Trade Cases

Will NAFTA Round 4 Be the Knockout Blow?

Written by Sandy Williams

The fourth round of NAFTA talks is under way in Washington with some negotiators fearing the demise of the 20-year-old agreement.

“There are several poison pill proposals still on the table that could doom the entire deal,” said Tom Donohue, CEO of the U.S. Chamber of Commerce in a speech in Mexico City on Tuesday.

The “pills” are being prescribed by the U.S. administration, which is pushing for changes to automotive rules of origin, investor-state dispute settlement and government procurement. The administration also wants to add a five-year sunset clause to the agreement that the Chamber of Commerce says will undermine the goals of NAFTA.

“It’s hard to imagine a proposal that would do more to create uncertainty and undermine the business confidence needed to foster investment in job-creating enterprises,” said John G. Murphy, senior vice president for international policy at the Chamber. “As surely as night follows day, including a ‘sunset clause’ in the NAFTA would mean lost economic growth and lost American jobs.”

Curtailing the investor-state dispute settlement would make it harder for companies to sue Canada, Mexico or the U.S. for perceived unfair treatment under the NAFTA agreement.

The recent tariffs imposed on aircraft to the U.S. from Canadian company Bombardier is an example of why the Chapter 19 interstate dispute settlement is necessary in NAFTA, said Andrew Leslie, parliamentary secretary to Canada’s minister of foreign affairs, Chrystia Freeland. Leslie says Boeing does not make or compete with the Bombardier planes that it is blocking from entry to the U.S. and is taking advantage of U.S. trade remedy rules.

The U.S. Commerce Department levied a 220 percent preliminary countervailing duty on Bombardier’s C Series planes last month and last week added an additional 80 percent antidumping duty. Removing Chapter 19 would require any challenge by Canada to the trade remedies to be heard by a U.S. court instead of an independent panel. “And you want to know why we in Canada are quite keen on having Chapter 19 as an interstate dispute resolution mechanism,” Leslie said.

The issue of government procurement is another non-starter for Mexico and Canada. The U.S. proposes treating Canada and Mexico as one market and matching government procurement contract access dollar-for-dollar to the U.S.

During the third rounds of NAFTA talks, James Moore, senior business advisor at Dentons, moderated a conversation with Commerce Secretary Wilbur Ross, pointing out that it is “not diplomatic or negotiating in good faith” to treat two partners in a tripartite agreement as one.

“Well, it’s very good faith; our market is 10 times the size of either of those markets, so if you gave equal percentage market share we’d been giving them 10 for one,” Ross said, as quoted by Inside U.S. Trade. “How is that good arithmetic? If I’m not mistaken, it is actually to the benefit of the parties because it’s the cumulative total of the two economies rather than individually,” he said.

Such an agreement would give the two NAFTA partners less access to U.S. government contracts than WTO partners of the United States, said Moore.

“That may very well be,” Ross said, “but you can’t take one isolated proposal and just compare it. The fact is that we think it was absurd in general to give away 10 times as much market access as we’re getting back. That’s one of the fundamental flaws that the president feels – and I agree – exists in NAFTA to begin with.”

Changes to rules of origin is one of the most contentious issues proposed by the administration. It has not been welcomed by negotiators in Canada, Mexico, or the automotive industry.

The U.S. is expected to propose that NAFTA regional value for autos be boosted from 62.5 percent to 85 percent and require 50 percent U.S. content. Ross asserted that vehicles imported to the U.S. from Canada and Mexico currently have less than 20 percent U.S. content and much more than 25 percent non-NAFTA content.

“The non-NAFTA content has been growing, and growing rapidly, and largely at the expense of the U.S., so that’s the reason we have rules of origin as a target,” said Ross.

Although not all car parts are manufactured in the U.S., Ross was confident that the percentage increase could be attained. “I think you will find we will get increased percentages in the rules of origin, and I think you’ll find that the car companies will adapt themselves to it,” he said.

“There is no one trade agreement in the world that has country-specific content. It doesn’t exist,” said Mexico’s top negotiator, Economy Secretary Ildefonso Guajardo. “Content has to be measured regionally.”

NAFTA on Shaky Footing

Although the U.S. has touted a “do no harm” policy regarding the NAFTA negotiations, President Trump continues to reiterate the possibility of terminating the agreement entirely.

On Tuesday, Trump said in a Forbes interview, “I happen to think that NAFTA will be terminated if we’re going to make it good.”

On Wednesday at the start of round four of the talks, he said, “It’s possible we won’t be able to make a deal, and it’s possible that we will. We’ll see if we can do the kind of changes that we need. We have to protect our workers. And in all fairness, the prime minister wants to protect Canada and his people, also. So we’ll see what happens with NAFTA, but I’ve been opposed to NAFTA for a long time, in terms of the fairness of NAFTA.”

Canadian Prime Minister Justin Trudeau has tried to remain optimistic that a deal can be worked out that will satisfy all parties, but is not ruling out the possibility of a bilateral agreement should NAFTA negotiations fail.

“I continue to believe in NAFTA; I continue to believe that as a continent working together in complementary ways it’s better for our citizens and better for economic growth, and allows us to compete on a stronger footing with the global economy,” Trudeau said.

“So saying, we are ready for anything, and we will continue to work diligently to protect Canadian interests, to stand up for jobs, and look for opportunities for Canadian business and citizens of all of our friends and neighbor countries to do well.”

Mexico won’t accept “limited, managed trade,” said Mexico’s foreign relations secretary Luis Videgaray and accused Trump of starting a “protectionist war.” Ending NAFTA would be a breaking-point in U.S./Mexico relations and would impact cooperation in other areas, he said.

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