Canada: Canada Begins NAFTA Consultations

In the June 3, 2017 edition of the Canada Gazette – Part I, Vol. 151, No. 22 (the "Consultation Notice"), Canada officially announced the start of consultations for the renegotiation and modernization of the North American Free Trade Agreement ("NAFTA"). Concerned parties may make written submissions on or before July 18, 2017.

These consultations come on the heels of US President Donald Trump's May 18, 2017 official notice to the US Congress and the leaders of Canada and Mexico that it is his government's intention to either reopen NAFTA for negotiation or exit it altogether. This is an important opportunity for industry and stakeholders to provide input to the Canadian government on key trade and investment issues in all three NAFTA countries.

Areas of Focus – Existing NAFTA Chapters

In the Consultation Notice, Canada sets out the areas in which it seeks public comment – essentially every chapter of NAFTA. We expect that among the areas of strongest interest to the Parties will be the chapters on Rules of Origin, Government Procurement, Trade in Services, Intellectual Property, and Dispute Settlement.

1. Rules of Origin (Chapter 4)

Rules of origin form the backbone of any major trade agreement by delineating which products are given preferential tariff treatment and duty-free access. Under NAFTA, products can qualify for preferential treatment if they are wholly obtained or produced in the NAFTA territory. Many products may also be considered "originating" if during the manufacturing process in the NAFTA territory their foreign components undergo a shift in tariff classification as set out in the specific rule of origin for the final product.

Other products have additional requirements centered on the percentage of the product's value that is derived from NAFTA originating inputs, a "regional value content" requirement. This imposes additional restrictions on the manufactured product and makes it more difficult to use non-NAFTA originating inputs in the manufacture of the end product. These requirements are usually used for complex items or those for which additional protection is sought, for example, automobiles.

The Trump Administration has repeatedly stressed that they will be seeking more stringent rules of origin as well as provisions to prevent circumvention. It is likely that they will be pushing for higher regional value content requirements, particularly in the automotive sector.

Any Canadian, US or Mexican manufacturer that makes and sells products built with foreign inputs must pay careful attention to the negotiations on these rules. While this chapter is exceptionally technical, it is one of the most critical areas of the agreement. By defining what makes a product a "NAFTA product" it serves a gatekeeper function. This can result in massive tariff costs for manufacturers whose products fail to qualify under the narrow definition of "originating".

2. Government Procurement (Chapter 10)

The current government procurement chapter in NAFTA has become somewhat dated and has been surpassed by several other Canadian trade agreements including the Comprehensive Economic and Trade Agreement ("CETA") with the EU. NAFTA procurement obligations are less sophisticated, particularly with regard to negotiated procurements. The procurement chapter also represents major market opportunities for all Parties – the Canadian public procurement market is valued at over $200 billion while the US market is valued at $1.7 trillion.

Unfortunately, procurement is also a fairly contentious area. The United States has historically kept its procurement market fairly closed and protectionist. This is reflected in both in the Buy America Act and the manner in which the US creates mandatory offsets or subcontracting provisions for small and medium enterprises. Canada has addressed this issue previously with negotiated exceptions to Buy America for which it granted limited access to certain provincial procurement.

This necessarily ties Canadian hands to a degree. The stated position of the Trump Administration is to achieve greater market opportunities for US goods and services while simultaneously seeking to maintain policies giving US companies domestic preferences. It will be important for Canadian stakeholders to make clear to the government the necessity of opening US procurement, particularly on the state and local level and receiving reciprocity on any procurement market access granted.

3. Cross-Border Trade in Services (Chapters 12-14)

Trade in services is a hot button issue at the moment and has been a focus of US negotiators in several fora. Services represent an ever growing segment of the US and Canadian economies – particularly the provision of digital services. There will likely be considerable pressure from the US to adopt a "negative list" approach to the services chapter which will liberalize access to the Canadian market for a broad range of US and Mexican service providers (and vice versa).

It is also likely that US negotiators will be interested in increasing access to the Canadian financial services market for US financial institutions and other financial service providers. Given that Canada's protections and regulations on financial services were critical in limiting contagion from the US housing crisis, this will be a hotly contested area.

4. Intellectual Property (Chapter 17)

The US is likely to push for intellectual property protections that were similar to or exceed those proposed in the Trans-Pacific Partnership. The United States is particularly interested in seeking greater commitments on criminal enforcement of IP infringement and providing remedies for rights holders.

Canada has already provided considerable concessions in many areas of intellectual property in the course of CETA negotiations. These include patent-term restoration for pharmaceuticals, camcording provisions, and the strengthening of our copyright regime.

There will likely be a great deal of interest in the contrast between Canada's notice and notice regime, and the US notice and takedown regime. In addition, the United States may wish Canada to make additional trademark and copyright concessions in the course of negotiations. Rights holders have an excellent opportunity to push the Canadian government to embrace these ideas and do so in a way that could allow Canada to leverage these concessions for additional benefits elsewhere.

5. Review and Dispute Settlement (Chapters 11, 19 and 20)

The United States wishes to eliminate the measures in place allowing for an independent tribunal review of antidumping and countervailing duties imposed by one of the Parties on goods of another Party. It is also expected that there will be significant changes proposed to the investor-state and government-to-government dispute settlement mechanisms.

It is also likely that while the United States will not seek to fully reopen the chapters on agriculture and sanitary and phytosanitary measures, it will seek to commitments from Canada to liberalize restrictive trade measures arising out of Canada's controversial supply management regime for dairy and poultry. Given the commitments Canada has made with the European Union as part of the CETA, it may be difficult for Canada to grant any meaningful concessions to the United States in this area.

NAFTA's Chapter 11 has provisions designed to protect cross-border investors and facilitate the settlement of investment disputes. All NAFTA parties must accord investors from the other NAFTA parties non-discriminatory treatment and may not expropriate any investments except upon payment of fair market value compensation. Investors may seek damages arising out of a NAFTA Party's violation of its investment obligations by submitting a claim to arbitration under the International Centre for Settlement of Investment Disputes (ICSID) Convention, the Additional Facility Rules of ICSID or the Arbitration Rules of the United Nations Commission on International Trade Law.

New Areas of Focus Under Consideration

In addition to the already existing NAFTA chapters, Canada is seeking input on seven topics that have become major areas of interest since NAFTA's inception more than 20 years ago:

  1. Transparency and anti-corruption;
  2. E-commerce;
  3. Trade facilitation;
  4. Development of small and medium-sized enterprises;
  5. State-owned enterprises;
  6. Cooperation and capacity building; and
  7. Regulatory coherence.

Each of these areas raises new opportunities for Canada. In particular, improving regulatory coherence between our market and that of the United States would allow North American entities to more easily and quickly streamline input supply chains across the continent. In addition, there may be opportunities to leverage this with the regulatory coherence provisions in CETA.

These NAFTA consultations offer a significant opportunity for companies to have input on the primary drivers of their access to Canadian, US and Mexican markets. With the EU-Canada CETA coming into force in the coming months, Canada will be in the unique position of having preferential trading and investment relationships with the world's two largest economies. As Canada continues to pursue trade and investment treaties in Asia, Africa and elsewhere, it will be critical to understand how these agreements interact and impact supply chains, service offerings and foreign investment activities. It will be vital for those seeking to make submissions to concisely identify the specific NAFTA issues they wish to address and set out a strong economic and legal basis for the proposal.

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