Canada: A Closer Look At Round Three Of The NAFTA Negotiations

Last Updated: October 12 2017
Article by Dentons LLP and Brenna Evans

Round three of the NAFTA negotiations concluded in Ottawa on September 27, 2017. Before this round, the hope was that meaningful progress would be made on some of the more contentious issues. While some modest progress on less controversial issues was reported, real bargaining on the higher stakes issues does not appear to have advanced.

In a joint statement, Canadian Foreign Affairs Minister Chrystia Freeland, Mexican Secretary of the Economy Ildefonso Guajardo and United States Trade Representative Robert Lighthizer said that they had "substantially completed" matters dealing with small and medium-sized enterprises (SMEs) and had "advanced substantively" with respect to the competition chapter of the agreement. So far, it is known that the chapter on SMEs aims to increase the access that these businesses will have to member states' markets, including through various cooperative activities and information sharing, as well as the creation of a NAFTA Trilateral SME Dialogue initiative between the private sector, non-governmental organizations, and other stakeholders.1

Minister Freeland stated that "meaningful advances" were made in telecommunications, digital trade, furthering good regulatory practices, and customs and trade facilitation,2 but Secretary Guajardo told a news conference that there would still be "substantial challenges" in the next round in Washington that is set to begin on October 11, 2017. He expressed some skepticism and told reporters that at this point, NAFTA talks could continue into 2018.

The delegations are largely remaining tight-lipped on most of the details that were discussed by the three teams this round, and Mexican and Canadian officials are still concerned that the United States has not yet tabled concrete proposals on the most contentious issues, including with respect to rules of origin, which mandate how much of a product must actually originate in the NAFTA region. It was anticipated that the dairy industry and supply management would be discussed during this round of negotiations, but no formal statements have been made on this issue so far. On September 25, 2017, Canada's Minister of Agriculture, Lawrence MacAulay, did meet with Andrew Leslie, the parliamentary secretary to Chrystia Freeland for Canada-US relations, and various agri-food stakeholders, to discuss the NAFTA negotiations.3

With respect to the auto sector, Robert Lighthizer previously stated in the first round of negotiations in Washington that the North American content requirement needed to be increased. As per the current rules of origin in the NAFTA, vehicles require at least 62.5 percent North American content in order to meet the threshold for duty-free movement between NAFTA member states. The media is reporting that the United States wants to increase the North American content requirement to more than 70 percent, with a United States content requirement ranging from 35 to 50 percent. Reports also indicate that the United States wants to add steel and electronics to the list of automotive parts that will need to be traced back to a NAFTA member state under the content requirement.4 It is still unclear whether the United States has formally tabled any hard numbers and whether the negotiators found any solid ground on these points during the Ottawa discussions.

On government procurement, the US tabled an offer that would claw back market access commitments currently in the NAFTA Chapter 10. This goes contrary to the progressive gains made on government procurement in other trade agreements, including under the WTO. Canada and Mexico will likely reject this offer and push back hard to at least retain current access to US government procurement opportunities.

Other areas that remain at a standstill include the Chapter 11 investor state dispute resolution process and labour issues, both raised by the Canadian delegates as key priorities. Canada aims to confirm the government's ability to regulate in the public interest without facing investor-state claims and to establish a standing, independent claims tribunal (along the lines of what was agreed in the Canada Europe Comprehensive Economic and Trade Agreement (CETA)) rather than the current system which relies on party-appointed, ad hoc arbitration tribunals.

Since Canada has been the subject of more successful Chapter 11 claims than the other parties, it is not surprising that it would view this as a priority but, so far, it does not appear that any headway has been made on this front at all. Canada's position on Chapter 11 merits careful attention. If, as Canada appears to want, Chapter 11 protections for investors are altered, perhaps even by changing the language on various standards of protection to align with what is in the CETA, this could have a material impact on the investment protections afforded to cross-border investors.

With respect to labour, Canada continues to face opposition from the United States and Mexico on its position that labour standards need to be raised, specifically with respect to "right to work" jurisdictions in the United States and to the working conditions of many workers in Mexico. Importantly, officials who are familiar with the proposal said that the text dealing with labour did not specify wage levels for workers. Moises Kalach, the head of trade for the Mexican Business Council that remains closely tied to Mexico's key negotiators, has said that Mexico is willing to accept more stringent labour laws as part of a "balanced pact" that is also beneficial to Mexico.

There have been some developments in the talks surrounding e-commerce and data security/sovereignty, with the United States formally presenting intellectual property text that would effectively erode the "safe harbour" language relied upon by many internet businesses to protect them from liability when pirated content is uploaded to their sites. This language has been met with resistance from the Internet Association, a trade group that includes Alphabet Inc. (Google, YouTube) and other major online businesses.

In the textile industry, the United States has also now put forward a proposal related to the NAFTA's yarn-forward rule of origin. The United States has tabled a proposal to eliminate tariff preference levels (TPLs) that grant the NAFTA preferences to certain textiles and wearing apparel assembled from non-NAFTA content. The TPLs are viewed as a loophole from the NAFTA's "yarn-forward" rule of origin, which generally requires that the yarn used to produce textiles and apparel be NAFTA-originating in order for the finished goods to receive NAFTA preferences. There is reportedly space for a short supply list, but critics are concerned since there is no guarantee that products that currently qualify for the TPL carve-out would be included in a new NAFTA short supply provision.

Despite the developments listed above, the slow pace of the negotiations offers little grounds for optimism that a deal can be struck before the end of the year. If no deal can be signed by very early in 2018, it will likely become increasingly difficult to conclude a deal until after Fall 2018 elections in the US and Mexico. The third round of negotiations does not provide any greater assurance that the parties are on track to successfully conclude negotiations. Key points of contention still need to be bridged and uncertainty continues to prevail. Assessing the potential impact of the NAFTA negotiations on a given company's business remains very challenging. We continue to advise clients to assess their exposure in the event the NAFTA preferential tariffs (and other advantages of NAFTA) were to be eliminated, take stock of their main supply and sales agreements to ensure they contain adequate protections in the event the NAFTA is terminated, and generally review their trade compliance functions to ensure they are in a position to react adequately if the negotiations fail.

The fourth round of NAFTA talks are set to take place in Washington, DC from October 11 to 15, 2017, with the fifth round taking place in early November in Mexico City, followed by the sixth round in Ottawa, by the end of November. We will continue to monitor these rounds and update clients on the implications for their businesses.

This article was co-authored by Brenna Evans, an associate in Dentons' Toronto office.

Footnotes

1 U.S. Mission to Canada, "Trilateral Statement on the Conclusion of the Third Round of NAFTA Negotiations", U.S. Embassy & Consulates in Canada (September 27, 2017)

2 Mike Blanchfield, "Trade ministers praise NAFTA progress as others worry about snail's pace", CBC News (September 27, 2017) [Blanchfield , CBC News]

3 Mike Blanchfield, "U.S. dairy takes aim at Canada's supply management in round three of NAFTA talks", Business News Network (September 25, 2017)

4 See, e.g., The Canadian Press, "Chief Canadian NAFTA negotiator not expecting progress on auto content rules", CBC News (September 2three, 2017)

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

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