Setting the stage for a new NAFTA

Talks between Canada, the United States and Mexico to renegotiate the North American Free Trade Agreement begin in August. Donald Trump wants a big “win.” Can he actually get it? And what does it mean for Canada?
By Paul Brent

Win one for the gripper: Prime Minister Justin Trudeau got the best of President Donald Trump in their first handshake; in new NAFTA talks, it might not be so easy

More than two decades have passed since the North American Free Trade Agreement redrew the continent’s trade map. It is safe to say that the renegotiation of NAFTA demanded by U.S. President Donald Trump that begins this August will be more acrimonious than the trade pact’s creation by the “three amigos” team of George H.W. Bush, Brian Mulroney and Carlos Salinas.

Beyond the drama that America’s first reality TV president brings to the table, the world is a lot more complicated and intertwined than it was in 1994 when NAFTA went into effect. Trade has deepened among the trio, particularly between the U.S. and Mexico—a relationship Trump describes as “a one-sided deal from the beginning.” Renegotiation will also be highly political, with federal elections in all three countries expected to transpire before any remade NAFTA is ultimately agreed upon.

Trump, in particular, will be seeking a “win” from any new deal. He is the one who sparked the process and owes his surprise election in large part to votes from the Rust Belt and its traditionally Democrat-leaning voters who are those most hurt economically from shifting trade patterns. A failure to deliver will put those swing votes at risk in 2020 (and possibly even in the 2018 mid-terms). “Those voters who voted Republican for the first time in their life, where are they going to go?” says Dan Ujczo, an international trade lawyer based in Ohio. “They are going to go back to the Democratic Party and the Bernie Sanders/Elizabeth Warren wing which will be even worse for NAFTA.”

Ujczo notes that the officials running the NAFTA talks from the U.S. side, Commerce Secretary Wilbur Ross and trade representative Robert Lighthizer, have been on the international trade front lines for decades and have their sights set beyond America’s immediate borders. “Their fight is with China. These are old steel [industry] warriors…. So the [goal for] NAFTA to them, in our view, is really shutting down anything coming in from the back door,” either through Mexico or Canada.

Given that focus, Canada’s increasing trade coziness with China and talk of a free trade deal is a red flag to U.S. negotiators. “I think it is very dangerous for Canada to be out there talking about a free trade agreement with China.”

What might be on the table in terms of trade chips for Canada in NAFTA talks? For one, expect a focus on softwood lumber—a perennial U.S.-Canada trade irritant that was freshly reignited this spring and summer when the U.S. imposed a 20% tariff and 10% duty on softwood imported from Canada. Other key topics: supply management (dairy and poultry) and primary materials such as aluminum, steel and other metals. Even auto production, which has swung against Canada as production has shifted to Mexico, could be affected.

“There are so many more chips on the table that you could do a deal that benefits softwood and gets rid of dairy or you could save dairy and sell softwood down the river,” says Christopher Sands, director of the Center for Canadian Studies at Johns Hopkins University in Washington.

Prime Minister Justin Trudeau stands to be a political loser (at least domestically) out of the new NAFTA, says Sands. “There are only so many chips that Canada has and there will be tremendous pressure to make concessions. And on every one, the Trudeau government is going to be criticized” with some provinces feeling pain among key economic sectors.

A new NAFTA does not necessarily have to be all bad news, though, says Cyndee Todgham Cherniak, with Toronto-based international trade law firm LexSage. “There are many things within NAFTA that can and should be improved upon, so there is a wonderful opportunity for a win-win solution.”

Ottawa has opened a consultation process seeking suggestions from business, experts, other interested parties and individuals and Cherniak hopes Canadians embrace that process. “Everyone should be coming forward with positive suggestions on how to improve the marketplace for Canadian businesses.”

Consumers are “always” winners after free trade agreements are made while supply industries such as in agriculture will be hit, says Geoffrey Kubrick, a partner in McMillan LLP’s international trade law group in Ottawa. Trade winners and losers are not always immediately evident, he adds, noting that Canada’s nascent wine industry was a vociferous opponent of NAFTA and yet it has prospered since.

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To be sure, rewriting NAFTA to any great degree will be more difficult than creating the pact in the first place. Mexico has a sizeable trade surplus with the U.S., but its industry today is highly integrated with businesses across the U.S. border. In the process, it has emerged as a major buyer of U.S. natural gas and agricultural products, befitting its status as the the country’s third-largest trading partner—in terms of goods—behind China and Canada. Mexico’s surplus with the U.S. is larger than Canada’s, but dwarfed by China’s (see chart).

Canadian negotiators are entering the NAFTA talks with a level of concessions already built in when it comes to supply management, Kubrick observes. “Two absolute minimums are what we gave to the Europeans under CIDA and what we were prepared to give to Asia Pacific countries under the TPP. We will have to give that to the United States, they’re our best buddies. They will want better access for milk but I imagine they will not go for everything. They will just want some sort of victory to claim.”

Free trade deals have long been criticized as structures that undermine the sovereignty of countries in favour of international conglomerates. But a recent Canadian victory in a five-year battle in front of a NAFTA tribunal (a mechanism which itself could be on the table) related to a dispute over drug patents with U.S. pharmaceutical giant Eli Lilly casts an interesting dynamic over the new talks.

The victory in the Lilly claim was “resounding” for Canada, notes Osler intellectual property lawyer Nathaniel Lipkus. At issue was the threshold for challenging decisions by Canadian courts against U.S.-based competitors. In upholding the Canadian side, the tribunal set a very high bar for any future challenge on similar grounds. “Canada has not had the luxury of picking its NAFTA fights,” Lipkus wrote after the ruling. “The government defended judicial sovereignty against Lilly, and now it must defend free trade altogether in dealing with President Trump. Time will tell whether Canada can navigate NAFTA renegotiation as adeptly as it did Lilly’s claim.”

Canada may be an economic lightweight in comparison with the U.S., says the Toronto-based lawyer, but he expects it to hold its own at the bargaining table. “Canada has not been sitting on its hands. We have been negotiating trade agreements with China, with the Mercosur countries, we have finished the Canada-European Union trade agreement. We have proven ourselves capable of entering modernized, advanced trade agreements. We were instrumental in TPP and we are going to continue to negotiate with key trade areas around the world for reasonable trade agreements.”

Lipkus foresees NAFTA negotiations focusing on two areas: regulatory rules, and tariffs and quotas. “On the tariff/quotas, that is more horse trading and bargaining power kind of stuff. But on the regulatory, I think that we would take a principled approach to make sure that we will not do anything to harm our sovereignty.”

Photography: Kevin Larmarque/Reuters (story and slider)

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