Towards a New North American Free Trade Agreement (in Principle)

After a brief hiatus during the run up to the recent Mexican elections, negotiations on the North American Free Trade Agreement (NAFTA) are in the news again, with hints of an agreement by the end of August. We have heard talk of an imminent agreement before and the chances of an agreement within the month may not be very high, and even if it does happen it may be more of an “agreement in principle” with many details still to be worked out. Nevertheless, with the renewed interest, we thought it was worth breaking down some of the key remaining issues (there are a lot of them, which helps illustrate the amount of work still left to do!).

Rules of Origin (RoO) for Autos

This is the focus of the current talks taking place between the U.S. and Mexico (Canada does not appear to be actively involved, perhaps because it does not have strong feelings about some of the outcomes here). In essence, the Trump administration wants to tighten the requirements for having trade in autos benefit from zero tariffs. In this regard, the U.S. wants to increase the percentage of content that must be from North American sources (currently the figure is 62.5%; the U.S. proposed raising it to 85%, and press reports suggest that 75% is the figure being discussed now). It also wants a percentage of the autos to be made by workers who make above a certain hourly wage (reports suggest that the current U.S. proposal is that 40% of light-duty vehicles and 45% of pick-up trucks are to be made by workers that make as least $16 an hour).

The Trump administration’s goal here is to provide an incentive to do more production in higher wage Canada and the U.S., although the actual impact will depend on the percentage required and the wage specified, so the effect of this policy is unclear. If the Trump administration gets what it wants, it is likely that free trade in autos in the North American market will be scaled back.  If the requirements are too burdensome to meet, automakers will simply opt for paying the 2.5% MFN tariff instead and just raise the cost of cars for consumers to compensate; and if they do meet the requirements, their costs will go up as a result of doing so. Either way, it will be bad for the industry and for consumers.

Government Procurement

In October, Secretary of Commerce Wilbur Ross suggested that government procurement rules should be made more “reciprocal” by establishing dollar-for-dollar access to each country’s procurement market. This idea prompted some cheekiness from Mexican negotiators who proposed that the U.S. should receive the same level of government procurement contracts in Mexico as Mexico receives in the United States (about $1.1 million dollars, a very small portion of the overall American procurement market). As with auto rules of origin, the Trump administration seems to be looking to take some of the free trade out of NAFTA.

Canadian Agriculture Restrictions.

The U.S. has had its sights on dismantling Canada’s agriculture barriers for quite some time. The 2017 National Trade Estimate Report on Foreign Trade Barriers highlights concerns with Canada’s supply management for dairy, and also for the chicken, turkey and egg industries. Another bone of contention has been Canada’s Special Milk Class Permit Program that gives domestic processors milk components for discounted prices. Canada has opposed any changes to its supply management system “on principle” and argued that the U.S. also maintains agricultural protections, such as on sugar.  Canada may ultimately give a little bit here, but it is likely to want something in exchange.

Seasonal Growers

There was some talk early on that the U.S. would push for rules that would make it easier for seasonal growers to bring anti-dumping and countervailing duty cases. Current trade remedy laws require domestic producers to account for at least half of domestic industry to access AD/CVD proceedings. This has been a hotly contested issue even within the U.S., as it has pitted produce growers from different states against each other.

Chapter 11: Investor-State Dispute Settlement (ISDS)

The Trump administration wants to opt-out of the investor-state dispute settlement mechanism for investment protection, based on their own concerns about sovereignty, and also to make the agreement more palatable to various critics of trade agreements. The precise scope of the opt-out is unclear, but it seems likely that some form of it will end up in any new NAFTA.

Chapter 20: State-to-State Dispute Settlement

The Trump administration has said it wants to “soften” dispute settlement, by making the outcomes of dispute settlement “non-binding.” It would be hard to see Congress or Canada and Mexico going along with this.

Chapter 19: Binational Panels on Anti-dumping/Countervailing Duty Disputes

Chapter 19 allows special binational panels, rather than domestic courts, to review domestic anti-dumping and countervailing duty decisions involving the NAFTA parties. Though a similar mechanism appeared in the predecessor to NAFTA, the Canada-U.S. Free Trade Agreement (CUSFTA), it has not appeared in any other U.S. trade agreement. There has also been a question of whether Chapter 19 is constitutional. In the first round of negotiations, the U.S. put forward a proposal to completely eliminate Chapter 19. Canada and Mexico want to keep it. Nothing has been said about this issue in recent months.

Sunset Clause/Performance Review

The Trump administration has been pushing for a provision under which NAFTA automatically expires after 5 years unless all three governments affirmatively decide to stay in. Congress, Canada, and Mexico are unlikely to accept this, but there is some possibility that Canada and Mexico would agree to a periodic performance review, so long as it didn’t trigger a lapse in the agreement.

Currency Manipulation

The November 2017 update of USTR’s NAFTA negotiating objectives stated that it would aim to “ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage” through “an appropriate mechanism.” In the recently renegotiated Korea-U.S. Free Trade Agreement (KORUS), the currency side-deal was said to be “historic” even though the provisions are non-binding. The big question in NAFTA is whether there would be a binding and enforceable chapter on currency manipulation.

Intellectual Property

Intellectual property protection has some powerful industries behind it, and some strong advocates in Congress. In the TPP, the United States pushed hard for stronger protections on “biologic” drugs and achieved some but not all of it what it wanted. And the United States has long complained of insufficient Canadian protections for copyrights and patents. There has been little reporting on these issues during the NAFTA renegotiation, but the outcomes are going to be important for generating Congressional support.

Telecommunications

Telecom reform has been a longstanding issue in North America. USTR’s 2017 National Trade Estimate Report on Foreign Trade Barriers noted that “Canada maintains a 46.7 percent limit on foreign ownership of certain suppliers of facilities-based telecommunication services” and that Mexico’s “barriers included limitations on foreign investment in telecommunications and broadcasting, a weak regulatory agency, and an uncompetitive market dominated by a near-monopolistic player.” There seemed to be some progress on this issue in the second round of negotiations, but very little has been heard of it since then.

E-Commerce

This is a key component of the “modernizing” elements of a new NAFTA. It was widely suggested that the e-commerce provisions in the TPP would be the starting point for negotiations on this chapter, and would cover issues such as digital trade and data localization.

De Minimis Threshold

The U.S. has been pushing for Canada and Mexico to increase their de minimis threshold for duty-free treatment of express shipments to the higher U.S. standard of $800. Currently, Canada and Mexico have a $20 and $50 threshold, respectively. Christine McDaniel of the Mercatus Center has noted the value to small businesses from raising this limit.

Regulatory Cooperation

Inu talked in detail about the possibility of a regulatory cooperation chapter in the new NAFTA after a proposal was tabled in the second round of negotiations. In March, it was reported that a chapter on Good Regulatory Practices was closed, but it was unclear as to what it would include. Will this go beyond the TPP? How much of the current bilateral regulatory cooperation initiatives would be incorporated? In June 2018, a memorandum of understanding was signed between the U.S. and Canada reaffirming their commitment to the Regulatory Cooperation Council. This could be a signal that this process will remain outside of NAFTA.

State-Owned Enterprises

In the TPP, the United States and others pushed for the most detailed provisions on SOE behavior in any trade agreement. This issue has flown under the radar in the NAFTA talks, but the TPP provisions are likely to be carried over to the new NAFTA.

Labor and Environment

The labor and environment side-letters were brought into the original NAFTA by President Clinton to increase Democratic support. Over the years, many groups have argued that the lack of enforceability has made these chapters little more than symbolic gestures. All parties seemed to be on board to include them as individual chapters in the agreement, but the revised content remains unclear. Will there be, as Canada proposed, some sort of provision on combating climate change? Will Mexico concede in addressing concerns over unions and the minimum wage? Will there be updates to the standard labor chapter language in response to the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) panel ruling related to Guatemalan labor practices? And finally, what will happen to the NAFTA institutions that were created to monitor the labor and environment side letters?

Trudeau’s “Progressive Trade Agenda”

Canadian Prime Minister Justin Trudeau has made his “progressive trade agenda” a central marketing pitch in his government’s trade policy. What this means in practice, however, has been rather vague. In NAFTA, Canada has pushed for the inclusion of a chapter on trade and gender, as well as on indigenous rights. Questions that remain are: (1) whether the U.S. and Mexico would agree to an indigenous rights chapter at all, and (2) to what extent would a trade and gender chapter be any more than just opening up a dialogue, as it is in the Canada-Chile FTA?

What’s Next?

Given the deadlines set out by Trade Promotion Authority (TPA), it is clear that the current Congress will not vote on a new NAFTA, even if it is completed this month. However, it is possible that the deal can be voted on in Mexico ahead of the presidential transition, as President-Elect Lopez Obrador will assume office in December. His domestic agenda will be ambitious, and it is possible that NAFTA would not get the high-level attention it has received up until this point. What we do know is that we are down to the final grind, and no deal this year may lead to this being dragged out for quite a while.  The Trump administration says it wants to sign many new trade deals, but it is hard to see how they can do anything new if they struggle to update an existing agreement with our closest neighbors.