congressional trade committees.

What happened in Ottawa: The official story

Wednesday’s joint statement by the three countries’ ministers and secretaries leading the talks claimed progress in several areas:

  • In addition to substantively completing the chapter on small and medium enterprises, “meaningful advancements were made in the areas of telecommunications, competition policy, digital trade, good regulatory practices, and customs and trade facilitation.”
  • The discussions also “advanced substantively in the competition chapter,” which is expected to be finalized in the next two weeks.
  • The negotiators also exchanged initial offers on market access for government procurement, but as noted above, real discussions will not occur until the U.S tables its actual demands in this area.
  • “Discussions also touched upon energy trade, gender and Indigenous peoples.”
  • “Significant progress” was also made state-owned enterprises, and sanitary and phytosanitary measures.
  • The U.S. agreed to move the “de minimis” issue from the e-commerce/digital trade chapter to the trade facilitation chapter.
  • The negotiators are now working with consolidated texts in most areas.

What happened in Ottawa: Behind the scenes

 While progress was being made on the “bread and butter” subjects, there were some interesting glimpses of other issues still in development and clearly still at issue:

  • USTR and the U.S. treasury department are in a heated disagreement over a tentative proposal from Mr. Lighthizer to subject currency misalignment to a countervailable subsidy. Treasury has a historic aversion for including currency in trade agreements and claims it has exclusive jurisdiction in this area.  The issue apparently remains unresolved.
  • Canada wants to achieve greater cross-border labour mobility by updating the list of about 60 occupations in which people can more easily get work permits or visas to work on the opposite side of the border. This is proving to be an uphill battle for Canada, as President Trump continues to push anti-immigration rhetoric and policies.
  • There is a disagreement among the three parties at the negotiating table on how to handle energy. The U.S. has been trying to fold energy issues into other chapters of the agreement, while both Mexico and Canada want to retain a stand-alone energy chapter.
  • Also behind the scenes, the Mexican business community is increasingly troubled by the slow pace of the talks. Their mid-January deadline for reaching a deal moves ever closer; the Mexican presidential election is July 1st next year and the campaign will begin early in the new year.  Given the many insults and humiliations heaped on Mexico by Donald Trump, they fear their outgoing President, Enrique Peña Nieto, will not be able to agree to an unsatisfactory NAFTA outcome for Mexico, and may simply be forced to walk away.
  • The Mexicans are not that happy with Canada either. They see Canada’s attempts to insert gender equity and Indigenous issues into the talks as “creative agenda items” that will not speed the process and that Canada, having all the time in the world, is “slow walking” through the talks.

The next round of negotiations will be held in Washington, D. C. from October 11-15.

Boeing, Boeing…Gone

In a preliminary ruling that one headline described as “America First shock and awe,” the U.S. commerce department on Tuesday levied a countervailing duty of 219.63 per cent on Bombardier over its sale of 75 C-series passenger planes to Delta Airlines in April 2016.  Boeing had alleged the amount paid by Delta was well below market prices and made possible only by repeated massive Canadian subsidies to the company.  The size of the proposed penalty inspired heated comments from all sides:

  • In its victory lap Boeing said, “subsidies enabled Bombardier to dump its product into the United States market, harming aerospace workers within the U.S. and throughout Boeing’s global supply chain.”
  • Bombardier responded that “the magnitude of the proposed duty is absurd and divorced from the reality about the financing of a multi-billion dollar aircraft program.”
  • Canadian foreign minister Chrystia Freeland said that the U.S. action was “clearly aimed at eliminating Bombardier’s C-series aircraft from the U.S. market.”
  • Quebec Premier Phillippe Couillard was even tougher: “Not a bolt, not a part, not a plane from Boeing [should be] entering Canada until this conflict is resolved in a satisfactory way.”

This week’s interim ruling was just the first step in what will be a much longer-running saga.  Next up is a preliminary determination on Boeing’s anti-dumping case against Bombardier, due out October 4th.  This  December, the U.S. International Trade Commission will consider if Boeing has actually suffered injury from Bombardier’s actions, and then in February will settle on final anti-dumping and countervailing duties.  Beyond those venues, there are even more alternatives, such as appeal to the U.S. Court of International Trade or NAFTA’s Chapter 19 dispute resolution system.

The obvious casualty in all of this appears to be Canada’s previously-announced plan to buy 18 Boeing Super Hornet jet fighters to bridge its “capability gap” for Canada’s current CF-18s.  Given the Prime Minister’s commitment two weeks ago that Canada “won’t do business with a company that’s busy trying to sue us and trying to put our aerospace workers out of business,” it very much looks like the Boeing deal is dead.

Canada already knew that under the Trump Administration, economic relations with the U.S. are now dominated by ideology and hardball tactics, but this week’s Bombardier ruling drives the point home.  The U.S. is currently motivated far more by “zero sum” protectionism than it is by trade.  Boeing had no “skin” in this game.  It did not bid on the Delta purchase because it does not make an aircraft in the C-series class.  Moreover, with global aircraft production structured the way it is, a significant amount of C-series content is made in U.S. factories.  In addition, if Boeing succeeds in shutting Bombardier out of the U.S. market, that will likely open the door to Embraer, which builds its planes in Brazil.  It is easy to wonder whether Boeing launched its trade action simply to curry favour with the Trump Administration.

While Chrystia Freeland went out of her way to stress that trade disputes do not influence trade negotiations, the Boeing-Bombardier fight cannot help but stiffen Canadian spines in the NAFTA talks.

PM to visit Washington and Mexico City

PMO announced this week that the Prime Minister will visit both Washington D.C. and Mexico City in October.  Specific dates have not yet been released.