Canada: U.S. Reveals Much-Anticipated NAFTA Renegotiating Objectives

Our last international trade brief dealt with the deadline for submissions of public comments to Global Affairs Canada on the renegotiation and modernization of NAFTA. In this brief, we address the release by the Office of the U.S. Trade Representative of the Trump administration's objectives for the renegotiation of NAFTA and their potential ramifications for Canadian businesses.

On July 17, 2017, the Office of the U.S. Trade Representative (USTR) issued the Trump administration's renegotiation objectives for NAFTA

The release of the objectives is mandated by the Trade Priorities and Accountability Act of 2015 (TPA-2015), which requires the USTR to release the renegotiation objectives at least 30 days prior to the commencement of formal negotiations between the three NAFTA parties. Indications are that the negotiations are set to commence on August 17, 2017.

These renegotiation objectives follow a final notice provided by the USTR to Congress on May 18, 2017, public consultations during which the USTR received in excess of 12,000 submissions, and public hearings during which over 140 witnesses were heard over a three-day period.  The Government of Canada has also been seeking submissions from Canadian businesses and the public. Although July 18, 2017 was the closing date for receiving submissions this has been extended for an indefinite period of time in order to identify Canadian negotiation priorities in light of U.S. objectives.

Overview of U.S. negotiating objectives

The text of the negotiating objectives accompanying the USTR statement sets out more than 22 subject matters for negotiations and in excess of 100 individual objectives, which include:  trade in goods; sanitary and phytosanitary measures (SPS); customs, trade facilitation and rules of origin; technical barriers to trade (TBT); good regulatory practices; trade in services, including telecommunications and financial services; digital trade in goods and services and cross-border data flows; investment; intellectual property; transparency; state-owned and controlled enterprises; competition policy; labour; environment; anti-corruption; trade remedies; government procurement; small-and medium-sized enterprises; energy; dispute settlement; general provisions; and currency.

The majority of these objectives have been identified in USTR's draft notice letter to the Congress sent in May, which contained 19 formal objectives that the Trump administration sought to address. While many of the proposals would be administrative in nature or related to greater transparency of the applicable laws and regulations, and are neutral or positive for Canada, such as in the area of SPS measures, customs facilitation and good regulatory practices, a few of the proposals are potentially game changing. Notably, some of the proposals are signals not only to NAFTA countries but also to other U.S. trading partners, such as those concerning currency manipulation and restrictions on cross-border data flows of what they can expect in future bilateral trade negotiations with the United States.

Many of the stated objectives will have the "devil in the details," such as changes to rules of origin and opening up trade in services, the latter of which will also likely be affected by the World Trade Organization Trade in Services Agreement (TISA) negotiations, which the U.S. Congressional Services Caucus has urged the USTR to consider restarting soon.

The negotiating objectives also depart in many respects from that original intent of NAFTA, which was to create a trading block which would benefit from efficiencies fostered by free trade within the block. These negotiating objectives, by seeking to draw deeper divisions between the three NAFTA parties and advocating the achievement of stated goals of only one country over the others based on the "America First" principle, appear to be in conflict with the original goal of NAFTA which was to respond to the creation of the European common market.

Examples of objectives which would appear to seek to advance only U.S. interests over those of the other NAFTA countries, include reducing the U.S. trade deficit with Mexico while improving it relative to Canada (which already suffers a trade imbalance with the U.S.), obtaining increased government contracting opportunities for U.S. firms when  selling products and services into the other NAFTA countries, while at the same time "excluding sub-federal coverage (state and local governments) from the commitments being negotiated," and by also seeking to keep in place "Buy America" requirements on federal assistance to state and local projects, transportation services, "key" defence procurements and other government programs. In the area of investment, the "America First" principle is evident in the stated objective that the U.S. government will "secure for U.S. investors in NAFTA countries important rights consistent with U.S. legal principles and practice, while ensuring that NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors." Perhaps most significantly, the U.S. proposes to eliminate the binational panel dispute resolution system entirely in relation to trade remedies such as anti-dumping and countervailing measures, which would leave Canadian businesses dependent upon the domestic U.S. legal system to resolve politically charged cases such as softwood lumber.  

It is clear from these few examples that the renegotiations leading to a revised and modernized  NAFTA will be extremely challenging and that they are likely to take much longer than a few months, which has been the stated goal of the U.S. government. 

Summary of the key objectives

A few of the salient points arising from our review of these objectives have been addressed below:

1. Agriculture: In relation to agricultural goods, while the objective of dismantling Canada's supply management system for dairy, poultry and eggs is not expressly stated, it can reasonably be read into the objective of "seeking to eliminate non-tariff barriers to U.S. agricultural exports including discriminatory barriers, restrictive administration of tariff rate quotas, other unjustified measures that limit access to markets for U.S. goods." Tariff rate quotas are the basis of import protection for supply managed goods and the goal would appear to be  their elimination or significant reduction in the use of these import restrictive measures.

2. Rules of origin: The subject of "rules of origin" requires the USTR to obtain in the renegotiated NAFTA "updated" and "strengthened" rules "as necessary" to ensure that the benefits of NAFTA accrue to products "genuinely made in the United States and North America." No guidance is provided as to what existing methodologies of rules of origin are to be replaced with, to ensure goods are "genuinely" of NAFTA origin. Businesses that have been anxiously waiting to understand how these critical and complex rules will change so that they can undertake advanced planning, will now likely have to wait for months before obtaining any further details. More than in any other area of international trade regulation, rules of origin is an area where the "devil is in the details."

3. Services: Broad promises in the stated objectives of greater access to the services sector, including "specialized sectoral disciplines," which will be designed to "help level the playing field for U.S. delivery services suppliers in NAFTA countries," also lack the necessary details.  It is not clear whether these objectives are the same as, supplement or are independent of the objectives related to improving the competitiveness of U.S. telecommunications services providers in the other NAFTA countries and expanding the opportunities for U.S. financial service suppliers to "obtain fairer and more open conditions for financial services trade." However, the stated objectives have not proposed the elimination of Canadian foreign ownership restrictions on telecommunications and financial service providers, such as banks.

4. Customs and trade facilitation: While the customs and trade facilitation section of the negotiating objectives recognizes the standards for implementation of relevant WTO agreements, one notable suggestion is a "streamlined and expedited customs treatment for express delivery shipments," including a steep increase of Canada's de minimis threshold to $800 for goods being shipped into Canada by U.S. online retailers. Currently, the de minimis duty-free cross-border shipment amount is $20 in Canada and $300 for postal shipments in Mexico.

5. Investment: In relation to investment, the U.S. is seeking to eliminate barriers to U.S. investment in all sectors in the NAFTA countries. One can expect that this broad objective will be a very contentious area for Mexico and Canada, both of which have broad carve-outs or exceptions for areas where U.S. investment has not previously been given full access. In the case of Canada, the cultural industry exception is to be found in all of the free trade agreements and investment treaties it has signed since NAFTA came into effect. Another investment-related objective pertains to "secur[ing] for U.S. investors in the NAFTA countries important rights consistent with U.S. legal principles and practice, while ensuring that NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors."

6. Digital trade: In the area of digital trade and cross-border data flows, the USTR seeks to "ensure non-discriminatory treatment of digital products transmitted electronically" and "guarantee that these products will not face government-sanctioned discrimination based on the nationality or territory in which the product is produced."

7. Trade remedies: In the area of trade remedies, the goal of eliminating the Chapter 19 binational panel process can be expected to be strongly resisted by Mexico and Canada, particularly when Canada made the existence of the neutral dispute resolution process by experts from both countries, rather than U.S. domestic courts, a condition for its signing of NAFTA. This was a linchpin of the original Canada-U.S. FTA and then NAFTA. The Canadian softwood lumber industry has fared well under this binational dispute resolution process. We can also expect similar strong resistance to the U.S. objective of eliminating the requirement in global safeguard cases for a finding of serious injury caused by producers of each of the NAFTA parties rather than lumping in the exporters from the NAFTA parties with exporters from all countries.

8. Crown corporations: The stated negotiation objectives on state-owned and controlled enterprises could have broad implications for federal and provincial Crown corporations.  

9. Government procurement: As noted above, the U.S. objectives concerning government procurement may end up being one of the most hard fought. While seeking greater market access in this area for U.S. producers, the U.S. government appears to be entrenched in protecting and keeping in place the "Buy America" provisions and restricting access to key procurements by the Department of Defence. It is important to note that sub-federal procurement will be excluded from the government procurement chapter, and we expect that Canada and Mexico will similarly exclude sub-federal (provincial) procurement from this discussion.

10. Areas outside the objectives: Finally, on our preliminary review, the following are not   contained within the negotiating objectives: the initially proposed border tax, any changes to cross-border movement of business persons under intra-company transfer rules of Chapter 16 of NAFTA, and elimination of dispute resolution under Chapters 11 (investment) and Chapter 20 (government to government) even though both require resort to international panels similar to what exists under Chapter 19 (trade remedies) of NAFTA. Energy trade is included, but the objective is so vaguely worded it is difficult to discern if significant changes are proposed.

U.S. Congress to play a crucial role in negotiations

While to date the spotlight has been focused on President Trump and his executive international trade team, including USTR Lighthizer and U.S. Secretary of Commerce Wilbur Ross, the U.S. strategy in NAFTA renegotiation can be expected to be shaped by Congress to an extent not seen since the Ford administration in the 1970s. This is due to the unprecedented level of congressional oversight built in the bipartisan supported TPA passed in 2015.

TPA-2015 contains significant notification and consultation requirements to allow House and Senate members to monitor discussions and provide input throughout as a condition for granting negotiating authority.[1] For example, Section 4204 of TPA-2015 added a requirement for the USTR to seek consultation pertaining to trade in sensitive industries, such as fishing and textiles. TPA-2015 also stipulates that the administration submit environmental and labour market impact assessments and a plan for implementation and enforcement, and publish a draft implementing legislation, before Congress begins the ratification process.

If Canada, the U.S. and Mexico reach an agreement on a modernized NAFTA that complies with the conditions set out in TPA-2015, Congress will give the final agreement and associated implementing legislation expedited consideration through an up-or-down vote without further amendment. The grounds for finding that the president has "failed or refused to notify or consult" in accordance with TPA-2015 are exhaustive and concrete.

NAFTA renegotiations calendar

Negotiations can now begin as early as August 17, 2017, which marks the first day after the end of the 90-day consultation period required by the U.S. TPA-2015. Around this date, U.S. negotiators are expected to come to the negotiation table with their Canadian and Mexican counterparts. The negotiating schedule is also going to be affected by the NAFTA parties' respective elections cycle. Mexican presidential primaries are scheduled for late in 2017 for the general election, which will be held on July 1, 2018. U.S. mid-term elections will mostly be held on November 6, 2018, during which all 435 House of Representative seats, one-third of Senate seats and 39 state and territorial governorships, will be contested. Canada is scheduled to hold its federal election on or before October 21, 2019. NAFTA renegotiation is expected to be a big election agenda item in all three NAFTA countries. Once a NAFTA deal is reached, it must also be ratified by vote in all three countries' respective parliaments, which can add on another several months to the implementation calendar.  

Footnotes

1 See Margaret M. Kim, "Trade Promotion Authority: Evaluating the Necessity of Congressional Oversight and Accountability," available at: http://scholarship.shu.edu/cgi/viewcontent.cgi?article=1101&context=shlj at pp. 330-341. 

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