NAFTA 2.0: Rhetoric vs. Reality – Part 3

By Noah Arshinoff and Samukele Ncube

If round 3 of the NAFTA re-negotiation was trying to emulate the undeserved sleepy reputation of its host city (Ottawa), it succeeded. Most contentious issues remain in the realm of political speaking points and have yet to hit the reality of the negotiating table. Politicians rather than negotiators continue to dominate the headlines on the topics of labour standards, dispute resolution and trade deficits. As round 4 kicks off in Washington, it seems the United States wants to be on home turf before tabling their proposals on these issues. In the meantime, we can still sift through the rhetoric in anticipation of the realities.

LABOUR

Canada is pushing for more progressive labour standards, particularly aimed at working conditions for labourers in Mexico and “right to work” jurisdictions in the United States. Canada has stated that Mexico should do away with particular unions that favour and focus on the interests of employers over employees. Canada and the U.S are also concerned about the exodus of investment and quality jobs attracted by low wages in Mexico. The U.S. held off on tabling a proposed text addressing labour standards, seemingly due to some internal squabbling about its content. Interestingly, the Democrats signaled support for Canada’s position vis-à-vis Mexico. However, Canada’s rhetoric around dismantling “right-to-work” may be just that: a ploy to ensure it can concede something and back off on its demands if the three partners agree to a balanced agreement.

CHAPTER 19 DISPUTE RESOLUTION

Chapter 19 details a dispute-resolution mechanism that allows independent, binational panels to review anti-dumping and countervailing duty cases, rather than having judicial reviews done by domestic courts (it is separate and distinct from the Chapter 11 investor-state dispute settlement mechanism).

The U.S. has had long-standing issues with Chapter 19, partly due to its unfavourable rulings on softwood lumber. The U.S. has also previously stated that it violates national sovereignty.

Well…they say timing is everything. Just as this chapter inches closer to the reality stage of the negotiations, a U.S trade panel imposed hefty duties on Canadian jet manufacturer Bombardier. Their U.S competitor Boeing accused Canada of unfairly subsidizing Bombardier’s CSeries jets. The U.S trade panel’s decision sheds light on why this chapter is important to Canada and why they do not want to subject international disputes to domestic courts. While the U.S has been rather bombastic about their dislike for this chapter, we will have to wait to see what gets tabled to get a full picture of how this may play out in the negotiating room and whether Canada has any wiggle room.

TRADE DEFICITS

“Trade deficits are bad.” This blatant rhetoric coming out of the U.S doesn’t tell the whole picture of trade (or even part of it), yet it has been the cornerstone to the President claiming that NAFTA is the “worst trade deal in history”. However, the reality behind this rhetoric is that NAFTA has, in fact, increased trade among all three countries – quadrupling trade between Canada, the U.S and Mexico since its inception in 1994.

Where rhetoric and reality differ on this front, however, is further being muddled. The U.S is looking to tie the trade deficit to a sunset clause, giving the U.S. the ability to decide – based on assessments of their trade deficits with Canada and Mexico – whether or not to withdraw from the deal after five years. Whether anything of this nature comes to fruition is doubtful, especially since it would undermine the intent of a trade agreement and mainly be supported by faulty and misplaced reasoning.

WHAT’S NEXT?

Expect text on dairy, rules of origin, and possibly labour standards to be tabled by the U.S in Round 4.  Although round 4 resumes in Washington D.C. on October 11th, the slow pace of the negotiations, together with rumblings that the U.S may be hoping the talks fail altogether, is not being met by much optimism that a deal can be signed soon.

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NAFTA 2.0: Rhetoric vs. Reality – Part 2

“Sunset clauses”, “virtue signaling”, “warp speed” and “right-to-work”. Since Round 2 of NAFTA 2.0 negotiations wrapped up, these words have been bandied about in press briefings, news articles and interviews. Needless to say, there remains an incessant amount of speculation and rhetoric about what’s happening at the bargaining table. Although the outcome is still foggy, the good news is that the rhetoric is slowly easing, while the realities of a negotiation are beginning to set in. In anticipation for Round 3 which begins on September 23rd in Ottawa, let’s break down some of the areas that have received the bulk of the media’s attention.

Environment

A lot of rhetoric has been circulated domestically on the idea of including the environment in NAFTA. Some have disparaged it as “virtue signaling” and some have said that “social issues” should remain out of NAFTA – but the environment is a tricky little nugget.

The current NAFTA contains a side agreement on the environment, and is one of the reasons Brian Mulroney is often considered Canada’s greenest Prime Minister. Interestingly, both Canada and the U.S. want to bring the environment into the actual NAFTA text, perhaps as its own stand-alone chapter.

For Canada, the interest lies in preventing a “race to the bottom” – the progressive lowering of standards to attract investment, resulting in increased levels of pollution. While Canada is wary of the U.S., the U.S. is also wary of Mexico jumping onboard the race to the bottom. This indicates some of the U.S. interest in creating a more level playing field in NAFTA.

While the U.S. administration is not viewed as environmentally friendly, the fabric of the country is difficult to navigate on this issue. Many emissions and environmental standards are set at state level and some states such as California are more environmentally conscious than any Canadian jurisdiction. The President essentially has his hands tied to some extent, so it may be better to see something included in NAFTA on the environment, rather than leaving it to all the other unknowns.

For Canada, the environment presents an opportunity for the government to spin rhetoric and show their credentials as greens, but it’s also a somewhat realistic position and something that is being negotiated. For the U.S., on the other hand, you won’t hear the words “climate change” and they may not make a big fuss publicly about an environment chapter, but they will be negotiating one.

Rules of Origin (“They took our jobs!”)

A second theme that came out of Round 2 was the U.S. demand for “domestic content requirements” for the automotive sector. To put it plainly, the U.S. wants a certain quantity of a car’s parts to be made in America. The issue with this is it serves as a shift from the existing requirement that a quantity of car parts are to be made in NAFTA countries (i.e. Canada, the U.S. or Mexico). How will a new U.S. requirement affect the industries in Canada and Mexico?

The rhetoric around this one is clear: “They took our jobs!” However, the reality is much more uncertain. There is likely a middle ground that Canada and Mexico could agree to, but they must be vigilant not to undermine their respective domestic automotive sectors which largely rely on the benefits provided by the current NAFTA to stay afloat.

Sunset Clause (Expiry date)

A sunset clause is essentially an expiry date for a piece of legislation. It must either be renewed at such date or it is no longer in force. The U.S. frequently uses sunset clauses in domestic legislation. Canada and Mexico on the other hand do not.

This one seems to fit squarely in the U.S. rhetoric side of things. It is highly unlikely Canada or Mexico would accept it and it sounds more like pandering to sentiment by creating the possibility of getting out of a “bad deal”. The reality is NAFTA already contains a mechanism for any party to withdraw from the agreement. Why add uncertainty for the business community by potentially opening this up to debate every few years?

Going Forward

The rhetoric has been toned down since Round 1 and it looks as if the negotiators are slowly taking over ownership of this file. There is still a lot of noise out there, and that will likely continue as the negotiation deals with some of the more contentious issues down the road. For now, everyone seems content to get the easy stuff out of the way and make platitude statements about how all three sides are negotiating together.

Once Round 3 wraps up, we’ll turn our attention to some of the other difficult issues such as dairy and labour standards. We may even discuss the ramifications of Amazons HQ2 on the negotiations.  Until then, enjoy the headlines as they roll out.

NAFTA: Rhetoric vs. Reality – Part I

There’s a lot of noise surrounding the NAFTA re-negotiations (or as Mexico and Canada like to frame it, the “modernization”). Through all the media, analysis, lobbying and politics, it is easy to get lost in the hype of it all. But what is most crucial as we head into round 1 of talks on September 1st is separating the rhetoric (largely those in political roles making loud statements) and the reality (the pieces on the negotiating table, the legal elements, and the items of interest to the business community).

RHETORIC

Let’s start with the overall agreement. The introductory round of negotiations held in Washington D.C. in mid-August started with a bang. United States Trade Representative (USTR) Robert Lighthizer was quick to go on the attack stating that this would not merely be a “tweaking” to improve NAFTA, but would be a full scale re-write. His statements contrasted with the USTR’s written objectives for NAFTA that were released in mid-July and indicated a more nuanced and conciliatory tone.

Shortly after the introductions wrapped up, President Trump took to the airwaves to state his doubt that NAFTA could be renegotiated because Canada and Mexico were being difficult. In his view, the negotiations would end in NAFTA being terminated. This fits squarely into the rhetoric side of things for so many reasons that it is more economical to list them:

  • It’s blatantly pandering to populist sentiment (seemingly among a small minority) and sticking to his guns.
  • It’s a well-known negotiating tactic of the President’s in his business dealings (do what I want or I’ll walk away). Unfortunately, the threat is a little more empty in negotiations between sovereign nations that don’t represent one particular business dealing, but rather with creating an environment for prosperity.
  • Business associations in Canada and the U.S. have both been lobbying to keep NAFTA. Terminating the agreement would alienate not just those outside the U.S. border, but a huge agglomeration of interests within it, including droves who voted for Trump.
  • Terminating NAFTA does not end “free trade”. The Canada-US Free Trade Agreement of 1988 would likely remain in force. Modernizing NAFTA would surely be better for both sides that reverting to pre-NAFTA trade times.
  • The President is not all powerful in the United States. It is being debated whether the U.S. Congress (made up of a House of Representatives and the Senate) would need to agree to terminate NAFTA. Trump is hardly in their favour, let alone within his own political party at the moment.

On the Canadian side, there is also a fair amount of rhetoric, but it is more to do with our position on certain elements of NAFTA rather than generally degrading the agreement in its entirety or deriding one of the other parties for being unfair. There’s a lot of talk about how we won’t negotiate on dairy and we are not budging from the chapter 19 dispute settlement mechanism. While there is an element of truth to this, the rhetoric is stronger than the reality. Canada will likely negotiate at least as favourable terms as are contained in both the TPP and CETA, meaning we will be somewhat flexible on both of those items. But rhetoric is ensuring we hold our cards close to the chest.

REALITY

Now that the drum beating is dealt with, let’s move to reality. Overall, the political conditions in the United States are more favourable to the renegotiation of NAFTA. Most state level governors are keen on NAFTA and want to see a functional agreement emerge from the negotiations. Furthermore, the deeper you go into the heart of American politics, the more they seem to understand that the details of NAFTA should be worked out by the appropriate levels of government (i.e. the negotiators hired at the bureaucratic level to spend their lives doing trade agreements).

TO SUMMARIZE

In reality’s corner we have the business community and their associations, state level governors, Canada and Mexico (in terms of their willingness to negotiate). In rhetoric’s corner we have Lighthizer, Trump, and some position statements by Canada that will likely be softened to reflect reality.

Round 2 is sure to produce some made-for-journalism drama. We will try and sort the rhetoric from the reality at its conclusion to give a sense of what is being negotiated.