August 29, 2018
As analysts began parsing summaries of a partial U.S.-Mexico deal announced Monday, most details didn’t jump out as deal-breakers for the other partner in the 24-year-old continental trade pact.
The problems instead lie in a series of NAFTA fights always seen as squarely between Canada and the U.S., chief among them the pact’s dispute resolution systems.
“It seems like a set of things that are very easy for Canada to come in on,” Brett House, deputy chief economist at Bank of Nova Scotia, said in an interview with Bloomberg News about what the U.S. and Mexico agreed to. “We’re really just back to where we always were.”
Markets appear unconcerned, with Canadian auto-parts makers Linamar Corp. and Magna International Inc. extending gains Tuesday — signaling a bet Canada will make the cut on a final deal and that the Mexico problems were the biggest ones that needed fixing.
“I am not concerned right now for Canada’s position,” Bruce Heyman, a U.S. ambassador to Canada under Barack Obama, told BNN Bloomberg television.
But the clock is ticking on the North American Free Trade Agreement. Canadian Foreign Minister Chrystia Freeland arrives in Washington for talks Tuesday, and U.S. Trade Representative Robert Lighthizer wants to notify Congress of a deal by Friday. It would be a lot easier to do so with Canada, since U.S. lawmakers might fight the Trump administration if it tries to push ahead with only Mexico.
The following are issues that need to be resolved to preserve a trilateral deal:
NAFTA’s Chapter 19 allows for anti-dumping panels to resolve disputes. Justin Trudeau’s Liberal government considers it a red line, and has regularly said so, and it was a potential deal-breaker in U.S.-Canada trade talks a generation ago. Support for the prime minister crosses party lines in the current negotiations. Rona Ambrose, who once led the Conservatives after Trudeau’s election in 2015, urged him to dig in on the issue.
“Canada has to stand strong on the dispute resolution mechanism,” she told BNN Bloomberg television on Monday.
But Lighthizer wants to kill it, a point he repeated Monday, and Mexico doesn’t feel strongly. The two-country pact waters down a related mechanism, Chapter 11’s investor-state dispute settlement panels, that Canada may also squirm over. But Chapter 19 is bigger — either Canada or the U.S. will have to blink.
It isn’t in NAFTA now but it’s a big irritant for one key stakeholder: Donald Trump. The U.S. president often rails against Canada’s system of dairy quotas and tariffs, known as supply management. Domestic politics are a complicating factor. Quebec, the French-speaking Canadian province in which the system is considered sacred, is in the middle of an election campaign.
“My position on defending supply management hasn’t changed, we will defend supply management,” Trudeau told reporters in Montreal Tuesday. But while he regularly says he won’t dismantle supply management, he has left the door open to giving the U.S. a cut of the market.
Most analysts expect that since Canada did the same in both the Trans Pacific Partnership and its free-trade deal with the European Union.
“Every time we’ve negotiated a big trade agreement, we’ve essentially provided some additional access in return for compensation for farmers,” House told Bloomberg News.
An American demand for a sunset clause that would have killed NAFTA after five years unless the countries agreed to renew it was another deal-breaker for Canada. The U.S.-Mexico agreement stipulates a 16-year NAFTA that would be reviewed and possibly extended every six years. That opens a door for Canada to agree.
“They gave on the sunset clause, which continues to be a red line for Canada and Mexico,” Ambrose said. “Now it’s time for Canada to come to the table and for Canada to give something too.”
Asked Tuesday if Canada could accept the revised sunset clause, U.S. Commerce Secretary Wilbur Ross told Bloomberg Television: “We don’t know, because we haven’t had the sessions yet.”
One big question after Monday’s announcement is when, if ever, the U.S. will lift tariffs on Mexican aluminum and steel. The same tariffs were applied to Canada — the top foreign source of both metals to the U.S. — and Trudeau’s team will be looking for an exemption as part of any deal. Canada has taken steps to beef up protections against being a back-door for foreign steel in a bid to curry favour with the U.S.
The U.S. wants to limit the value of government contracts available to Canadian firms. Trudeau’s negotiators pushed back strongly against this at first but has been more quiet lately. There’s little signal they see it as a red line.
Mexico agreed to raise its so-called de minimis level — the threshold above which you pay taxes on a cross-border shipments — to $100, from $50. That will, in effect, exclude a larger number of shipments from the U.S. to Mexico from paying customs duties. Canada’s de minimis level remains low at just $20 ($15.50 US), but the government hasn’t stuck particularly closely to that figure. Many analysts see this as a bargaining chip Canada has at its disposal.
So it’s things like Chapter 19 that will decide NAFTA’s fate.
“Mexico wants a deal, Trump needs a deal. This is a good time for Canada to re-enter talks with a mandate to close and conclude,” Adam Taylor, a former trade official under the Conservatives who is now a principal with Export Action Global, an Ottawa-based consultancy, told Bloomberg News. “It’s time to shelve our ‘nice to haves’ and advance and protect our ‘must haves.’”