NAFTA 2.0 Talks: Key Issues

August 15, 2017 03:04 AM
NAFTA 2.0 timeline murky as negotiators from three countries must clear sensitive trade policy hurdles

NAFTA 2.0 timeline murky as negotiators from three countries must clear sensitive trade policy hurdles  

NAFTA 2.0 negotiations begin this week in Washington. The hoped-for conclusion will not be as quick as some want, nor take as long as some observers predict. But a long list of policy hurdles is evident.

Negotiators from America, Canada & Mexico begin talks in Washington Wednesday on revamping the North American Free Trade Agreement (NAFTA) — the 1994 trade pact that then-presidential candidate Donald Trump vowed to either rewrite or withdraw from. Talks will focus on revisiting current provisions of NAFTA and adding new chapters such as digital trade, which did not exist in the 1990s. The initial NAFTA helped integrate supply chains in the three countries and generates billions in cross-border trade. For example, Canada is the number two U.S. trading partner and Mexico is number three.

Timeline: take your pick. The three NAFTA partners hope to wrap up talks by early next year, ahead of Mexican and U.S. elections that could complicate ratification of a new agreement. The timeline goal appears optimistic, some say, as the original NAFTA took three years to complete. Others note a lot of groundwork has already been accomplished, and issues relative to the pulled-back Trans-Pacific Partnership (TPP) talks have brought complex topics under the policy microscope.

TPA connection? Some sources signal next July as the hard “deadline” for NAFTA 2.0 talks as that is the time when Trade Promotion Authority (TPA/fast track) expires in the U.S. Congress, provided no allowed extension is announced. TPA allows trade agreements to be voted on via an up-or-down vote with no amendments.

This week’s opening round of negotiations runs through Sunday; the second round kicks off in Mexico in early September.

Canada, Mexico and other countries are inking new trade agreements, and this is adding more pressure in getting the NAFTA 2.0 talks completed and approved. Canada recently inked an accord with the European Union, while Mexico has reached 11 such agreements with 44 countries since NAFTA took effect more than two decades ago.

President Donald Trump called NAFTA one of the worst trade agreements. “NAFTA’s a horrible deal for the United States,” the president told the Wall Street Journal in a July 25 interview. “We’re in the midst of a renegotiation right now so we’ll see,” he added. “Maybe we’ll have to terminate it.”

That’s not so relative to a lot of the U.S. ag sector. U.S. pork and beef exports saw big gains in exports to Mexico since the initial NAFTA. “Hog production in the U.S. has been on an upward trajectory, and new plants indicate that we have a world-class healthy and growing pork industry. You have to think that exports had a bearing on these decisions being made,” said Nick Giordano, National Pork Producers Council Vice President & Counsel, Global Government Affairs.

The NAFTA region covers one-fourth of the world economy and, according to its proponents, made the hemisphere more competitive against rivals in Asia and Europe. Since the agreement took effect in 1994, trade and investment between the countries has soared. The auto industry and other manufacturers have created a North American market with supply chains stretching across all three countries.

Before and after NAFTA. The U.S. has gone from running a small goods surplus with Mexico before NAFTA of about $2 billion to a $63.2 billion deficit last year.

NAFTA trade

The key players besides the leaders of all three countries.

United States. Billionaire Commerce Secretary Wilbur Ross initially built his fortune investing in distressed companies, while U.S. Trade Representative Robert Lighthizer served as a negotiator in the Reagan administration and its trade battles against Japan in the 1980s. He’s also spent decades as a trade lawyer representing clients including steelmakers. As USTR, Lighthizer is by law the president’s principal adviser on trade policy and the country’s main representative during trade negotiations. John Melle, assistant U.S. Trade Representative for the Western Hemisphere, has been tapped by Lighthizer as chief negotiator relative to oversight of the NAFTA 2.0 talks. He has nearly three decades of experience at USTR, having spent the last six years overseeing U.S. trade initiatives in the Americas.

Canada. Foreign Affairs Minister Chrystia Freeland was appointed largely to deal with the Trump administration. An ex-trade minister, Freeland knows Ross from her previous career as a journalist and she led Trudeau’s successful push to revive and revise its EU trade deal. Ambassador to Washington David MacNaughton will be a key dealmaker, pressing the Canadian case in Washington. Former Prime Minister Brian Mulroney, a Progressive Conservative, in the 1980s led the push for the Canada-U.S. Free Trade Agreement, a NAFTA precursor, and then NAFTA talks themselves. He is currently an informal emissary for Canadian Prime Minister Justin Trudeau, whose Liberals were once his top rival. Mulroney is a friend of Trump and a neighbor of Ross in Florida. Canada set up a new advisory body, known as the NAFTA Council, that will be providing input to negotiators as talks move along. Trudeau told provincial and territorial premiers that he would continue to keep them in the loop as the talks unfold. Trudeau and the premiers committed to continue working together to make sure U.S. decision makers understand the value of NAFTA and the U.S.-Canada trade relationship. Canadian officials assigned specific cabinet ministers to business leaders, mayors and lawmakers in different U.S. states, with a focus on local regions where U.S. jobs are dependent on trade with Canada and Canadian investment.

Mexico. Mexican Economy Minister Ildefonso Guajardo headed the NAFTA office in the Mexican Embassy in Washington during the early years of the pact's implementation. He oversaw Mexico’s team in the TPP negotiations. Mexican Foreign Minister Luis Videgaray served as President Enrique Pena Nieto’s finance minister until September, when he departed under criticism for working with Jared Kushner to organize then-candidate Trump’s controversial trip to Mexico. He returned to the cabinet in January. Mexican Chief Technical Negotiator Kenneth Smith Ramos heads the NAFTA office in the Mexican Embassy in Washington, beginning his career as a negotiator on the original NAFTA team. He has also worked at Mexico’s Agriculture Ministry, where he was responsible for farm trade negotiations and international cooperation. He will speak in Washington at the Wilson Center Aug. 15, one day before the talks officially launch. Smith Ramos also led the recent sugar negotiations with the U.S., backed by Salvador Behar Lavalle, who will be the assistant chief negotiator for the Mexico team.

Lots of recent visits among the three NAFTA members. USDA Secretary Sonny Perdue has visited his Mexican counterpart. Canadian Agriculture Minister Lawrence MacAuley visited Oregon and Iowa to promote the U.S.-Canada agriculture relationship. The three officials last gathered in Savannah, Ga., in June to discuss trilateral priorities and build a common relationship. Mexico’s main trade group has had more than 120 meetings with U.S. policy makers over the past nine months, including 20 governors and more than 50 members of Congress.

Sensitive and thorny issues. Some U.S. groups and voters favor Trump’s America First promises, especially the anti-NAFTA message that helped him win Ohio, Michigan and Wisconsin in the 2016 election. In this camp are unions, environmental groups and activists.

What U.S. trade policy activists want. AFL-CIO President Richard Trumka wants an updated NAFTA to require Mexico to raise workers’ wages, allow independent unions and institute labor rights that are enforceable. Raising labor standards, they argue, would aid Mexican manufacturing workers who earn less than their American and Canadian counterparts. Changes also would make Mexico a less attractive place for U.S. companies seeking cheaper labor.

U.S. election-year focus. “We’ll hold the president at his word and make sure we get a renegotiation. If it comes out that it is a bad deal, no deal is better than a bad deal,” Trumka said about what he would support.

Major U.S. goal: shrink America's trade deficit with both countries, especially the more than $60 billion-a-year deficit with Mexico. “Our objective is to, first of all, do no harm, said USTR Lighthizer. U.S. officials want to eventually declare victory by garnering enough concessions from Mexico and Canada so that Trump can declare victory to his factory-worker base without upsetting his business backers, who largely prefer the status quo.

Canada does not like “Buy American” move. U.S. union leaders and apparently Trump want U.S. negotiators to end NAFTA provisions that allow Canadian and Mexican contractors to bid on U.S. government projects, treating those countries as exceptions on federal projects generally reserved for American contractors under a “Buy American” requirement. Tightening the “Buy American” language, they argue, will lead to more business for American companies and jobs for U.S. workers.  Canada said its companies would not be able to compete for state government contracts.

Most U.S. agriculture, automakers and auto suppliers favor NAFTA and a redo. Those groups told the White House about the financial blows that would occur if Trump had withdrawn the country from NAFTA. He pulled back in part after USDA Secretary Sonny Perdue brought a map to a key White House meeting on the topic, showing U.S. exports by state that go to NAFTA participants...and the impact of voters from states that voted for Trump in 2016.

Even if a new NAFTA comes, the outlook on the issue for the U.S. Congress is murky. A 2015 vote to give former President Barack Obama “trade promotion authority” (TPA/fast track) to finish the 12-nation Trans-Pacific Partnership (TPP) deal got support from only 28 Democrats in the House and 13 in Senate. Looking ahead, not many of the 158 House Democrats and 33 Senate Democrats and independents will vote for any final NAFTA 2.0. Of note, Republicans in Congress have turned wary regarding trade agreements.

Growing Democratic Party support for NAFTA? A new survey released Monday shows that a record number of Americans are saying that international trade is good for the economy and helps create jobs in the United States. There has been a big rise in support for trade deals from Democrats: 41% said they supported NAFTA nearly a decade ago, in 2008, while 71% say so now, according to the study released by the Chicago Council on Global Affairs. Republican support has shifted slightly in the other direction. Forty-three percent of GOP voters surveyed said in 2008 that they supported NAFTA — a larger percentage than Democrats — while only 34% say so now. Overall, 53% of the 2,020 respondents said they supported the deal, compared with 42%

The U.S. International Trade Commission (ITC) is required to do an economic analysis of the new NAFTA before it is submitted to Congress.

Some details on key issues in NAFTA 2.0 talks.

— Build on NAFTA gains. Supporters say NAFTA has been successful in integrating the continental economy, boosting trade and investment among the three countries, and making North American-based businesses more efficient and competitive against rivals in Asia and Europe. Those successes should be updated and advanced, proponents agree.

— Currency manipulation. While neither Canada nor Mexico is seen as a currency manipulator, a revised NAFTA is seen as the new “template” for future trade agreements or renegotiated pacts. Some U.S. lawmakers and U.S. exporters support inserting enforceable rules into trade agreements to punish currency manipulation, opponents warn the rules could constrain a nation’s monetary policy choices. The Trump administration is seeking to negotiate some sort of currency rules but has not detailed its approach.

— Investor-state dispute settlement. The process allows an investor from one country to challenge a foreign government and win damages through an arbitration tribunal if the government is found to have violated the investor’s basic rights. Many left-leaning groups and some conservatives want the arbitration provision removed from NAFTA, but the Trump administration has been murky on the topic. Opponents note possible large damages would impact public policy and their bottom line. The U.S. has not lost an arbitration case and proponents say the settlement process gives U.S. companies an effective measure to confront unfair government policies in countries without strong, independent courts.

— Vehicle rule of origin. Products must have a certain amount of content originating in the trade bloc to be shipped duty free to other members of the pact. Trump administration officials have said they want to tighten the rules of origin for the auto industry to bring back assembly and supplier jobs to North America. But some auto makers and international suppliers say current rules are tight enough and that stricter rules could hurt profits or backfire by sending production abroad. Currently cars, light trucks, engines and transmission imports among the three countries are duty-free if 62.5% or more of the components are sourced from one of the three NAFTA nations. Some labor groups want to boost the threshold to increase U.S. content and reduce the use of non-NAFTA suppliers such as China. They say that could bolster U.S. manufacturers.

— Canada’s ag supply management; U.S. sugar market. U.S. dairy, poultry and egg producers are pressing the Trump administration to confront Canada’s policies that use quota limits and high tariffs to restrict agricultural imports. The U.S. dairy industry has focused on the restricted access to Canadian markets, notably limitations on ultrafiltered milk. Both Trump and USDA Secretary Sonny Perdue say the issues should be addressed. Some reports out of Canada suggest that country may want more access to the restricted U.S. sugar market, but U.S. contacts say that is just a diversionary tactic as Canada imports around 90% of all of the sugar it consumes. Also, the U.S. for around 20 years has been unable to ship U.S. sugar to Canada on prior charges that the U.S. subsidizes its sugar industry.

— Other ag issues. Overall, agricultural issues are sensitive in all three countries. Mexico is U.S. agriculture's third largest export market, and ag exports to Mexico have nearly doubled since the NAFTA agreement took effect; Canada is the second largest market for U.S. farm goods, and ag exports north of the border have jumped 44% under the pact. U.S. corn, beef and pork lobbyists are content with the current NAFTA and want to preserve their duty-free, quota-free access to Mexico and Canada. When Trump threatened to pull out of NAFTA last April, some Mexican politicians and government officials warned that their nation could import more food from other Latin American nations instead of the United States. In some cases, Mexico worked out purchases of non-U.S. farm products. Tomato growers in Florida want to create a new trade dispute resolution process for seasonal products. U.S. trade negotiators are planning to put forth a proposal aimed at making it easier for produce growers to bring antidumping cases against Mexico, Politico reported, adding the plan would boost efforts by growers of fruits and vegetables to allege that Mexico is selling produce in the U.S. at below-market prices by allowing American producers in a given region to band together to bring an antidumping case backed by seasonal data. Under current trade law, a majority of the industry nationwide must prove injury based on at least three years of annual data. Meanwhile, some agriculture groups want to restore the hard-fought gains won via the pulled-back TPP, including that proposal’s language relative to sanitary and phytosanitary guidelines.

— Chapter 19 dispute resolution. The provision allows one country in the bloc to challenge tariffs imposed by another due to alleged dumping or subsidies. U.S. officials have proposed scrapping Chapter 19, but Canada and Mexico insist on its survival. Mexican trade officials have made it clear they plan to fight for its survival, describing its importance in a summary of Mexican objectives for the talks issued in early August. Chapter 19 is an essential protection for Mexico, guaranteeing its ability to defend its legal interests against two much larger trade partners, according to de la Mora. “You think twice before you start a case, because you may end up being subject to a resolution panel that finds you in violation of your own commitments,” he said. Canada Foreign Minister Chrystia Freeland is indicating that Canada may leave the negotiations to revamp NAFTA if the U.S. seeks to remove the Chapter 19 dispute resolution procedure. Some officials from U.S. multinationals say they can’t accept the U.S. initiative, which includes a demand to give the U.S. more freedom to unilaterally restrict cross-border trade if it thinks foreign firms are cheating, and to tighten barriers against cheap imports from outside the region.

— Labor and the environment. Rules on labor and the environment were added late in the original NAFTA negotiations. More recent trade agreements have fully enforceable rules to prevent companies from moving production offshore to cut corners. Trump administration officials say the U.S. and its neighbors are on the same page in boosting environmental and labor rules south of the border, and Mexico City has recently enacted labor reforms. But many Democrats in the U.S. Congress want the highest level of international labor and environmental standards, while some business groups and Republicans would balk at rules that could add major costs to companies.

— Immigration. The topic is a high priority for President Trump, whose administration has been reducing legal and illegal immigration, especially from Mexico. However, Mexico wants to use the NAFTA 2.0 talks to further ease the free flow of workers between the two countries, seeking to expand the categories for professional visas granted to business people and executives.

— Softwood lumber. The U.S. Commerce Department in April imposed preliminary duties on Canadian softwood lumber after determining timber exports from several Canadian provinces are subsidized via below market-level government-set harvest fees. The U.S. charges the fees are subsidies that undercut U.S. competitors. The Commerce Department said it would deliver a final determination on the subsidy case by Sept. 7, with Canadian officials pledging to fight the action. Negotiations for a new U.S.-Canada softwood lumber agreement will have to exist side-by-side with NAFTA talks for a time, Canada Foreign Affairs Minister Chrystia Freeland told Canadian lawmakers Monday. “At the moment, the softwood lumber negotiations will continue in parallel with the NAFTA negotiations as has historically been the case,” she said during a hearing of the Parliament’s international trade committee.

Some of Canada’s key issues.

Foreign Affairs Minister Chrystia Freeland testified Aug. 14 before the House of Commons International Trade Committee and outlined a summary of government priorities.

Rules of origin, wage issues related to labor and intellectual property issues are some of Canada’s key topics of interest.

Defending Canada's supply management system and the dispute settlement mechanism that currently exists in NAFTA are two areas that Canada will put a priority on in the coming discussions with the U.S. and Mexico, according to Freeland. She said local-content provisions, such as Buy America, “are political junk-food — superficially appetizing, but unhealthy in the long run.”

The dispute settlement situation will be one of those that appear to be a line in the sand for Freeland as a related development from the initial round of Free Trade Agreement (FTA) negotiations with the U.S. in 1987. "It was during the initial FTA negotiations in 1987 that the late, great Simon Reisman walked out, pulled home by his PM over the Reagan administration's initial refusal to agree to binding bi-national review of antidumping and countervailing duties," she said. "Our government will be equally resolute. Just as good fences make good neighbors, strong dispute settlement systems make good trading partners." This could emerge as a key matter in the talks as the negotiating objectives laid out by the Trump administration included getting rid of that dispute settlement system as one of its keys. Freeland said that while she is "deeply optimistic" about the talks, "I think we do all need to be prepared for some moments of drama, that's going to be inevitable, and, as I also said, that happens in all trade negotiations."

Cutting red tape and harmonizing regulations will be another focus for Canada, something which Freeland said is a "clear objective" of the Trump administration. But even there, Freeland was cautious. "This cutting red tape effort is something we are very enthusiastic about," she noted. "But we're also going to do it with real attention to the technical detail and the balance of interests in each area."

The agricultural access issues could also loom large for the talks, given Freeland's position that Canada will protect its supply management programs that are in place for dairy and poultry.

Labor issues may be an area where the U.S. and Canada will agree, Freeland said, along with environmental issues. On the environment, she said Canada wants the countries to support efforts to combat climate change, and cast a skeptical eye toward countries that “[weaken] environmental protection to attract investment.”

Dairy policy issues are in focus as Freeland also testified before the Canadian Parliament Standing Committee on International Trade. "Dairy producers in the U.S. are beneficiaries of an extensive web of government supports, that is the reality as well," she stated. "We remind our American partners of that fact when we enter into this conversation." Canada will continue to point out that the balance of U.S.-Canada dairy trade that favors U.S. producers by a margin of five-to-one, Freeland pointed out. "I would call that already a pretty good deal," she said.

A U.S. dairy group responded to Freeland’s dairy policy comments. “For too long, Canada has relied on government controls on farm milk production to boost prices, while minimizing dairy imports to limit competition,” National Milk Producers Federation President and CEO Jim Mulhern said in a statement. “By comparison, the United States has slashed its government involvement in dairy markets and relies on exporting its products to global customers to a greater degree than ever before.” He also countered Freeland’s assertion that dairy trade is balanced in favor of the U.S.: “Much of what the United States exports to Canada is ultimately shipped back out under Canadian import for re-export programs. Canada has been refusing to share details of imports and exports under those programs, but the reality is that much of the dairy the United States ships to Canada doesn’t stay in Canada.”

Some goals Mexico has for NAFTA 2.0.

Stopping any new tariffs, notably for agricultural products. “We currently have no duties with the United States, and we want this free trade to continue,” said Kenneth Smith Ramos, who will lead the technical negotiations for Mexico. We are seeking guarantees that there will be no imposition of tariffs or any kind of return to a strategy that represents back-tracking on free trade.”

Mexico’s ag sector is key, Smith Ramos said, nothing the country will be looking for ways to remove additional trade barriers, such as the gap in sanitary and packaging regulations that make trade more complicated. Mexican officials will have to defend against U.S. efforts to open up Mexico’s restrictive potato market. Some smaller farmers in Mexico are lobbying for more agricultural protections, according to Jose Femat, the president of the National Farmers Association, or NFA, who is seeking a commitment that Mexico's government will provide the same assistance to small farmers as is provided in the U.S. and Canada, including access to credit and assistance for certain crops.

Mexico plans to focus on TPP-similar issues, said Francisco de Rosenzweig, who headed the Mexican team to negotiate the TPP.

Ag trade with Canada

Ag trade with Mexico


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