Poison Pills and Montreal Round

Poison pills and protectionism:

negotiators still face long list of

issues in next NAFTA round

 

As negotiators head to Montreal next week for the sixth round
of negotiations,
here’s an overview
of the issues in play.

BY SAMANTHA WRIGHT ALLEN

Last week, trade observers could be forgiven for feeling whiplash after reports swung from Canadian advisers expecting an imminent United States withdraw- al from NAFTA to U.S. President Donald Trump musing negotia- tions could continue past Mexico’s July presidential election.

The fifth round of negotia- tions in November was supposed to be a ministerial meeting, but was a dialled back to technical discussions after an acrimonious fourth round saw the Americans present several non-starters from the Canadian perspective—what Canada’s chief negotiator Steve Verheul told Parliamentarians last month were“extreme proposals.”

While there is“emerging agreement”on the less controver- sial ideas, like updating NAFTA for the digital age, the status of five issues commonly referred to as“poison pills”remain anyone’s guess, said John Weekes, Can- ada’s NAFTA negotiator from 1991 to 1994, who currently sits on a government advisory panel alongside other trade experts.

“This is seen as a bit of a make- or-break session,”said Mr.Weekes, noting Canada’s initial negotiating position appeared to be that the poi- son pills were so unacceptable, they weren’t prepared to engage.

Here is a list of the trade is- sues still in play:

The poison pills

Autos, rules of origin

The America First approach of the U.S. administration is perhaps most apparent in its fourth-round demand that 50 per cent of con- tent in vehicles be U.S. based in order to cross borders tariff-free. It also raises the NAFTA-country content to 85 per cent from the current 62.5 percentage require- ment in vehicles travelling duty- free between the three partners.

Before a House committee in the fall, Mr.Verheul told members the plan is“wholly unworkable.” The proposal has also been re- jected by Mexico and panned by that country’s auto lobby.

Insiders say Canadian indus- try—especially big auto and big la-

bour—are in line with the govern- ment, pushing against the U.S. ask. Unifor president Jerry Dias said agreeing would be the “death knell of so many different industries” and that on NAFTA content, Canada could live with 75 per cent but will “never agree” to half American.

But Mr. Weekes said he wouldn’t be surprised to see Canada counter with“practical changes”to rules of origin given the tracing list cov-
ers components that are no longer found in cars and fails to cover items invented in the last two de- cades. The Globe and Mail reported last week Canada’s negotiating team is working on a proposal
to increase the amount of North American-made content to address the contentious American ask.

The auto trade is probably the best example of North America making things together, said for- mer diplomat Colin Robertson in a Canadian Global Affairs Institute primer prepared for the Montreal round, because “building auto parts and components … rely on supply chains that crisscross the borders.”

For example, Ontario-based Magna employs 62,000 Ameri- cans, 22,000 Mexicans—far more than the 20,000 Canadians.The CEO has dubbed the proposal
a “lose-lose-lose”situation for North American car companies.

Supply management

Canada’s supply management system has been a no-go zone in trade agreements, but the NAFTA negotiations nevertheless squarely centred the hot-button issue. For decades Canada’s protectionist approach has set quotas and prices for local farmers, controlling the supply of milk, eggs and meat from turkeys and chickens. It tacks a 270 per cent duty on imports out- side of set amounts, an approach Mr. Trump has targeted as “very unfair.” Under his hand, American negotiators have called on Canada to eliminate those tariffs and the controlled flow of goods.

Mr.Trudeau’s key cabinet offi- cials on the file—Agriculture Minis- ter Lawrence MacAulay (Cardigan,

Steve Verheul, chief negotiator for NAFTA with colleague Dany Carriere appeared before the

House Standing Committee on International Trade in December, updating Parliamentarians on several proposals he considered ‘unworkable.’

The Hill Times photograph by Andrew Meade

P.E.I.) and Foreign Affairs Minister Chrystia Freeland—have held firm, with the Ms. Freeland (University- Rosedale, Ont.) telling a committee when negotiations launched last summer, Canada is“fully commit- ted”to saving supply management, making it part of her first speech on Canada’s NAFTA objectives.

Canada faced some of the tough- est farm lobbies in Europe, yet still emerged with both the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and
the supply management intact, noted Earnscliffe Strategy Group principal Paul Moen, a former Liberal trade adviser. There was some movement, however, with an increase of 16,000 tonnes of duty- free fine cheeses and 1,700 duty- free tonnes of cheese marked for industrial food processing cheese, so observers say something similar could be on the table with NAFTA, but only in the context of toned- down expectations from the U.S. And, if any further quota erosion is offered in NAFTA, Mr. Moen said to expect an assistance package (like the Conservatives offered to coun-

Canada’s agriculture lobby is actively pushing Canada to hold its ground, with groups like the Dairy Farmers of Canada and Chicken Farmers of Canada regu- larly in the mix. Canada’s chief agricultural negotiator Frédéric Seppey is granting regular meet- ings, with 181 communication reports filed to his name with the lobbying commissioner’s office over the last year, compared to 184 for Mr.Verheul.

Sunset clause

An automatic NAFTA five-year renewal by positive agreement from the member countries—or a sunset clause—has been panned by Mexico, Canada and industry stake- holders for the uncertainty it would create for cross-border business.

Mr.Verheul in December said the U.S. proposal is“a rather large concern”and the three“can’t have an effective agreement”if it could expire, noting that businesses need a“fairly long horizon”to plan their investments.

“[A sunset clause is] going to put a significant chill on invest- ment, on planning, and on the strength of the agreement.”

Mr. Weekes said there could
be a way to engage with the proposal without ever consider- ing it as an option. Canada could counter with a softer option that encourages ongoing reviews to update the deal, investigate how it functions—which he thought the countries should have done more following the first NAFTA.

“Part of the reason we got to this point was political neglect, and particularly in the United States, and then it became fash- ionable to badmouth NAFTA when you were running for an election. It’s not surprising that a strong constituency developed

at the grassroots level,”said Mr. Weekes, noting it wasn’t just Mr. Trump who would talk down NAFTA; both former president Barack Obama and Democratic nominee Hillary Clinton took some issue with the agreement.

“They all campaigned on the need to change or reform or get rid of it.” He said he believes the coun-

tries should have been doing“a lot more”over the last two decades and that committees were origi- nally set up with that in mind.

“I thought [review] would hap- pen but it hasn’t really happened,” he said.“We don’t want a sunset clause but I think it would make a lot of sense to have regular politi- cal supervision to make sure the three countries are living up to their obligations.”

Dispute settlement

Also in dispute is NAFTA’s approach to dispute resolution, with Mr.Trump taking aim at the agreement’s approach, preferring all matters be dealt with by the U.S. trade remedy system.

Chapter 19, which deals with countervailing duties and anti- dumping, is“vital to Canada and Mexico,”said Mr. Robertson be- cause there would be no recourse otherwise.

“If we don’t get that, then we’re simply at the mercy of the American trade remedy system which we think is unfair.” Mr.Verheul told the House International Trade Committee in December the chapter has been “an effective instrument” for Can- ada, which has taken up 20 cases over the years leading to the U.S. changing its practices 13 times.

But several suggested it’s a phil- osophical debate at heart, and that Congress should reign supreme.

“The whole notion of a tribu- nal that’s non-American, [that would] judge the U.S. is complete- ly inconsistent to the Trumpian view,”said Mr. Moen.

Ms. Freeland said in August Canada wants to reform the Investor-State Dispute Settlement process, or Chapter 11, which protects Canada’s ability to pass public interest regulations with- out the fear of corporate legal action. Canada is going after a CETA model where set judges adjudicate matters rather than ad- hoc appointees.

It’s seen the most pushback from American companies and Canada is already a target, facing more Chapter 11 lawsuits than any other country, according to a Globe and Mail report.

During the first NAFTA nego- tiations, Chapter 19 was almost a deal breaker, and insiders say it’s still a red line Canadian negotia- tors won’t cross.

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Negotiating NAFTA: How it works

Behind the scenes of how Canada’s ‘dream team’ negotiates NAFTA

Chief negotiator Steve Verheul, and Canada’s top two officials in Washington, David MacNaughton and Kirsten Hillman, are among the dozens involved in the sensitive trade talks, which see negotiators holed up in a different North American capital’s hotel board rooms every few weeks to hash out the text.

Mexico’s Economy Secretary Ildefonso Guajardo, Canada’s Minister of Foreign Affairs Chrystia Freeland, and U.S. Trade Representative Robert Lighthizer exit a press briefing during the third round of negotiations to rework NAFTA.The Hill Times photograph by Andrew Meade

PUBLISHED :Wednesday, Oct. 18, 2017 12:00 AM

Every few weeks this fall, roughly 300 Canadians, Americans, and Mexicans descend on a hotel in one of their respective capitals for about five days. While lobbyists chat in the hotel coffee shop or restaurant and reporters troll for tidbits of news, trade negotiators are holed up in hotel board rooms, sometimes 20 to a room, hashing out how to rework the North American Free Trade Agreement, at times until the wee hours of the morning.

The hundreds of Canadians working on the highly secretive NAFTA renegotiation operate largely behind the scenes and work on a need-to-know basis, but the talks nevertheless follow a formula familiar to the experienced team, say trade experts.

“There’s a considerable effort to keep things fairly quiet in public,” said Queen’s University professor emeritus Robert Wolfe, adding the relatively few leaks to media on Canadian strategy is no mistake.

Representatives of businesses and other groups getting updates or serving in advisory roles have signed non-disclosure agreements.

The negotiations, ongoing since August, involve 28 “tables” or negotiating rooms, each hashing out what will likely become a chapter in the final deal’s text.

These NAFTA talks are different from past trade talks in that the time between rounds is only a few weeks, whereas in other talks it might be months. Also, the politicians leading the talks from the three countries fly in for the end of each round, typically dining with each other, sitting down for formal meetings, and approving a joint communiqué on what was accomplished.

During the latest round, the fourth, in a Washington-area hotel, negotiators seemed to have finished the low-hanging fruit where the three countries could easily agree, and moved on to stickier subjects. “Substantially all” initial text proposals have been tabled, according to the three sides’ joint communiqué at the end of the round.

Canada, the United States, and Mexico have touted progress after effectively closing chapters on small- and medium-sized enterprises and competition, but tensions grew in the fourth round, which ended Oct. 17, as American negotiators were accused of pushing non-starters and United States President Donald Trump mused again about pulling out of the deal if his country doesn’t get what it wants.

After the breakneck speed of initial negotiations, there will now be more time in between, the communiqué said, with Mexico set to host the fifth round of talks in Mexico City from Nov. 17-21. More negotiating rounds will be scheduled through the first quarter of 2018.

Based on past practice, like with the Trans-Pacific Partnership trade deal, there wouldn’t be many Canadians involved who know very much of the big-picture details, and Mr. Wolfe’s sense is with NAFTA even less are in the loop.

“They are being very careful. They really do not want to negotiate in public, they really do not want something being said in Ottawa that could cause a firestorm in the White House because there’s a completely unpredictable negotiating environment.”

It’s a necessity born of the alchemy of several factors: a tight timeline ahead of 2018 elections in Mexico and U.S., the intensity of interest in Canada, and the volatile situation under Mr. Trump and his America-first rhetoric.

 

The tables

The chief negotiators’ table seems to meet all the time during a round, observers noted, made up of John Melle of the United States, Kenneth Smith of Mexico, and Canada’s Steve Verheul. They also would have met early on to determine the topics each table would focus on—which are likely to become the chapters of the deal’s text.

Each table, or negotiating room, works with the text in their chapter alone, while the chief negotiators carry with them the full text and will cover the contentious issues. They usually meet at the beginning and end of the day to debrief with their table leads and funnel key information up to the political leads, in Canada’s case Foreign Affairs Minister Chrystia Freeland (University-Rosedale, Ont.). Sometimes a chief negotiator might interrupt a head of one table if their discussion becomes relevant, but “they try and do it in tandem so they’re not upsetting the process,” said former Canadian diplomat Colin Robertson.

Last week, U.S. Commerce Secretary Wilbur Ross circulated a list of 28 topics not previously made public. Global Affairs Canada did not respond to confirm if the list was accurate, after some observers noted oddities, namely the lumping of trade remedies in with dispute settlement and a “securities annex,” which sources told Inside U.S. Trade was not a topic being covered in the talks or something the three countries were looking to include in a new deal.

Other topics included agriculture, customs, energy, environment, digital trade, intellectual property, labour, rules of origin, and technical barriers to trade. While there is a table on gender, which Canada said was a priority, a chapter dedicated to Indigenous people was absent. That’s likely still being handled at the chief negotiators’ table, said Mr. Wolfe.

As much as Canada may publicly push for the above goals and environmental standards, the reality is defensive issues are taking the top spot, said Ottawa-based trade strategist Peter Clark. Hotly contested issues are rules of origin, the review of Chapter 19’s dispute settlement, and supply management, which came into the crosshairs this week as the U.S. demanded its end, according to media reports.

Most of the tables are working from a single unified text, with sections in square brackets highlighting separate language where the sides disagree. A particular clause could have three different versions, or perhaps two, if only one is the odd country out on language agreement. The tables work off that piece of paper until they reach consensus, or one single text they all agree on.

Often the Canadian chapter heads managing each table would be from Global Affairs Canada, but also from the government department responsible for the area. That’s the case with Canada’s chief agriculture negotiator Frédéric Seppey, who observers note is in a uniquely—and historically—public position given the complexity of the highly technical file. Other negotiator names are not public and Global Affairs did not respond to a request for that list.

Other than the heads and their supporting staff, the hundred or so Canadians in Arlington, Va. supporting the negotiations this week didn’t divide into sectors. There are legal staff, regional and provincial experts, including those from the respective department or the embassy in Washington.

“They’re the resource people. They’re to help you from falling into [an] abyss,” Mr. Clark said, adding Canada’s Ambassador to the United States David MacNaughton—the country’s quarterback when it comes to Congress—has a big team working for him, including his No. 2 Kirsten Hillman, deputy head of mission, who used to be Canada’s chief negotiator for the TPP.

“They’re aware where all of the bodies are buried, where Canada has leverage, which states are big suppliers to Canada. He puts it all together,” said Mr. Clark, referring to Mr. McNaughton. He was speaking last week from Washington where he said the sides were going in the rooms to negotiate late in the evening, often with at least half a dozen people from each country. By Sunday, he noted the pace of the meetings had slowed.

In an interview last month, Rideau Potomac Strategy Group president Eric Miller, a former vice-president with the Canadian Council of Chief Executives, called them the “dream team.” Ms. Hillman has the technical knowledge from her years working in trade, including on the TPP, and Mr. MacNaughton, while not a deep trade expert, has the “complete trust” of Prime Minister Justin Trudeau (Papineau, Que.).

Both Mr. Wolfe and Mr. Robertson sit on a trade-experts council that acts as an advisory sounding board to the deputy minister of trade, who briefs the group periodically and seeks their views. There are also a number of advisory groups from various business sectors, Mr. Robertson added. Those groups likely have their own lawyers looking at the language of the deal and aware of the sensitivities.

“That’s why these things run over three or four days, because you are constantly checking back to verify,” Mr. Robertson said.

As much as the action is where the negotiating teams meet, there’s also that chain of check-ins and a fairly complex behind-the-scenes process in Ottawa to develop negotiating objectives and to ensure there is broad support within the government, Mr. Wolfe added.

Hotels make a good space for these sorts of negotiations, said Mr. Robertson, explaining in his experience how they would reorganize tables to fit in a big square or triangle to fit the three sides. Principal negotiators for each country would be in the front row, with those in supporting roles behind.

In this round, Mr. Clark said the board rooms can hold around 20 people.

“Each table will have its own dynamic and it is a reflection in part of the personalities at the table,” said Mr. Robertson, but what’s different here is that the players know each other quite well, many of whom would have been at the table for TPP.

“The rhythm depends on what it is you’re negotiating,” he added.

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Full Court Press on USA

‘Full court press’ by ministers, Trudeau ahead of NAFTA negotiations

An active cabinet is key to Canada’s new approach to U.S. relations, say former diplomats, current Parliamentarians.

Prime Minister Justin Trudeau speaks with Virginia Governor Terry McAuliffe during a Q&A session with governors after his keynote address to the National Governors Association last week in Providence, R.I.Photograph courtesy of the PMO

PUBLISHED : Wednesday, July 19, 2017 12:00 AM

Canada’s “full court press” on U.S. relations is one coordinated from the top and taken up by MPs of all political stripes ahead of North American Free Trade Agreement negotiations expected to begin next month.

“Our strategy is quite simply to work at all levels. We are doing everything reasonably possible to expand our relationship with the United States at every level,” said Liberal MP Wayne Easter (Malpeque, P.E.I.), who is co-chair of the Canada-United States Inter-Parliamentary Group.

He, like other Canadian officials, pushed back against reports that Prime Minister Justin Trudeau (Papineau, Que.) is going around Donald Trump’s White House, pointing to the bilateral meeting with vice-president Mike Pence that coincided with Mr. Trudeau’s speech to governors on July 14 in Rhode Island.

“We continue to work constructively with the Trump administration and with the United States Congress to advance mutual interests as well as our strong and prosperous partnership,” said Adam Austen, spokesman for Foreign Affairs Minister Chrystia Freeland (University-Rosedale, Ont.), in an emailed statement.

Since Mr. Trump’s inauguration, there have been more than 175 visits and “300 individual contacts” with senior U.S. officials and Canadian cabinet members, parliamentary secretaries, premiers and provincial and territorial ministers and Parliamentarians, according to data sent Monday by Ms. Freeland’s office.

Some 28 cabinet ministers and five parliamentary secretaries represent 95 of those interactions. Meetings have been with Mr. Trump, Mr. Pence, 17 U.S. cabinet members, 200 members of Congress, and more than 45 governors and lieutenant governors, with numbers expected to grow in the coming weeks, the office added. Washington represented the vast majority of meetings with 78, followed by New York with 18, and several spots in California made up eight visits.

 

U.S. NAFTA objectives released

Monday’s late-day announcement of negotiating objectives for the NAFTA by the United States Trade Representative started the next phase of the NAFTA talks, said Paul Frazer, a former high-level diplomat at Canada’s embassy in Washington.

“At this stage we can guess about the public role many in the Congress will choose to have. All-in-all I am confident that the Canadian advocacy work in the U.S. will need to be maintained and adjusted where necessary,” said Mr. Frazer, president of PD Frazer Associates who advises clients on cross-border issues.

“Including deficit reduction as a U.S. goal signals that the president and his rhetoric will unavoidably be prominent; Ottawa and Mexico City will have to manage two tracks: the negotiation itself and the impact of the president’s actions/statements over the course of the negotiations.”

Export Action Global principal Adam Taylor highlighted several areas that “provide a key line of sight into the Trump administration’s thinking,” including: its fixation on trade deficits; sensitivities in agricultural trade; enshrining ‘Buy American’ policies; and raising Canada’s de minimis threshold, a rule that slaps customs and duties on imported goods worth more than $20.

“While there are very few surprises, it is now clear that one person’s tweak is another’s transformation,” he said by email.

Canada will be ready for negotiations to “modernize NAFTA, while defending Canada’s national interest and standing up for our values,” said Ms. Freeland in a statement Monday.

“Canada is the top customer of the United States. Canada buys more goods from the U.S. than China, Japan, and the United Kingdom combined.”

That messaging reflected Mr. Trudeau’s address at the National Governors Association meeting Friday—a first for a Canadian leader.

 

Personal relationships key to U.S. strategy

Mr. Trudeau’s reception in Providence is one sign that Canada’s message—as America’s “biggest and best” customer—is being noticed, and that the nation is less of an afterthought, said an official in Ms. Freeland’s office who said they could only speak on background.

Standing ovations at the summit, and the number of people who recognized Canada’s prime minister, speak to the work done to build ties recently, the source said.

The month before, Canada sent Andrew Leslie (Orléans, Ont.), parliamentary secretary to the foreign minister, to the Western Governors’ Association meeting.

The official didn’t confirm whether specific ministers were handed regional assignments, as reported by Vice News in May, but said some are a natural fit given their industries, like Innovation Minister Navdeep Bains’ (Mississauga-Malton, Ont.) connections to Michigan and its established auto and aerospace industries.

Former Canadian diplomat Colin Robertson said face-to-face interactions were the most effective form of free trade advocacy.

“It’s a contact sport,” said Mr. Robertson. “Personal relationships are everything.”

“There have been a whole series of efforts that [go] beyond traditionally how we approached the administration,” he said, adding there have been more minister-level meetings, such as those between Finance Minister Bill Morneau (Toronto Centre, Ont.) and his counterpart U.S. Secretary of Treasury Steven Mnuchin in February and again in June, accompanied by Ms. Freeland.

It was a smart strategy by Ms. Freeland and Defence Minister Harjit Sajjan (Vancouver South, B.C.) to meet with U.S. officials before their respective policy speeches in February, he added. 

Public Safety Minister Ralph Goodale’s (Regina-Wascana, Sask.) effort to build a relationship with U.S. Secretary of Homeland Security John Kelly, the first of Trump’s cabinet to come north, was also crucial, he said.

“The homeland security side is really important, because that’s Trump’s base and so that relationship is very important,” he said, noting Mr. Kelly met with other key ministers.

An unusually large number of American officials are deciding they should make the trip north, Mr. Robertson noted. Recently Republican Nebraska Gov. Pete Ricketts said he’d visit Canada this summer, leading a delegation of government and business representatives.

“I can’t think of a time when we’ve had that many in that short a period,” said Mr. Robertson.

Mr. Bains is one Canadian minister who has “undertaken significant outreach,” said spokesman Karl Sasseville—most notably in Michigan, Colorado, and California. And, while Mr. Trudeau was in Rhode Island, Mr. Bains met with U.S. Secretary of Commerce Wilbur Ross, who has also met with Ms. Freeland to discuss issues like softwood and steel.

Mr. Bains has met with business leaders, governors, and other elected officials where he “[insisted] on the mutually-beneficial nature of the Canada-U.S. trade relationship,” said Mr. Sasseville.

The 10 other cabinet offices contacted deferred questions about their minister’s role to Global Affairs Canada’s Mr. Austen.

 

PMO briefing Parliamentarians

Ms. Freeland accompanied the prime minister to Providence, as did Ontario Premier Kathleen Wynne, whose government has fought against Buy American rhetoric, stressing the impact Canada has on various state economies, and warning that protectionist trade measures will harm more than help.

Global Affairs has helped to brief members of the Canada-U.S. Inter-Parliamentary Group attending bilateral meetings with the latest issues and messages from the communications branch of the Prime Minister’s Office, said Mr. Easter,

The PMO has also launched an unprecedented U.S.-relations ‘war room,’ led by Brian Clow, Ms. Freeland’s former chief of staff when she was international trade minister.

Conservative Senator Bob Runciman was among the group in Rhode Island last week, and said he’s also seen more attention paid to Canada-U.S. relations.

“It’s simply more a sense of urgency and a higher priority, given some of the things president Trump has said and veiled threats, if you will, in respect to tearing [NAFTA] up. I think there’s a real full court press,” he said.

He said there’s a real “team feeling” to the meetings, and agreed it was a good idea for Mr. Trudeau to reach out to governors, noting several key cabinet secretaries came from those ranks.

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