NAFTA 2.0 End Game Briefer

From what we know so far, the prospective deal is not as good as we hoped, but it is not as bad as it could have been. 

 

Are we in the end game for NAFTA?

I would give it a more than 50/50 chance. To be in the end game, two conditions must be met: Canada has to be able to live with the proposals worked out by the U.S. and Mexico over the past five weeks and there must be enough benefits across all sectors of the agreement to provide a landing strip for settlement.

• Condition 1, Autos and sunset clause – The major advancements made during the Mexico-U.S. talks focused on automotive rules of origin and watering-down the sunset clause - extending it to a 6 to 16 year configuration and removing the prospect of a deal cancellation. Early analysis indicates that the automotive proposal will raise the cost of vehicles in North America but, Canadian labor and automotive stakeholders have indicated that they can live with the new terms. Similarly, the new sunset clause proposal decreases investor certainty but is less bad that the original.
  
   
• Condition 2, Balance of benefits and concessions across a critical mass of sectors – When the trilateral meetings halted at the end of May, the three countries had settled 9 out of 32 chapters. Easy issues such as support for SMEs were resolved but tough issues such as dispute settlement were outstanding. The USTR fact sheets on the bilateral deal (the only formal documentation released this week) show a smattering of progress across a range of sectors but much of the language is set out in very vague terms. What specific commitments there are tend to cut from previously agreed TPP texts, with a few exceptions discussed below.

The fact sheets do provide some directional arrows as to where the negotiations with Canada will be heading. For example, the threshold for duty-free treatment for low-value shipments across the border has been raised to $100 by Mexico. Canada has been holding out at $25.

Surprisingly, the fact sheets suggest that domestic supports in dairy, including supply management, would continue to be permissible as long as they are designed to have minimal trade distorting effects.

From what we know so far, the prospective deal is not as good as we hoped, but it is not as bad as it could have been.

Is the US happy with the deal?

It is important to remember that there are significant schisms between the White House and USTR on one side and Congress on the other, with farmers and business groups pushing back against the President’s most protectionist proposals. As soon as the U.S.-Mexico deal was announced Monday, business groups and members of Congress began to weigh in on the inadequacies of the deal, from insufficiencies in labor to under-developed intellectual property protections. It remains to be seen whether these interests coalesce into effective opposition to the USTR deal or whether these criticisms represent minority interests.

Will NAFTA 1.0 disappear if we don’t reach a deal by Friday?

Perhaps but not right away. Since the first days of his presidency, Donald Trump has threatened to launch a six-month notice of withdrawal. He might still do that but there are a number of Congressional hurdles as well as legal challenges that stand in the way of a full withdrawal.

What’s the rush?

If USTR submits a Notice of Intent to Congress by August 31, followed by a full text on September 30, then a deal could be signed by the U.S. on November 29, but it could not be implemented until after about 105 days in the reporting and mark-up phase and then up to 90 days under congressional consideration. So, there is no possibility that a deal concluded this week would be considered by the current Congress. However, this would provide Mexico with a ‘signed’ deal before President Lopez Obrador takes the Oath of Office on December 1.

What happens if Canada doesn’t go along with the new deal?

If Canada is not able to reach a deal with the other two Parties, the President has said he will submit the bilateral deal for consideration. However, Congress could refuse to consider a US-Mexico deal because Trade Promotion Authority was given only for a three-party deal. This would slow the process down by approximately 180 days as Congress considers whether to provide authorization for the two-party deal (too late to meet Mexico’s December 1 deadline).

Should Canada rag the puck?

Although Canada is not facing the same kind of political deadlines as the U.S. – with the Congressional midterms in November – and Mexico – with the transition to a new President – the prolonged NAFTA negotiations and the associated tariff wars have created uncertainty in the minds of investors and manufacturers and had a dampening effect on the Canadian economy. Ragging the puck (strategic delays) will only prolong that uncertainty.

What does Canada have to do to cross the finish line?

Even though the USTR texts indicate that supply management might be maintained, President Trump has painted on a target on Canada’s Class 7 milk market and vowed to open it up to U.S. producers who, for a time, were able to export to Canada. This issue is indicative of the kind of visible, politically popular ‘wins’ that the President will need to show his supporters that he delivered a great deal. Movement on the Chapter 19 review process for anti-dumping and countervail decisions will be trickier.  These mechanisms are seldom used any more – except for softwood lumber. And we are in the middle of a lumber dispute. Wiser legal minds suggest that there may be a way to introduce a review process that achieves similar results with fewer ruffled feathers, but I’ll leave that assessment to the lawyers. Government procurement continues to be a problem for Canada if the U.S. maintains its initial proposal, which would see Canada much worse off in future government contracting opportunities in the U.S. Perhaps with procurement, as well as with the TN visa/movement of people, maintaining the status quo is the best that Canada can hope for right now.

It is pretty clear now what concessions Canada will probably have to make and that the main elements of the U.S.-Mexico deal are tolerable if not optimal. Moreover, many of the areas of where consensus has already been reached, such as improved border clearance measures and benefits imported from the TPP on electronic commerce should be logged on the plus side of the ledger. If sufficient benefits can be cobbled together in areas not discussed in this week’s public briefings, then Canada might well find a pathway to a deal sooner rather than later.

Highlights of the U.S.-Mexico Trade Deal

• Automotive

  • Rules of Origin (ROOs)
    • North American content increase from 62.5% to 75%.
    • Other sectors facing tougher ROOs are Chemicals, Steel-Intensive Products, Glass, Optical Fiber, and Textiles
  • Labor Value Added Content & Higher Wages
    • 40-45% of auto content must be made by workers earning a minimum of $16 USD per hour. This will have the effect of shifting more production to U.S. and Canada.

• Agriculture

  • Tariffs that are at zero will remain at zero.
  • Non-discriminatory grading standards (aimed at Canadian grains)

• Geographical Indications (GI)

  • Attempts to roll back some recognition of EU geographical indications recently accepted by Mexico and Canada in their EU free trade agreements to allow continued access for U.S. users of GIs that are also common names (e.g. gorgonzola cheese)

• Intellectual Property

  • Biological drugs: 10 year protection
  • Minimum Copyright term: 75 years (stronger than the TPP)
  • Copyright safe harbors for Internet Providers:
    • Notice-and-Takedown system vs. Notice-and-Notice System

• Digital Trade

  • Similar to TPP, includes Prohibition of duties, electronic signatures, enforceable consumer protection, and prohibits data localization requirements.

• De Minimis (Low-Value Shipments) Threshold

  • Mexico increases it from $50 to $100 USD
  • Canada remains at $25 USD

• Sunset Clause

  • Agreement period set at 16 years
  • A review will be conducted 6 years in to approve for another 16 years.
  • Sudden death no longer on the table.

• Financial Services

  • Includes national treatment, MFN, and market access commitments
  • Prohibition on local data storage requirements

• Investor-State Dispute Settlement

  • Eliminates comprehensive protection but provides ISDS for specific sectors: Energy, Telecommunications, and Infrastructure
    
     

• What’s missing?

  • Dispute settlement for allegations of rules violation (Chapter 20)
  • Panel review of national trade remedy decisions (Chapter 19)
  • Government procurement (WTO government procurement commitments or NAFTA 1.0 could be maintained)

Sources: Thanks to all of our wonky friends in the twitterverse, but especially @inumanak, @snlester, @lherman8, @JAHillman, and @chris_e_wilson.