What to watch as Canada looks for a breakthrough in NAFTA talks

What to watch as Canada looks for a breakthrough in NAFTA talks

NAFTA negotiations have entered a heated phase after the White House cranked up the pressure on Canada to sign on to a U.S.-Mexico agreement by Friday.

If the parties fail to agree on the modified North American Free Trade Agreement, U.S. President Donald Trump has threatened to move forward with a bilateral deal with Mexico and slap punitive duties on Canadian autos.

Not surprisingly, early signs out of Washington this morning suggest the talks – which are likely to produce an “agreement in principle” with hard details to be nailed down later – are tense, with U.S. Trade Representative Robert Lighthizer issuing a statement that “there have been no concessions by Canada on agriculture.”

Separately, Donald Trump reportedly told a news outlet the U.S. will make no compromises in any agreement with Canada.

“Every time we have a problem with a point, I just put up a picture of a Chevrolet Impala,” The Toronto Star reported of the off-the-record comments apparently made in an interview with TheNewsEditorial News. The Impala is produced at the General Motors facility in Oshawa, Ontario.

Trump later confirmed the comments, saying on Twitter: “At least Canada knows where I stand.”

So far, Prime Minister Justin Trudeau and Foreign Minister Chrystia Freeland have responded positively – if coolly – to the deadline pressure, with Trudeau insisting at a press conference in Oshawa that the Canadian team would continue to be positive and constructive but “unequivocal about always standing up for Canadians’ rights and Canadians’ interests.”


Canadian Foreign Affairs Minister Chrystia Freeland speaks prior to her meeting with U.S. Trade Representative Robert Lighthizer Thursday.

Jim Watson/AFP/Getty Images

And indeed, there is plenty of skepticism about Trump’s ability to swiftly achieve a bilateral deal in the face of overwhelming legal and Congressional obstacles.

Still, the prospect of a breakthrough in the talks has prompted “a lot of heavy breathing about what a good or bad outcome looks like for Canada,” observed Robert Wolfe, professor emeritus at Kingston-based Queen’s University who has studied Canada’s international trade policy for several decades.

So what’s a “good deal” for Canada?

In answering that question, it is helpful to rewind the clock to the beginning of the talks, about a year ago, when the tension was between a shared desire to modernize the 24-year-old pact and the singular intention of the Trump administration to renegotiate or “rebalance” it, Wolfe says.

“These are quite separate tracks and on the modernization issues, things seem to have gone quite well,” Wolfe said. “The problem was always on the renegotiation chapters, and there a good outcome is the one of least harm. It’s not that we’re out to win on any of that stuff, we’re just trying to limit the damage.”

Here then, are the issues to watch:


Dairy represents only a small fraction â about US$600 million â of a total US$900 billion in cross-border trade, but it’s a hot button.

Canadian Press/Darryl Dyck

Dairy

For Trump, no Canadian policy has a bigger target on its back than dairy supply management. The system keeps Canadian prices high in three ways: by restricting the amount of dairy, poultry, eggs produced in Canada, by setting a fixed price for those commodities, and by limiting imports through hefty border tariffs.

Dairy represents only a small fraction – about US$600 million – of a total US$900 billion in cross-border trade. And the U.S. has also been accused of unfairly subsidizing its own dairy sector, not to mention using a system that bears a striking resemblance to supply management to protect its sugar producers. Nevertheless, Trump has latched on to Canada’s dairy protections as “not fair to our farmers!”

From the beginning, concessions on dairy were inevitable, Wolfe says: “We knew that, the dairy industry knew that. The only question is how far we would go.”

The Canada-European Union Comprehensive Economic and Trade Agreement, or CETA, negotiations – which saw Canada open up about 3.5 per cent of its dairy market, could provide a template for negotiators, according to a report from TD Economics.

But if a complete dismantling of supply management is what U.S negotiators are after, they may be waiting a long time, Wolfe said.

“I doubt this deal will be the end of supply management,” Wolfe said. “Whether or not that’s a good idea, we’ll do it on our own time in Canada.”

Dispute Settlement

Nested within NAFTA are three methods for sorting out disputes. Chapter 20 lets governments settle disputes with other governments. Chapter 11 enables companies to sue governments for unfair treatment. And Chapter 19 allows companies to fight a country’s anti-dumping or countervailing duties before an independent, binational panel of five arbiters, agreed upon by both parties, rather than rely on the U.S. domestic court system.

U.S. Trade Representative Robert Lighthizer, who built his career as a lawyer pursuing anti-dumping and countervailing duties for American steel companies, is no fan of any of these mechanisms. He wants Chapter 19 done away with altogether.

But from the outset of the talks, Chapter 19 has been portrayed as Canada’s ultimate red line – just as it was back in 1987, when Canadian negotiators nearly abandoned trade talks over the issue.

“I think Canada still has to fight for some kind of dispute settlement in NAFTA, I’m just not sure Chapter 19 is it,” said Lawrence Herman, a former Canadian diplomat who practices international trade law at Herman & Associates.

Apart from the softwood lumber dispute, Canada hasn’t used Chapter 19 much over the years, said Herman. And in the years since NAFTA was first negotiated, the World Trade Organization has introduced new ways to appeal unfair duties – though the U.S. has been blocking the appointment of any new judges to the WTO’s appellate body, calling into question the effectiveness of this system.

“In the short term, I think you could use it as a bargaining chip and in the long term, countries could be looking for some better way to deal with predatory pricing,” Wolfe said. “From a negotiating perspective they may think Chapter 19 is a ditch we wouldn’t die in, but if we give it up, they’ll have to give us something in return.”

Government Procurement

Back in February, Canada’s chief NAFTA negotiator Steve Verheul called the U.S. proposal on government procurement “the worst offer ever made by the U.S. in any trade negotiation.”

At issue is access to lucrative government contracts. Canada wants to expand companies’ access from federal contracts to state and local deals, too. The U.S. wants to restrict those rights even further, limiting Canadian and Mexican companies on a dollar-for-dollar basis to what American companies win in their countries.

Government procurement was absent from the fact sheets on the U.S.-Mexico deal – and there’s been little noise about the issue from the parties in Washington.

“If the U.S. is willing to move away from this dollar-for-dollar position I think something could get sorted out here,” Herman said, noting that WTO rules, countries must provide non-discriminatory access to government procurement. “We at least want the same access as Germany or the U.K.”

Other possible flashpoints

Steel and aluminum tariffs: When (and if) a NAFTA deal is ultimately forged, Ottawa will want Trump’s tariffs on steel and aluminum lifted. The industries in question have made it clear they want tariff and quota-free trade with the U.S. Canada will also want a guarantee that the U.S. won’t slap tariffs on cars made in Canada.

Sunset clause: The original U.S. proposal was to place a five-year “sunset” or expiry date on NAFTA unless all three parties agreed to extend it. Both Canada and Mexico balked, saying such a deal would prevent the type of certainty necessary for long term business investment. The U.S. has since softened its proposal to a 16-year sunset, with reviews every six years. This will be more considerably more palatable, analysts say.

Cultural products: Canada’s NAFTA exemptions for some cultural industries have been an irritant to the U.S. for decades. Though Lighthizer has recognized the need for some of these policies, others are simply protectionism, he’s said.

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