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Explainer: What’s Happening With the NAFTA Talks?

Posted August 15, 2018

With various deadlines now looming large, Canadian businesses that are keeping a watchful eye on the talks to revamp the North American Free Trade Agreement may be having an increasingly hard time making sense of the worrisome direction being taken lately by the Trump administration at the negotiation table as it races to get a deal before the end of the month.

Following a month-long hiatus during which the NAFTA talks had broken off completely – maybe not by coincidence shortly after the G7 meeting in Quebec where President Trump and his top trade officials lashed out at Canada and what they said were Justin Trudeau’s “backstabbing” remarks about the U.S. steel tariffs – at the beginning of August, it was learned that the U.S. and Mexico would be conducting discussions between themselves to hammer out various remaining differences, but without Canada being invited.

Moreover, the two countries said they intended to reach a bilateral agreement of some sort before looking to bring Canada back into the talks. “My hope is that we will before very long have a conclusion with respect to Mexico and that as a result of that, Canada will come in and begin to compromise,” said U.S. Trade Representative Robert Lighthizer in congressional hearings last month. At about the same time, Commerce Secretary Wilbur Ross told a conference in Washington that the administration’s “immediate, most close-to-completion negotiations are with NAFTA, particularly with Mexico,” adding “there’s a pretty good chance that we could be on a pretty rapid track with the Mexican talks.”

According to Republican congressman Michael Conaway of Texas, Trump is actually now working to replace NAFTA with two separate bilateral agreements. Speaking to farm sector leaders in Washington State earlier this month, the chairman of the House Agriculture Committee said “he didn’t have further details, but he got the sense that was the direction Trump was moving with both countries during a recent meeting on trade with the president.”

Late last week, Trump tweeted: “Deal with Mexico is coming along nicely. Autoworkers and farmers must be taken care of or there will be no deal,” adding that incoming Mexican president Andres Manuel Lopez Obrador “has been an absolute gentleman.” Then turning to Canada, he said it “must wait” and issued a new threat: “Their Tariffs and Trade Barriers are far too high. Will tax cars if we can’t make a deal!” the president said.

In response, Canada’s Finance Minister Bill Morneau reiterated a warning about the harm caused by tariffs to consumers on both sides of the border, before dismissing the “national security” premise of such an action, saying that it was not applicable to Canada – this despite the same justification having been successfully employed in the case of steel and aluminum. Even so, Morneau said: “We do not believe that there is any reasonable grounds for any sort of auto tariff,” adding that the government would be prepared for a “measured” and “proportionate” response in the event that tariffs come into effect.

Aside from Trump’s threat being a departure in terms of at long last acknowledging that tariffs are taxes, his remarks were nothing terribly new when it comes to indicating that he would prefer to end NAFTA in favour of striking separate, bilateral deals with America’s immediate neighbours. “I wouldn’t mind seeing NAFTA where you go by a different name, where you make a separate deal with Canada and a separate deal with Mexico. Because you’re talking about a very different two countries,” Trump said back in June.

However, this bilateral approach faces a challenging obstacle, as was pointed out the other day by Raymond Bachand, an ex-Quebec finance minister and now the province’s chief NAFTA negotiator: it may not be legally allowed under the terms of the Trade Promotion Authority under which the NAFTA talks were commenced. Sometimes called “fast-track” authority, the TPA gives the executive branch the ability to negotiate trade deals and submit them to Congress for an up-or-down vote with no amendments. Bachand says “there is no worry whatsoever” because he contends they don’t have the legal authority. “They have the authority from Congress to negotiate a trilateral NAFTA deal in a fast-track way — meaning Congress votes yes or no on the final deal once it’s been reached. They don’t have that (fast-track) authority for a bilateral deal.”

This limitation with the fast-track procedures for the NAFTA talks was also highlighted recently by several U.S. lawmakers, who warned USTR Lighthizer at the end of last month that a separate deal with Mexico has not been approved by Congress and that entering into such bilateral talks requires the administration to submit a “new and different” notification for lawmakers to consider. Under the terms of the TPA, “new consultations, public hearings, and reports, including a summary of negotiating objectives specific to a bilateral Mexico agreement, would be required,” the four Democratic House Ways and Means Committee members stated.

A bilateral deal with Mexico “would be a fundamentally different agreement from a new trilateral agreement with Mexico and Canada,” the group of lawmakers said, noting that it would “present different economic opportunities on a different scale, and require different trade-offs.”

Apparently undeterred by this bothersome legal constraint, the administration has been eagerly pressing forward with efforts to strike a deal with Mexico and positive reports of “making a lot of advancements,” and getting “a lot of work” accomplished during intensive discussions in Washington have abounded. As for Canada’s possible return from the sidelines, that depends “on the speed in which in the next few days or weeks we finish the US-Mexico elements,” Mexican Economy Secretary Ildefonso Guajardo said Friday as he was leaving his seventh meeting in three weeks with USTR Lighthizer.

Earlier this week, White House Council of Economic Advisers Chairman Kevin Hassett said negotiators from the U.S. and Mexico are “very, very close” to a deal. “The team has been working overtime, late nights, going through what I would almost characterize as the final details,” he excitedly told Fox Business. “You should stay tuned because right now it’s closer than it’s been since I’ve been here,” Hassett added.

Driving the administration’s current urgency at the moment is the aim of getting a modernized NAFTA deal signed before Mexican President Enrique Peña Nieto leaves office on December 1. For that to happen though, all sides will have to reach a preliminary agreement by August 25 because the Trump administration must give Congress at least 90 days’ notice before a deal can be signed.

The administration’s strategy to put off reaching a trilateral agreement until the undisclosed bilateral “elements” between the U.S. and Mexico are resolved runs the risk of backfiring however because without Canada’s involvement in the talks, the window is rapidly closing for NAFTA negotiators to deliver a deal in less than three weeks. This objective is made especially daunting as many of the most contentious U.S. demands have yet to be addressed.

The Trump administration’s push for the inclusion of a sunset provision under which the new NAFTA agreement would expire after five years unless all three countries take steps to extend it has been a “deal-breaking” sticking point for both Mexico and Canada, who argue that it would not only unfairly skew future direct business investment towards the U.S., but that it runs counter the purpose of trade agreements, which are supposed to offer the assurance of continuity for companies and make it easier for them to comply with regulatory requirements.

Canada’s supply management program is another area where the sides have been at loggerheads throughout the talks. The issue has been a persistent thorn in the side for President Trump, who has said repeatedly that he’ll stand up for “badly treated” U.S. dairy farmers and get a better deal for them. Ottawa though so far remains absolutely steadfast in defense of the controversial farm program that many free market advocates oppose and has been the source of much of Trump’s ire about Canada’s allegedly “unfair” trade practices.

However, talking on CBC Radio yesterday, Trudeau emphatically declared that supply management wasn’t on the table in the trade talks with Mexico and the United States, before proceding to renew his pledge not to give up on domestic support programs for dairy farmers and other agricultural producers because it is “a system that works” (as opposed, one presumes, to the crisis-level oversupply problems which are causing major financial headaches for a lot of U.S. dairy farmers these days) and is therefore “something we will continue to protect.”

There are a number of other similarly vexing issues besides the two noted above that will also need to be resolved if a trilateral deal is to be reached before the August 25 deadline. Finance Minister Morneau alluded to this full slate of outstanding topics in a meeting with business leaders in Windsor earlier this week when he said there “was a lot more work to be done” and assured them “we are working hard to make sure that we’re prepared for continuing discussions around NAFTA.”

Complicating matters further for U.S. negotiators as they strive to wrap things up before the current legislative window closes, is the unlikely chance that Congress will take a vote on any new trade agreement until next year, after the mid-term elections. At that time, if a Democratic “blue wave” materializes as many are predicting, Trump’s team of trade and economic advisers will have to carefully estimate what they believe can pass that incoming body of future lawmakers.