NAFTA Round 2: Mexico City

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September 6, 2017

NAFTA Round 2: Mexico City

In the run-up to last weekend’s second round of NAFTA negotiations in Mexico City, there were several important developments, as the principal players and key stakeholders sought to define their interests.

Trump’s termination threats

President Trump twice threatened to begin the process of terminating NAFTA. While Canada remained mute in response at least in public, Mexico snapped back, saying that if that were to occur, it would exit the talks. In a series of tweets on August 27, Trump made things worse by referring to Mexico as “one of the highest crime nations in the world” and reiterated that Mexico would pay for “the wall.” With the Mexican presidential election approaching—July 1, 2018—Trump’s continuing insults are fuelling nationalist feelings in Mexico and making it increasingly difficult for the current president, Enrique Peña Nieto, to be seen as cooperating in the talks. To make the point even stronger, Peña Nieto left the country during the talks this weekend to visit China and talk trade.

Labour flexes its muscle

Speaking to the United Food and Commercial Workers Canada national council convention in Montreal, Prime Minister Trudeau cast his government as labour’s “strong partner in Ottawa” and promised labour would get a NAFTA deal “they can be proud of.” Addressing a major rally of workers in Mexico City, Unifor President Jerry Dias called on the talks to transform Mexico’s unionization practices, deliver higher wages in Mexico, bring an end to right-to-work laws in the U.S., and create an international mechanism to ensure countries respect labour promises: “The Mexican workers that work in your auto plants can’t afford to buy the cars that you build. And that is an absolute disgrace.” But Flavio Volpe, president of Canada’s Automotive Parts Manufacturers Association countered that a sudden and dramatic growth in Mexico’s labour costs would simply risk moving production to Asia, leaving all of North America worse off.

U.S. farm interests worried and split

U.S. Agriculture Secretary Sonny Purdue acknowledged “anxiety” among U.S. farmers over the administration’s stance on NAFTA. While many U.S. producer groups are desperate to protect gains made under the agreement, others want their negotiators to target Canada’s supply management system. U.S. agricultural stakeholders are also split over a possible American proposal to enable seasonal produce growers to seek antidumping and countervailing duty rights. Those opposed to the move say it would invite “tit-for-tat” retaliation against the U.S. from Canada and Mexico. On the other side, food retail groups, backed by six members of Congress, argued that Mexico has already targeted several commodities, such as pork, beef, corn syrup and poultry, and that Canada and Mexico could go after U.S. growers of apples, peaches, pears, tomatoes and avocados. Because of the split, U.S. negotiators have not yet taken the proposal formally to the NAFTA table.

De minimus rules in the spotlight

Several Ontario local and regional chambers of commerce are pushing the Canadian Chamber of Commerce to support Canada’s de minimis rules in NAFTA and hold the line against U.S. demands the limits be raised. The U.S. threshold is currently $800, Mexico’s is roughly $50 and Canada’s is CA$20.

In a late August joint statement, the four chambers argued that “any level of an increase in the [de minimis threshold] in Canada (currently CA$20) would be unwelcomed for retailers and raising the de minimis level to $200 would lead to massive increases in cross-border purchases negatively affecting retailers in items such as apparel, footwear, books, toys, consumer electronics and housewares, most of which are priced below $200 and easily shipped.”

Boeing-Bombardier dispute takes off

The trade dispute initiated by Boeing over Canada’s alleged subsidies to plane-maker Bombardier escalated in several ways this past week. Boeing International President Marc Allen defended his company’s trade action against Bombardier, saying Boeing would not back down, and urged Canada to stop linking the potential purchase of 18 Super Hornets to the subsidies dispute. Prime Minister Trudeau flatly rejected Allen’s comments and released a statement that “Canada is reviewing current military procurement that relates to Boeing, as Boeing is pursuing unfair and aggressive trade action against the Canadian aerospace sector. Meanwhile, Boeing receives billions in support from U.S. federal, state and local governments.” Trudeau also called Missouri governor Eric Greitens (where the Super Hornets are assembled) to remind him that 164,000 jobs in that state depend on trade with Canada. Finally, Canadian government officials disclosed they recently visited Australia to see if that country’s surplus F/A-18s could fill Canada’s needs for an interim fighter.

Conservatives offer strings-attached support

Under former interim leader Rona Ambrose, the federal Conservatives signed on to the Trudeau government’s Team Canada “charm offensive” to reach out to U.S. cabinet secretaries, key elected officials in the U.S. House and Senate and state governments that trade heavily with Canada. Under Andrew Scheer, this support will continue, but with some pointed nuances. This past weekend, newly-minted Conservative Shadow Foreign Affairs Minister Erin O’Toole said his party would offer non-partisan support to the government in the NAFTA talks, but has no time for the government’s “virtue signaling” on such issues as gender equality, Indigenous rights and environmental protection that Canada has raised as bargaining priorities.

As for the government’s objective of making progress on labour rights and higher pay, O’Toole said the Conservatives are on the same page as the government, and that NAFTA should strive to seek ways to elevate Mexican workers with higher pay, better working conditions and stronger benefits, such as workers’ compensation. Environment and Climate Change Minister Catherine McKenna responded angrily on Facebook to O’Toole, saying that she was “done” with “ridiculous” Conservative language on the environment: “Climate change is real and environmental protection is essential. It is time for the Conservatives to understand the message.”

Mexico City round 2 recap

In the first round of negotiations in Washington, the various sectoral teams often ended before their allotted time. In this second round, the anticipation was that the pace would be ramped up, but even in the days prior to the round beginning, those expectations were tamped down significantly. The slowpoke here is the U.S. team, which has its hands tied by two separate bosses – the President and Congress, meaning that they do not have sufficient time for the clearance and approval process for U.S. positions between rounds. These realities, plus the demands of the Trade Promotion Authority requirements have created a drag effect that was not fully anticipated or appreciated by the United States as they designed this schedule. In Mexico City, this resulted in Canada and Mexico complaining that the U.S. had still not put its detailed asks on the table in several areas.

As expected by most trade watchers, Canada is proving itself to be a tough negotiator. Remembering back to the TPP talks, Canada was frequently criticized by the USTR for slow-walking negotiations and appearing unwilling to address specific issues. This is a tactic, long and successfully employed by the Canadian trade team. The Americans are reportedly yet again frustrated by Canada, but perhaps the real difference in this set of negotiations is how frustrating the Americans have become.

In their joint statement at the end of the Mexico session, the three country’s Ministers/Secretaries said that “more than two dozen working groups” and had “exchanged information and proposals. In several groups, this engagement resulted in the consolidation of proposals into a single text which the teams will continue to work on during subsequent negotiation rounds.”

Some highlights on the specifics:
• The United States is intent on adding a domestic content requirement to the agreement’s rules of origin for autos and auto parts to boost more manufacturing in the U.S. Both Canada and Mexico oppose a country-specific rule of origin, as do the U.S. automakers, who fear the administrative burdens and costs resulting from a country-specific rule. On the regional value content requirement (North America vs Europe/Asia), the U.S. is said to be considering a level of 70%-80%, but has not yet tabled specific numbers.

• On the labour mobility front, Canada wants the U.S. to abandon state-based “right to work” laws, and is pushing for greater U.S. visa access under NAFTA for Canadian professionals working in the U.S. Given its sensitivities around immigration, the U.S. is resistant to Canada’s visa demands.

• Both Canada and Mexico are determined to retain some form of independent dispute settlement for trade remedies; the U.S. is equally committed to terminating this mechanism.

• Agriculture remains a stalemate with the U.S. targeting Canadian supply management, and Canada defending it stoutly. It should be noted that in both the CETA and TPP negotiations, Canada defended its supply-managed sectors until the end of the process, when it relented marginally in selected industries.

• The U.S. has not yet moved on its commitment to tougher Buy America and procurement rules.

• There appears to have been progress in Mexico City on a digital commerce chapter for NAFTA, but few details are yet available. Going into the talks, all three sides had agreed that the absence of such a chapter in the agreement needed to be rectified.

On to Ottawa…

Round 3 of the negotiations is slated for Ottawa September 23-27. Mexico City produced several consolidated chapters of a draft agreement for more substantive discussions, and the extra time will give the Americans more time to get their proposed positions nailed down. This likely means that Ottawa will be the first time the parties actually engage in negotiations on the thornier issues. With the House of Commons back in session on September 18th, just five days before the Ottawa round, opposition parties will be after the government to commit publicly to defend Canadian interests, to push this specific interest, and not to give in on others.