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NAFTA Talks Making Headway, Canada to Decide Fate

9.21.18

 

General Updates:

Last month, the US and Mexico announced that they had agreed to a preliminary bilateral deal to replace NAFTA after several weeks of talks between the two countries beginning in July.

Canada was absent from these talks and President Trump has threatened to move forward with a bilateral trade agreement that excludes Canada should they be unable to agree to a deal by the end of the month

US and Canadian negotiators have reported progress in recent talks, with both sides willing to make compromises, however several key sticking points remain as pressure ramps up  

CURRENT SITUATION:

President Trump finally achieved a long-elusive breakthrough in NAFTA negotiations in late August when the US and Mexican delegations announced that they had reached a preliminary bilateral agreement.  The two sides had been holding talks over several weeks following the Mexican presidential elections in July, and the announcement marks the first significant progress since talks fell apart last spring and the US and its two neighbors exchanged tariffs on steel and aluminum.  A full NAFTA agreement, however, has not yet been secured.  Canada has been absent from bilateral talks this summer and has yet to agree to any deal, despite increasing pressure from President Trump.  After negotiations continued past Trump’s self-imposed deadline of the end of August, the President took his boldest step yet, notifying Congress of his intent to sign a trade deal within 90 days whether or not Canada was included.  The move set the clock ticking on negotiations as, by law, the final written agreement must be presented to Congress by the end of September in order to meet Trump’s ratification deadline.  

Across the negotiating table, Canadian Prime Minister Justin Trudeau and several Canadian officials have expressed cautious optimism that “flexibility on both sides” could bring about an agreement, while at the same time firmly repeating their vow not to sign anything that is not in Canada’s best interest.  With Trump threatening tariffs on Canada’s heavily integrated automotive industry if an agreement is not reached, as well as the fate of Trump’s Section 232 tariffs on steel and aluminum hanging in the balance, the next several weeks are likely to have major consequences for the future of manufacturing, automotive and a host of other tightly integrated industries in North America.

In the last few weeks, both Trump and Trudeau have faced mounting pressure to reach an agreement. Various members of the US Congress have stated that there will be no agreement without Canada included. And in Canada, several interest groups and government officials have stressed the importance of getting a deal completed. Doug Ford, the Ontario premier, met with Canadian negotiators on Wednesday, emphasizing the criticality and necessity of getting a deal done, even going so far as to say Canada should compromise if needed. Facing re-election in October 2019, Trudeau’s Liberal government would require significant support from Ontario in order to win.  

KEY CHANGES IN NEW PROPOSED AGREEMENT:

The three nations agreed to increase the regional value content of passenger cars required to be “originating” in NAFTA nations from 62.5% to 75%.  According to Article 401 of NAFTA, the regional value content can be measured by either the transactional cost of the car or the net cost value and, with a few exceptions, requires that material be entirely sourced in NAFTA nations from raw material extraction through to final product assembly in order to qualify as “originating.”  These new regional content requirements will force automotive manufacturers to adjust their supply chains, as domestic producers are forced to source fewer components from cheap suppliers abroad and foreign manufacturers must choose between expanding their production footprint in NAFTA countries or searching for low cost alternatives to offset the margin impact from import duties.

The three countries have agreed to a new threshold of 40-45% of car components required to be made in high wage factories paying at least $16 per hour.  Many OEMS have opened plants in Mexico and this provision will help ensure that auto manufacturers maintain operations in the US and Canada as well.

After demanding a five year sunset clause, US negotiators gave in to Canadian and Mexican resistance and agreed to a 16-year horizon with the ability to make revisions at six year intervals.  This will create stability and certainty for stakeholders and corporations that can count on the agreement not combusting after five years.

The US has conceded to Mexican and Canadian requests to keep (with slight modifications) a provision for foreign companies to sue member governments that impose trade barriers, which could limit Trump’s ability to use tariffs in the future as a negotiating tool among NAFTA countries.

Additional updates have also been made to intellectual property rights and labor negotiations.

KEY STICKING POINTS REMAINING WITH CANADA:

President Trump has repeatedly called for greater access to Canada’s dairy market, which relies on a supply management system with production quotas and foreign duties in place, intended to protect Canadian dairy farmers.  While Trump has gone short of calling for a complete tear down of the supply management system in Canada, he has attacked the steep tariffs facing products coming into Canada from US producers.  Despite PM Trudeau’s tough stance on the topic, which has particular salience for his Liberal party in Canada, recent reports indicate that Canadian negotiators have agreed to a partial opening of the dairy market to the US, similar to what was offered during the failed Trans-Pacific Partnership talks.

President Trump has also been seeking to remove a provision establishing binational panels to challenge anti-dumping and countervailing tariffs, a move that Trudeau has refused to accept on the grounds that it ensures a fair playing field and protects against bullying by the US.  Notably, Canada has successfully blocked US duties aimed at Canadian lumber, meat and other sectors under this provision.  This topic currently appears to be the largest impediment to reaching a deal and could reopen other key points if the two sides cannot reach a compromise.

There are also disagreements reported over cultural protections for Canadian media firms, however these appear to have largely taken a backseat to the two preceding issues.