Worldwide: Dentons' Pick Of Global Regulatory Trends To Watch In 2018

Public affairs: Canada

NAFTA in 2018

As 2018 begins, the most important public policy issue facing Canadian business is, without question, the continued renegotiation of the North American Free Trade Agreement (NAFTA). The renegotiations were originally scheduled to endure through seven rounds, beginning in mid-August 2017, and concluding by the end of December 2017. The timeline has now been pushed back to early 2018, with the sixth round taking place in Montréal at the end of January.

Thus far, progress has been made on smaller, easier areas of NAFTA – a new small business chapter, telecommunications and some regulatory cooperation, for example. But what has emerged with greater clarity is the steadfastness of the Trump Administration's commitment to proposals for NAFTA reform that threaten the future of the Agreement and risk creating broad uncertainty in the North American economy for years to come.

Specifically, the American proposal to enact a five-year sunset clause on NAFTA is a non-starter for both Canada and Mexico. With a time-limited NAFTA there would be a chill on long-term investment – particularly in Canada and Mexico – by firms perhaps hoping to take advantage of US market access, coupled with Mexican labour, Canadian tax rates or a weaker relative Canadian dollar, for example. Further, with a six-month termination clause already embedded in the Agreement if Mexico, Canada or the US wish to exit, having a forced sunset of NAFTA is an unneeded tool for those wishing to end the Agreement.

On another front, from the beginning, the Trump Administration has made combatting trade imbalance with Mexico in particular a focal point of their rhetoric. While Canada and the US now have an effective trade balance, Commerce Secretary Wilbur Ross has been quick to point out that while that may be true now, over the course of the past 23 years of the Agreement, Canada has persistently had a trade surplus with the US. While the economics of suggesting trade imbalances are bad is entirely dubious at best, the politics of exploiting anti-Mexican and anti-Canadian sentiment on this front has been easy politics for decades. As such, the automotive Rules of Origin (ROO) provisions of NAFTA and Government Procurement policies have become the remedy to this alleged problem. To wit, the Trump Administration has proposed dramatically increasing the American-based content of vehicles. Specifically, they propose requiring that a vehicle be composed of 50 percent American content to avoid tariffs, whereas under NAFTA today there is only a requirement that a car include 62.5 percent content from North America as a whole.

While the auto sector has deemed the proposed policies to be counter-productive to a globally-competitive North American-rooted auto sector, this is a critical point of negotiation for the US. The politics behind the proposal are easy to understand when one considers the Electoral College support in key auto-producing Midwest states that propelled Donald Trump to victory in 2016. States like Michigan, Ohio, Pennsylvania and Wisconsin would be enthusiastic audiences for this kind of proposal – at least rhetorically. In the end, however, the soundness of its implementation and net-positive impact of job creation in those regions are difficult to imagine.

Other issues, such as Canada's supply management policies, dispute settlement chapters and government procurement policies, remain unresolved, with large policy gaps between the negotiators.

What to watch

Beyond the divisions at the negotiating table, there are four things to watch that will influence, and perhaps drive, the negotiations to their ultimate outcome.

Montréal – Round Six

The sixth round of negotiations at the end of January could well be the tipping point for President Trump's decision about whether to trigger the official American withdrawal from NAFTA. If substantive movement is not seen, and further rounds are not agreed to, there is a strong likelihood that President Trump will begin the six-month formal withdrawal process in order to pressure Mexico and Canada to buckle to his demands.

Mexican election

The July election and the preceding campaign of the next Mexican President will be charged with antagonistic anti-Trump, and perhaps anti-American, rhetoric that will challenge the US-Mexico relationship, and therefore the NAFTA relationship, for years to come. It is hard to imagine Mexican negotiators not paying keen attention to (and being influenced by) the rhetoric and commitments of the two leading candidates to be the next President of Mexico: Andrés Manuel López Obrador and José Antonio Meade.

Reaction to President Trump's anti-Mexican rhetoric, his anti-NAFTA rhetoric and his proposal to build a border wall on the US-Mexico border loom large as Mexican voters search for their own tough leader to defend Mexican interests and challenge President Trump. This dynamic will, without question, have an impact on the substance and style of Mexican negotiators of the incumbent administration and could prove enormously challenging in achieving a tripartite agreement on NAFTA 2.0.

US midterm elections

While the President is responsible for the renegotiation of NAFTA on behalf of the US, it is Congress that holds the power over whether a new NAFTA is legislatively enacted, or, whether the existing NAFTA is repealed. With Democrats entirely opposed to President Trump's agenda, and more and more Republicans breaking with President Trump, the dynamic of Congressional influence over the negotiations will grow in importance. Add to this, President Trump's sagging poll numbers and the fact that 23 Republican Members of Congress are seeking re-election in districts that voted for Hillary Clinton in 2016, and the necessary recipe for Republicans to retain control of the House, Senate and White House in 2018 looks increasingly tough. The pre-midterm posturing on NAFTA by all players and the post-midterms power dynamic will be critical in implementing a renegotiated agreement, or triaging the way forward post withdrawal.

Trump Administration stability

Whether it is the ongoing investigation by special counsel Robert Mueller into the 2016 election campaign and foreign influence, or President Trump's Twitter musings, or the drama of White House staffing challenges, there is no shortage of instability within the Trump Administration. These challenges diminish the President's ability to deliver on his agenda and shrink public confidence in President Trump to lead, which in turn feeds both stakeholder and Congressional opposition to NAFTA management and, perhaps, withdrawal.

Conclusion

NAFTA has been the most prosperous and successful trading partnership in the history of the world. Its renegotiation will, rightly, dominate public policy discussions, investment decisions and observations of political commentators. While five of seven negotiation rounds have been completed, very little has been concluded and 2018 will be a watershed year for NAFTA and the Canada-US-Mexico relationship.

Public affairs: UK

June 2018 will mark the second anniversary of the UK's vote to leave the European Union (EU). March 2018 will mark the half-way point in the two-year period which EU law provides for the EU and UK to agree on the terms of the UK's departure. That period is extendable with unanimous consent of all 28 Member States. With the clock ticking and much to do to prepare the UK statute book for the transition away from reliance on the direct effect of EU law, the UK Government has little capacity to deal with any subject matter other than Brexit. This effect is likely to intensify in 2018, with even subordinate legislation, which requires Parliamentary time, likely to be kept to a minimum.

The various Bills which will be working their way through Parliament over the next couple of years will be focused on adapting EU law to a post-Brexit UK, rather than on any substantive amendment. The UK Government has indicated that it views most EU regulation (for example, on agriculture, food safety and workers' rights) as a floor rather than a ceiling. This indicates that there is unlikely to be a "bonfire of red tape" on or after Brexit.

The main legislation to be passed is the European Union (Withdrawal) Bill, which is, at the time of writing, at Committee stage. This will still need the support of the House of Lords, where the Government cannot pass it without cross-party support, and also the devolved legislatures, in particular the Scottish Parliament, following the UK Government's commitment to seeking a Legislative Consent Motion (under the "Sewel Convention") to avoid further constitutional uproar.

The current programme of government, set out in the Queen's Speech in 2017, will cover a two-year Parliamentary term which will not expire until mid-2019. The reliance of Prime Minister Theresa May's minority Conservative government on the support of the 10 MPs from Northern Ireland's Democratic Unionist Party (DUP) limits her government's room for manoeuvre on Brexit issues. Equally, a nationalist government in Scotland, a Labour government in Wales and various groups of Conservative backbenchers of varying wings of the party (but consistent rebelliousness) will hold the government back from pursuing anything controversial. Labour politicians also hold the two elected mayoral roles with the most significant devolved powers, in London (Sadiq Khan) and Manchester (Andy Burnham), and will press for further devolution of powers and money to their city regions.

There may yet be another General Election if May's control of her own party continues to wither away, but two things stand against this happening. First, the Fixed Term Parliaments Act 2011 (which the Conservative Party would have abolished had it achieved its desired majority in 2017) means an early General Election can only be called if two-thirds of MPs vote for one. This prevents the Prime Minister from unilaterally going to the country. Secondly (and connected to her ability to secure a two-thirds vote in the House of Commons), it is unlikely that May's own backbenchers would allow her to do so after her setback in June 2017 and Labour's consistent small lead in the polls since then. Many Conservatives view a government led by current Labour leader Jeremy Corbyn as the worst possible outcome. Ironically this possibility is all the more threatening post-Brexit, without EU strictures to hold back a radical Labour government.

A second referendum on Scottish independence looks a little further away following the result of the 2017 election, where it might be suggested the only real "winners", anywhere in the UK, were the Scottish Conservatives, who increased their headcount above one for the first time in more than 20 years (to 13). The Scottish group of Conservative MPs, like the DUP, now exerts considerable influence over the UK Government. Meanwhile, the Northern Irish Assembly remains in abeyance pending an agreement on a new power-sharing government between Northern Ireland's political parties.

Public affairs: US

Republicans in Washington enter the new year with the wind at their back—the party just managed the first major overhaul of the United States' tax code in some 30 years—but lacking consensus on a governing agenda. With their first major legislative win behind them and the legislative midterm elections before them, the city's power axis can't agree.

Paul Ryan, the young Speaker of the House who's rumored to be eyeing an exit from Congress, is pining for conservative, transformative reform of the social safety net, while his Senate counterpart, Mitch McConnell, has endorsed taking a less contentious approach, and is pushing possible two-party deals on immigration and Dodd-Frank, the 2010 Wall Street reform package. President Donald Trump, meanwhile, favors a major infrastructure package.

The question is: whose approach will win out when the House Speaker wants entitlement reform, the Senate leader wants bipartisanship, and the President wants big, beautiful roads? Because of the delicate political waters into which Republicans are wading, and the procedurally-taxing reconciliation process that allows a skirting of the normal 60-vote filibuster threshold in the Senate (over which McConnell will exert the defining influence), it's probably easier to advise whose approach will likely lose - Ryan's.

Bowing to the political realities of the moment, the President and his midterms-sensitive allies in Congress will likely balance infrastructure spending with bipartisan deals on the Obama-era Deferred Action for Childhood Arrivals (DACA) program and Dodd-Frank.

Because both the pace and scope of President Trump's regulatory erasure have grown as a consequence of elusive legislative victories, the new year's ambiguous legislative agenda will likely mean a redoubling of the Trump Administration's deregulatory campaign. At this time last year, the Federal Register was around 68,000 pages long. Today, it's fallen to just 45,000, and the President recently signaled his eagerness to continue shedding rules.

Infrastructure

The Trump Administration has indicated that it will release its long-awaited infrastructure plan this month. The plan is expected to lay out principles intended to spur US$1 trillion in infrastructure investment from US$200 billion in federal funding. Early indications are that the Administration has a four-pronged strategy for dividing up the US$200 billion: (i) a program for states and cities, with a focus on local matching funds, (ii) block grants for rural America, (iii) existing federal loan programs, and (iv) what is being described as "transformational" projects.

Immigration

An ad hoc House GOP working group has finished a list of the immigration reforms that Republicans would want in exchange for allowing people who were illegally brought into the US as children to remain here. The proposal has three components: reform of legal immigration policies, such as ending chain migration and creating a guest worker program; border security, specifically securing funding for Trump's border wall; and interior enforcement, by requiring all employers to use the federal E-Verify system and cracking down on so-called sanctuary cities that refuse to enforce federal immigration law.

Energy

Early 2018 could see executive branch actions that could have significant impacts on the energy sector. The Federal Energy Regulation Commission (FERC) faces an early-year deadline to respond to the Department of Energy's notice of proposed rulemaking on grid resiliency pricing, which would allow certain coal and nuclear power plants to recover their costs of service. In addition, President Trump, who has advocated for taking a more aggressive approach to tackling allegedly-abusive trade practices, must make a decision by late January 2018 on whether to impose tariffs on imports of solar cells and modules. Meanwhile, his Administration is expected to forge ahead with lease sales that would open up additional offshore and onshore areas for oil and gas development. On the legislative side, Congress could consider an infrastructure package that could include energy provisions, such as reforms of permitting processes for pipelines, transmissions lines and hydropower projects.

Financial services

The Senate Banking Committee advanced S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. This regulatory relief bill, which has long been sought by community banks and credit unions, would "right-size" regulations that were imposed on smaller financial institutions as a consequence of the Dodd-Frank reforms.

Telecom

The Federal Communications Commission's (FCC) repeal of net neutrality will undoubtedly land in Congress's lap, as will other items on Chairman Ajit Pai's deregulatory agenda in 2018 as they face challenges in the courts. These challenges will leave the affected unsure about the rules of the road and the calls for congressional involvement will grow louder. Aside from net neutrality, we expect the FCC's relaxation of media ownership rules to also fight for congressional attention.

Climate

The Trump Administration will continue its efforts to unwind the Obama-era climate change regulations, and begin a formal process of reviewing, critiquing and possibly debunking the underlying science of man-made climate change. EPA Administrator Scott Pruitt recently told Congress that the agency would be introducing a rule to replace the Clean Power Plan, an Obama Administration policy aimed at reducing carbon dioxide emissions and the centerpiece of that Administration's climate-change efforts.

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