NAFTA ROUND 6: SHAPING A DEAL

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January 31, 2018

NAFTA ROUND 6: SHAPING A DEAL

After a week of focused trade activity, Round 6 of the NAFTA renegotiation wound up this past Monday in Montréal. Last week, the political leads met for bilateral discussions in Davos on the margins of the World Economic Forum. In addition, the announcement of an agreement on CPTPP broke the same day the Montréal session began, generating heated opposition from some quarters but largely was seen as further strengthening the hands of both Canada and Mexico heading into this round.

President Trump’s reaction to the announcement on CPTPP was an uncharacteristic openness to the agreement, surprisingly stating that he would be open to the possibility of the United States re-joining TPP if he could negotiate a substantially better deal.  To this President, the underlying theme is that all the trade deals negotiated by anyone before him are “bad deals” and that only this administration can negotiate in the best interests of Americans.

In the run-up to the week-long meetings, the Montréal round was described by many as “make or break,” where substantive discussion and progress would be essential to keep the negotiations going. For the most part, Montréal lived up to its advanced billing, although modestly.  Some progress was made, no one broke away from the table and President Trump has now gone several days without threatening to terminate the deal, but it’s only Wednesday!

During the negotiations, the U.S. International Trade Commission also surprisingly and unanimously decided not to find that Bombardier C Series Jets were causing injury to the U.S. aerospace industry. While there was muted celebration by the Canadian government, others warned about the possibility of still further trade action that could be taken by Boeing and/or the Trump Administration.

When all is said and done, the Montreal round does seem to have shifted the narrative from whether President Trump will terminate the deal, to the possible terms of a new agreement, leading to the conclusion that the President’s threats to end NAFTA were aimed directly at inducing Canada to respond to the U.S. proposals.

Finally, in an interview with CBC’s The House, Prime Minister Trudeau said he does not believe President Trump will move to terminate NAFTA, but that if he does, “Not only do we have a Plan B, we have a Plan C and D and E and F.”  While he did not go into details, he said, “Just know that we have looked at a broad range of scenarios and have an approach that is going to continue to stand up for Canadian jobs while we diversify our markets.”

SO, WHAT GOT DONE IN MONTREAL?

The mood among negotiators and stakeholders in Montréal was distinctly (yet cautiously) optimistic. The attempts to cool down the talks after an overheated Round 4 back in October resulted in an environment ripe for creative ideas and paths forward.  Let’s look at what was accomplished.

Auto Rules of Origin

The Canadians presented a set of proposed adjustments to the framework contained in the original NAFTA agreement, rather than addressing the U.S. proposal presented in round 4. The Canadian suggestions included creating a broader understanding of what a car contains – where everything from R&D to engineering to marketing would be included in the calculation of regional content. Credits to the calculation could be accrued by using North American-sourced steel and aluminum, as well as investment in the region.

The United States team initially welcomed the engagement and the effort to bring solutions to the table, but in the end, Ambassador Lighthizer panned the Canadian proposal somewhat derisively. The conversation will need to continue, but given that this is by far the most contentious file, this should be considered progress.

Dispute Resolution

There are three chapters in the current agreement containing dispute resolution mechanisms that are up for discussion – Chapters 11, 19, and 20. Chapter 11, or the Investor-State Dispute Settlement mechanism, received significant attention in Montreal.

The United States would like to make this an “opt-in”/”opt out” mechanism, but Canada and Mexico prefer an all-in or all-out approach. The result appears to be an attempt to create a carved-out bilateral discussion on this mechanism – still under NAFTA – but  eliminating the U.S. entirely from the chapter.

Labour Standards

The Canadian push for higher labour standards mirrors attempts within the Democrats in the House of Representatives to create an agreement that provides stronger protection for workers in all three countries. The Mexicans and the Republican administration are less eager to mandate changes that would raise the bar for wages and working conditions throughout the continent.

Dairy

The United States is pressuring the Canadians to end their supply-management system and open the Canadian market to fair competitive practices. More specifically though, the United States wants to see the end to the Class 7 protections that will allow it to export more dia-filtered or ultra-filtered milk to Canada.  This is the issue that came up last year when Wisconsin dairy farmers complained bitterly that their exports to Canada were being blocked by Ontario dairy farmers.

Procurement or “Buy American”

The U.S.  proposal on government procurement was to limit the amount of access into the United States to a dollar-for-dollar match of the access American contractors have to Canadian and Mexican government procurement. That proposal has not been substantially discussed since Round 4

Sunset Clause

Of the original series of “unreasonable” proposals made by the U.S. side, this is the one that appears the closest to resolution. The reframing of the U.S. proposal for a sunset clause in which the agreement would have to be renegotiated every five years, into a much less stringent review clause, has gained traction with both the Mexicans and the Canadians. The Americans have yet to outright reject it, but also have not agreed to it.

Key chapters advanced

The chapter on anti-corruption was reportedly concluded, as well as significant advances on sectoral annexes.  Progress was also made on several more, including telecommunications, customs and trade facilitation and sanitary and phytosanitary measures.  These are reportedly nearing conclusion, and the hope is that some of these can be closed prior to round 7.

SOME FIREWORKS AT THE CLOSING PRESS CONFERENCE

While the tone in the room for the closing news conference of the Ministers and Secretary was somewhat less angry than in Washington the last time they met, it was still pretty icy.  All three agreed that some progress had been made, but after Mexico’s Minister Guajardo offered an optimistic take on the Montreal round, Ambassador Lighthizer came out swinging, saying progress was far too slow, and targeting the much-anticipated Canadian proposals on auto rules of origin. He blasted them for moving more jobs out of North America, saying that “this is the opposite of what we are trying to do.”

He went on to call out Canada for the wide-ranging WTO complaint made in the weeks leading up to this round, calling it a “massive attack on all our trade laws.”  Since that complaint was made public in early January, Mr. Lighthizer has rejected the premise that it was is about Canada achieving fair access to U.S. markets and has pointed out that the result of the complaint will be to make U.S. market access easier for countries like China, and to the detriment of Canada. Without a doubt, Ambassador Lighthizer is angry with Canada, and his comments at the press conference clearly exposed that frustration yet again.

In her response, Foreign Minister Chrystia Freeland was more subdued, but gave as good as she got.  In reference to Mr. Lighthizer’s comments on Canada’s WTO complaint, she said the case is directly tied to softwood lumber, where the U.S. in 2017 imposed significant duties: “We are aware that the U.S. is concerned by our litigation. And to those concerns, I have a very clear response and a clear offer, which is: let’s sit down and let’s negotiate a softwood lumber deal.  I’m happy to start this afternoon.”

Canada wasted no time with its continued Maple Charm initiative.  The next day, former Prime Minister Brian Mulroney appeared alongside former career U.S. Ambassador Earl Anthony Wayne and former Secretary of Commerce and Industry of Mexico Jaime Serra Puche as witnesses at the U.S. Senate Committee on Foreign Relations. All three waxed eloquent about the benefits of NAFTA before a committee largely supportive of a NAFTA 2.0, but glimpses of protectionism shone through some of the lines of questioning.

With more work to do, Prime Minister Justin Trudeau will deliver similar messages on his three-city tour of the U.S. February 5-7, with whistle stops in Los Angeles, San Francisco and Chicago. In addition, Foreign Minister Freeland will meet with her counterparts, U.S. Secretary of State, Rex Tillerson and Luis Videgaray, Mexico’s Secretary of Foreign Affairs at the North American Foreign Ministers’ Meeting in Mexico City on February 2, 2018.  They will discuss ongoing and future opportunities for trilateral cooperation and collaboration on the economy, including the modernization of NAFTA, as well as regional and global issues.

NEXT MEETING?

The venue for the next round of talks was announced as Mexico City. Although not yet confirmed, the negotiators may be meeting again from February 26th to March 6th, and rumors of a subsequent round in the late spring have been widely reported.

Many believe the negotiations could be paused for the federal election in Mexico on July 1st and possibly for the U.S. mid-terms in November. All that said, there is still the sense that President Trump could invoke Article 2205 (termination) at any point, scuttling the progress made. Expect the Trump Administration to keep its options open and for Canada and Mexico to claim progress in the game of inches that is this trade negotiation.