Some initial agreements, but thorny issues will linger
Canada’s chief NAFTA negotiator is downplaying expectations for major breakthroughs in the talks, which began Saturday in Ottawa and run through Sept. 27. “We’re not expecting to see anything radically new” proposed on the so-called rules of origin, one of the key contentious areas, Steve Verheul said as he entered the first day of talks in Ottawa. In particular, he said he didn’t expect specific proposals related to the auto sector. It’s too early to say how things will go in the third round, Verheul said.
The agenda. The first day of talks included subjects such as anticorruption, the environment, small and midsize enterprises, and gender, according to a copy of the itinerary. Rules of origin will be discussed Tuesday and Wednesday. Dispute settlement is set for discussion on the final day. Other subjects of discussion include both the telecommunications sector and workers’ temporary entry rules on Monday and Tuesday; other labor provisions Tuesday and Wednesday; and agriculture Tuesday and Wednesday.
The Trump administration plans to focus on the areas of the North American Free Trade Agreement (NAFTA) it finds most. “At this point in the negotiations, more challenging issues will start taking center stage, and the U.S. remains committed to advancing and negotiating substantial changes to NAFTAfor an agreement that benefits all Americans,” John Melle, the U.S. chief NAFTA negotiator, said in a statement to the Wall Street Journal.
Canadian Prime Minister Justin Trudeau sounded optimistic on Friday when he said, “There are strong things that we can do to make the deal more progressive, even better for our citizens in all three countries. We have a tremendous opportunity to grow our economies.” Some issues can be agreed on immediately, while others will require ongoing discussion, he said.
Mexico Economy Minister Ildefonso Guajardo warned the success of the renegotiations hinge on addressing “elephants in the room.” He told a Mexico City audience that seven NAFTA chapters are close to completion, with some of them likely done in the Ottawa round. But he said work remained on another 13 chapters “that represent some degree of difficulty.”
He said the Ottawa session would focus on boosting small and medium-sized companies’ participation in trade, transparency on regulatory matters, unspecified agricultural issues, and food safety and plant sanitation rules. But Guajardo said the eventual success of renegotiating the 1994 trade pact will turn on how negotiators address the U.S. goal of reducing its more than $60 billion-a-year trade deficit in goods with Mexico and the Trump administration’s push to increase the percentage of components in a vehicle that must come from the three nations in order to receive duty-free treatment.
Rules of origin govern how much of a product must be sourced within the NAFTA region to get the trade pact’s benefits -- for autos, for example, it’s currently 62.5%. There is speculation the U.S. wants to raise that to 70% or higher. The subject will be discussed during talks, Verheul said. U.S. Commerce Secretary Wilbur Ross said President Donald Trump’s administration wants a provision added that would require a specific amount of U.S. content in goods traded within North America, calling the rules of origin a key to the entire renegotiation of the pact.
The U.S. also wants to establish a requirement that components for all cars manufactured in the NAFTA region contain perhaps as much as 35% of American-made material, in essence a guarantee that all NAFTA duty-free cars have a minimum U.S. content. The Trump administration believes that setting a specific American content requirement would aid U.S. manufacturers and workers.
Commerce Secretary Wilbur Ross said U.S. content in vehicles produced by the three countries has declined over the years. “This problem is particularly troubling because the previous U.S. share of the content found in imports from Canada and Mexico is largely being absorbed by non-NAFTA trading partners, not by Canada and Mexico themselves,’' he wrote last Thursday in an opinion piece for the Washington Post. “The share of content from foreign countries other than Canada and Mexico has almost doubled in our imports from Mexico, from 14 percent to 27%,’' added Ross. “The non-NAFTA content of our imports from Canada likewise rose, from 12% to 21%. ... NAFTA has provided entry into a bigger market for outside countries, and the United States is paying the price.’'
Mexico’s Guajardo said, “We do not want to alter the rules of origin in a way that it makes more sense to actually end up buying finished products from other regions, which could very well happen.”
Canadian ambassador David MacNaughton called the idea of a U.S. domestic content requirement “inconsistent with the trilateral trade agreement. We’re prepared to sit down and discuss ways to make our industries more competitive.”
Asked about the NAFTA chapter related to the environment, Canada’s Verheul said it’s “doubtful” it could be finalized during the third round of talks. The nations are aiming for a deal by December.
Chapter 19. Canada’s MacNaughton said that one of Ottawa’s key issues is preserving the Chapter 19 trade-dispute resolution program that Trump wants to eliminate. “Getting rid of Chapter 19 and putting everything at the mercy of the U.S. courts — that is not something that we would envisage as part of this agreement,” he told the Global Business Forum in Banff, Alberta, on Friday. The third round may focus on issues where there is already “substantial agreement,” he said. He previously called the idea of a U.S. domestic content requirement “inconsistent with the trilateral trade agreement. We’re prepared to sit down and discuss ways to make our industries more competitive.”
The U.S. has said it wants to do away with Chapter 19, in which panels of trade experts resolve conflicts over tariffs. But Canada’s exporters see the dispute-resolution panels as an essential safeguard against U.S. protectionist whims in areas such as softwood lumber.
Trump administration trade officials want to bring in the “America First” theme championed by Trump, including by rolling back international arbitration and other forms of dispute resolution enshrined in the current version of the trade pact. The Trump administration has expressed strong reservations about such binding arbitration decisions, seeing them as an erosion of national sovereignty. But those proposals are facing opposition from not only Canada and Mexico, but from some U.S. business officials and some members of Congress in both parties.
U.S. Trade Representative Robert Lighthizer backs a preference for government-to-government consultations and negotiations to resolve disputes rather than binding solutions imposed by an arbitrator.
Other outstanding issues include the trade pact’s contentious investor-state dispute settlement process, or ISDS, provision. Lighthizer has expressed discomfort with that provision, which allows foreign investors to challenge a NAFTA government’s regulations or laws using an arbitration panel of private attorneys that issues binding decisions on monetary damages. Under NAFTA, investors can argue that a country’s laws or regulations affect their bottom line.
Canada has indicated that it might be interested in changing the process since it’s been the most sued of the three countries. Negotiators might suggest investor-dispute provisions in the Canada-European Union Comprehensive Economic and Trade Agreement that include an appeal process. Implementation of that trade agreement began last Thursday.
