We are pleased to present NAFTA NEWS, a periodic newsletter offering important information and insight as the renegotiation of the North American Free Trade Agreement takes shape in 2017.
Through Manatt’s and ManattJones’ offices in Washington, D.C. and Mexico City, and TACTIX’ head office in Ottawa, the firms are collaborating to provide their respective clients with the critical information and experienced judgment global companies and North American industry associations need to help navigate the choppy NAFTA waters.
Each edition of NAFTA NEWS provides our readers with need-to-know information and political insights from the three NAFTA national capital cities.
Former Prime Minister Brian Mulroney captivated his audience at a recent public speaking engagement in Ottawa when he spoke about the original Canada-U.S. Free Trade Agreement negotiations undertaken while his government was in office. He relayed a fascinating anecdote about the 11th hour negotiations when the U.S. negotiators, led by then-Treasury Secretary James Baker, firmly rejected Canada’s last ditch efforts to include a dispute settlement mechanism for anti-dumping/countervailing duty matters (Chapter 19) in the text of the agreement.
With the clock ticking toward midnight, when Congressional approval for the negotiations was set to expire, Mr. Mulroney telephoned Mr. Baker and told him that he was going to call President Ronald Reagan, who the PM knew was at Camp David. Fully aware of the fond relationship between the two Heads of State, Mr. Baker asked the Prime Minister what he was going to say to the President. Mr. Mulroney said that he would tell his close friend, President Reagan, that he could not understand why the United States could negotiate an arms treaty with its arch-enemy, the Soviet Union, but could not agree with its closest friend, ally and neighbour on a free trade deal.
Mr. Baker asked the Canadian Prime Minister to hold off calling the President, indicating that he would do so himself. Moments later, James Baker walked into the room of negotiators and threw a document on the table, saying to the Canadian contingent, “Here is your damn dispute settlement provision.”
We recount this little gem of a story for two reasons. First, former Prime Minister Mulroney, who knows President Trump and Commerce Secretary Ross personally, has been brought in by the Canadian government to advise on the NAFTA renegotiations. Second, the dispute settlement mechanism in NAFTA (also Chapter 19) continues to be a line-in-the-sand issue for Canada today, thirty years after the signing of the Canada-U.S. FTA. As was the case in those original negotiations concluded by the Mulroney government, and repeated in the NAFTA negotiations several years later, the United States bristles against trade agreement provisions that circumvent their domestic court system, which Canadian negotiators seek to avoid.
This position was reinforced once again in the Summary of Objectives for the NAFTA Renegotiation released by the Office the United States Trade Representative on July 17. The Summary text could not be any clearer: “Eliminate the Chapter 19 dispute settlement mechanism.” Not renegotiate – eliminate.
As noted in an earlier edition of NAFTA NEWS, Canada’s NAFTA renegotiation team will be bringing a fact-based brief to the bargaining table with their U.S. and Mexican counterparts when negotiations commence August 16. And when it comes to the facts surrounding cases heard pursuant to Chapter 19, the Canadian team has interesting data to put on the table.
International trade lawyer Riyaz Dattu, a partner with the prestigious Osler law firm, has examined the history of disputes brought by Canada or Mexico against the U.S. under Chapter 19. Mr. Dattu found that, of the 47 cases brought, 36 were decided by unanimous decision of the five panelists, representing close to 77 per cent of the cases. No doubt these facts will be presented by the Canadian negotiating team to their U.S. counterparts.
Abandoning their previous position of not negotiating in the media, Prime Minister Trudeau has publicly affirmed that Chapter 19 is Canada’s sine qua non. We can expect Canada’s Foreign Affairs Minister, the Hon. Chrystia Freeland, to reiterate her boss’ assessment when she appears before the House of Commons International Trade Committee on August 14 to outline Canada’s objectives at the NAFTA renegotiation table.
It is not a surprise that much of the success, or failure, of the pending negotiations revolves around dispute settlement. Former Prime Minister Mulroney could rely upon his friendship with then-U.S. President Reagan thirty years ago to have Chapter 19 delivered in the 11th hour for the Canadian side. Prime Minister Trudeau may have to find a rabbit to pull out of his hat too.
Mexican reaction to the U.S. NAFTA negotiating objectives has been mixed since they were released on July 17. The inclusion of new to NAFTA (or updated) disciplines addressed in the Trans Pacific Partnership negotiations such as e-commerce, financial services, intellectual property rights, and energy are viewed as positive efforts to modernize the agreement. The list of objectives was also characterized by a major industry association as “less radical than feared.” The focus on reduction of the U.S. trade deficit and some proposals to restrict market access rather than expand it, are seen as problematic at best. Secretary of Economy Ildefonso Guajardo, in his initial comments, called the focus on the trade deficit worrisome and repeated his oft-stated position that Mexico is ready to discuss reduction of trade deficits through trade expansion, not through trade restriction. Guajardo and other Mexican officials have also repeated their prior exhortations that modernization of the agreement must be beneficial for all three parties.
Initial Mexican reaction to the proposed elimination of Chapter 19 (dispute settlement for AD/CVD cases) suggest that Mexico may be reluctant to agree to this U.S. objective (as will be Canada). Though Secretary Guajardo seemed to imply that Mexico might be willing to agree to the elimination of Chapter 19 when he noted that “the majority of recent controversies…we have won them all in the WTO, which has been for us, a much more efficient mechanism than Chapter 19 of NAFTA 1, a Mexican multi-party Congressional coalition (including members of the ruling PRI party) has called for the Mexican government to reject the proposed elimination of Chapter 19. Industry groups have also voiced opposition.
In addition to dispute settlement, rules of origin could pose challenges for Mexico. The U.S. negotiating objectives make multiple references to products, goods and materials from the United States and North America. The intent behind this distinction is unclear at present. If the United States seeks to negotiate both regional and domestic content requirements for goods seeking to claim NAFTA preferences, the result could prove disruptive to commercial supply chains and potentially discourage development of such regional supply chains in the future. Proposed changes to the government procurement chapter to reinforce “buy American, hire American” provisions and thus restrict rather than expand market access could also prove challenging for Mexico to accept. Finally, the objectives include novel provisions to promote anti-corruption measures and to prevent currency manipulation which could pose challenges for Mexico. Inclusion of currency language is likely aimed more at China and as a model for subsequent FTAs to be negotiated or updated. Mexican Ambassador to the United States Geronimo Gutierrez recently told a broad group of private sector and foreign embassy officials that the anti-corruption measures were a Mexican proposal adopted by the United States. As a result, these two disciplines may prove non-controversial or could be used as bargaining chips by Mexican or Canadian negotiators.
Mexico also opposes the U.S. proposal to eliminate the exemption for Mexico and Canada from U.S. global safeguard measures which can involve the imposition of tariffs or quotas on an industry that has suffered serious injury from imports.
Mexico continues to prepare for an aggressive negotiating schedule in order to complete the negotiations in late 2017 or early 2018. Secretary Guajardo indicated that there would be no more than a three week gap between negotiating rounds which would allow for 6 – 9 rounds in the proposed timeframe. Completion before the 2018 presidential campaign kicks off in Mexico remains a priority for the current Mexican negotiating team.
1 “WTO better for solving U.S. trade spats than NAFTA tool: Mexico Minister,” Reuters, July 20, 2017 United States
The Trump Administration published its NAFTA negotiating objectives document on Monday, July 17. The first round of negotiations is scheduled to begin on August 16 and run through the 20th in Washington; the earliest date possible under the Trade Promotion Authority legislation. While some reports have quoted Mexican officials in saying that 6 – 9 rounds of negotiations will be conducted before the year’s end, only the first has been confirmed by the United States.
The negotiating objectives document’s initial premise is that the biggest problem with the agreement is the US trade deficit with North America. In fact, the introductory paragraphs blame NAFTA for the explosion of trade deficits, the closure of thousands of factories, and the loss of millions of jobs held by Americans “no longer able to utilize the skills for which they had been trained.” The Administration states that the renegotiation must focus on “addressing America’s persistent trade imbalances in North America.” Further, the first item in the description of the objectives is “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.” This language is consistent with the 2016 campaign and the Trump Administration’s trade policy to date. Yet the introduction also highlights the need to improve market access for US exports and calls for the continued elimination of trade barriers.
The introduction also calls for a more efficient market system in North America. One overarching question that is being posed around town is whether elimination of market access barriers would alter the trade deficit sufficiently or rapidly enough to satisfy the Trump Administration and Congress (and their constituents) that a NAFTA 2.0 based on these stated objectives is responsive to the goals identified during the campaign.
The specific proposed changes draw frequently from the TPA itself and from the text of the Trans Pacific Partnership. The more than 100 separate objectives call for greater transparency, regulatory compatibility, and elimination of barriers across several chapters and disciplines. Canada and Mexico agreed to many of these provisions in the TPP so there may be an assumption that they can be easily adopted into the NAFTA, though there is no mention of TPP in this document. It is important to note, however, that the 12 country TPP negotiations offered considerable new market access in return for concessions – whereas in the case of NAFTA there is very little additional market access to be gained for Mexican or Canadian businesses.
Finally, USTR Robert Lighthizer also announced that assistant U.S. Trade Representative for the Western Hemisphere John Melle would be the lead U.S. negotiator. Melle has served in the office of the USTR since 1988.
Additional specific objectives worth highlighting include:
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