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.