What to Watch for in NAFTA Round 5

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November 16, 2017

What to Watch for in NAFTA Round 5

Round 5 of the NAFTA renegotiation begins in Mexico City this Friday.  This round was supposed to be at the ministerial level, but has been scaled back to chief negotiators instead—presumably to lower the temperature in the highly-charged U.S. domestic and trilateral contexts.  In delaying this round of talks due to the “considerable gaps” in the negotiating positions, the three countries also abandoned their target of completing the process by the end of 2017 and extended the timeline into the first quarter of 2018.

By the end of the Round 4 in Washington, the U.S. had placed all of its remaining positions on the table, aptly described by Bloomberg News as “poison pills.” From the U.S. demand for a five-year sunset provision to proposals to tilt the table permanently in the Americans’ favour on auto content rules, supply management, public procurement and dispute resolution, the Canadians and Mexicans responded with a combination of disbelief and stony silence.

Some Possible Scenarios

The harshness of the U.S. proposals tabled in October caused a huge amount of speculation as to possible motives and optional end-games on the part of President Trump.  With a month to take in related developments and think further, here’s a summary of some possible scenarios for the talks going forward:

  • The U.S. positions will cause either Canada or Mexico, or both, to throw up their hands and quit the talks in anger or frustration. This may be high on the U.S. wish list, but it will not happen; Canada and Mexico have long since decided it is better to hang together than hang separately.  They are determined not to give the President the opening to say, “These guys were never serious about negotiating; see, they just walked away.”  Prime Minister Trudeau and Mexico’s Peña Nieto are close, and neither will cut and run on the other.  Neither will they enter negotiations on a bilateral agreement with the Americans unless that is the only remaining option on the table.
  • Canada and Mexico tell the United States that their proposals are completely unacceptable, and the President triggers the six-month notice to withdraw the U.S. from NAFTA, claiming that Canada and Mexico are unwilling to negotiate. Immediate chaos would ensue, especially in the U.S., where there would be a pitched battle between Congress and the administration over who has the constitutional right to do what: Congress controls trade, while the president gets to make treaties.  NAFTA, of course, is both.  Many courts would become involved.  Whether any of this would get resolved before the six-month notice period expires is anyone’s guess.  Beyond that, we are in terra incognita.
  • The “Zombie NAFTA” option: The U.S. refuses to budge on its demands, and Canada and Mexico refuse to engage on what they consider to be outlandish and damaging proposals.  The renegotiation drags on and on, with neither side willing to give in to the other. This scenario is quite possible, depending largely on how speedily the President gets the tax reform bill through Congress.  If the bill is delayed, he may not want to destabilize Congress by pulling the pin on the six-month notice to take the U.S out of NAFTA.  If he gets tax reform more quickly, he may feel he can take the congressional hits resulting from a NAFTA withdrawal and take it down.  Also, if he gets tax reform, he will need the revenue from higher tariffs (see below).

U.S Developments

Domestic affairs have the complete attention of the U.S. Congress as they desperately seek legislation that will pass both houses and receive Presidential approval. Despite having a majority in both houses, the Republicans have so far failed on every major issue on their legislative agenda. Unless they are able to pass tax reform, the first of two years with a clear majority will end with nothing to show for it.

Throughout the NAFTA renegotiation, domestic issues such as immigration and health care have taken center stage in the U.S. with little impact. However, the push to pass tax reform is clearly connected to NAFTA and trade deals writ large. Within the inner concentric circles of the White House and the Republican Party are believers in an 18th century-style mercantilism where national revenue is generated primarily via tariffs. President Trump himself famously declared in a meeting with his trade team, “Tariffs. I want tariffs.”

The tax reform provisions sitting in Congress promise tax cuts to both corporations and individuals, leaving little opportunity for revenue generation. In the President’s mind that opportunity is trade.  The collection of duties, therefore, is not just an attempt to level the playing field for the American worker and American goods, but is an opportunity to make up for the revenue lost in tax reform.

This administration has declined to do any analysis of what walking away from NAFTA would do to the U.S. economy. The underlying strategy for this neglect is based on the belief that a re-orientation of the American economy to a nationalist, protectionist regime is part of a long-term correction. Changes advocated by this administration, from taxation to trade to industrial strategy, are part of their greater vision. The challenge will be to what extent can they pursue these shifts without legislation – because once the legislative branch is involved, change is…well, difficult.

U.S. Interests Rallying to Support NAFTA

The administration is not finding a lot of support for its hardball positioning on NAFTA.  In fact, with the key U.S. negotiating positions finally placed on the table in October, American NAFTA proponents and stakeholders have been weighing in and voicing major doubts:

  • The U.S. Chamber of Commerce called the demand for greater use of U.S.-made products in autos a “poison pill.” A dozen members of the House teamed up to support U.S. auto makers, arguing that the U.S. auto proposals create “a potential for a very counterproductive outcome on rules of origin.”  One Republican lawmaker described the U.S. proposals on autos as “playing with fire.” And in late October, several major auto companies, supplier groups and auto dealers came together to create the “Driving American Jobs” coalition to save NAFTA.
  • Over 80 U.S. farm groups wrote to Commerce Secretary Wilbur Ross in late October to warn that a notice of withdrawal from NAFTA would send agricultural markets spiralling and cause “immediate, substantial harm to the food and agricultural sectors.” Senator Jerry Moran (Republican-Kansas) this week sent an open letter to farming and ranching groups, calling on them to “do more” to counter the administration’s threats to leave NAFTA, warning that “every indication coming from the administration points toward outright withdrawal from the agreement.”
  • More than a hundred U.S. trucking groups this week asked USTR Lighthizer to keep NAFTA cross-border trucking rules that allow Mexican truckers to operate in the United States. At the fourth NAFTA round last month, the U.S. served notice it wanted a reservation for cross-border trucking services in the new deal.
  • The R Street Institute, a Washington-based free market think tank, released a letter to USTR negotiators challenging the administration on its preoccupation with trade deficits. “R Street urges the administration and trade negotiators to reject the false notion that trade policy alone can reduce or even eliminate a trade deficit between two nations. Trade deficits are driven by larger macroeconomic events, not trade policy.” 

Canada Repositioning?

In getting ready for the NAFTA talks, Canada opted for an extensive and carefully orchestrated “charm offensive” to reach out to key congressional leaders and state administrations that have a significant trading relationship with Canada. The purpose was to educate U.S. officials on the mutual stakes they share with Canada in a successful renegotiation.

As the talks have evolved and the specific U.S. demands have become clear, Prime Minister Trudeau and foreign affairs minister Freeland have been careful not to express concern or displeasure in public, but it now appears that Canada is beginning to pivot away from “passive resistance to a bully” and towards a more robust and tougher “Canada First” positioning.

More diversified trading relationships

Earlier this year, the Trudeau government finished the negotiations for the Comprehensive and Economic Trade Agreement with Europe (CETA), which began implementation this fall.  In his trip last week to Asia, the PM signed on to the “core elements” of the successor to the Trans-Pacific Partnership (TPP) framework agreement, which is now called the Comprehensive and Progressive Agreement for the TPP (CPTPP).  Canada is also in final discussions with China that will soon lead to the formal start of free trade negotiations with that country.  Together, these developments signal a “hedging of bets” approach to position Canada for the possible negative outcome on NAFTA by diversifying out trade relationships.

When President Trump took the U.S. out of the TPP, he and his administration thought the agreement would die a quick death, but the more other countries saw of his trade agenda, the more they came to see a resurrected TPP as hedge against the U.S. withdrawing from the world, so they revived it.  The most recent agreement in principle to move ahead on the CPTTP is therefore a not-so-subtle message to the Trump Administration that the U.S.’s current trading partners have options, and that they are prepared to pursue them, Canada included.

More aggressive response to trade disputes

On several fronts, Canada has been upping the ante and taking a more aggressive stance in responding to ongoing trade disputes with the United States and U.S. companies:

  • In response to a complaint by Boeing, the U.S commerce department levied a countervailing duty of 219.63 per cent on Bombardier over its sale of 75 C-series passenger planes to Delta Airlines. The federal government suspended its plans to purchase Boeing’s Super Hornet fighter jets and opened discussions with Australia to purchase their surplus jets.
  • Canada dropped the gloves this week on softwood lumber by requesting a binational panel under NAFTA to challenge the Trump Administration’s recent final duty rates. The final injury (i.e. harm) determination is set for December 18th, but with NAFTA talks heading into choppy waters in this next round, the Trudeau government is doubling down not only on the dispute but it’s stance on maintaining the NAFTA dispute settlement process in any future agreement.
  • Ottawa launched a $19 million lawsuit against Denver-based Omnitrax this week, alleging that the company had an obligation to repair its flood-damaged railway to the Port of Churchill in Manitoba. So far, the company has refused to carry out the repairs.  Ottawa’s response was triggered by Omnitrax serving notice on Ottawa that it will go to court under Chapter 11 of NAFTA to argue that the federal government’s decision to close the Canadian Wheat Board killed its grain-hauling business on the Churchill line.

At the end of the Washington Round in October, foreign minister Freeland said that Canada was “hoping for the best, but preparing for the worst” out of the renegotiation.  No doubt the experts at Foreign Affairs and International Trade are aware of the scenarios outlined earlier (and perhaps others) and are preparing for a robust response to whatever comes next on NAFTA.

Key Future Dates

  • This weekend: NAFTA renegotiations, Round 5, Mexico City
  • December 11-15: Possible Round 6 in Washington (could be pushed into January)
  • December 18: Final determination of softwood lumber “harm” by U.S. International Trade Tribunal
  • December TBD: Final determination by U.S. International Trade Commission of “material injury” to Boeing in its complaint against Bombardier