Trade Compliance

GHY discusses changes to international trade regulations and explores cutting-edge compliance strategies.

Harsh U.S. Demands Place NAFTA’s Future in Doubt

Posted October 19, 2017


Having “found mutual agreement on many important issues” and apparently making solid progress during the first three rounds of the negotiations to modernize the North American Free Trade Agreement – albeit dealing with issues trade officials referred to as “low-hanging fruit,” such as reaching common ground on customs and trade facilitation, digital trade and good regulatory practices – the fourth round of talks in Washington, D.C. that wrapped up earlier this week ended on a bitter note, with ministers publicly trading barbs amid mounting frustration over the deadlock resulting from a series of contentious demands made by the Trump administration.

“We have seen no indication that our partners are willing to make any changes that will result in a rebalancing and a reduction in these huge trade deficits,” said U.S. Trade Representative Robert Lighthizer. Foreign Affairs Minister Chrystia Freeland claimed Washington’s proposals would “turn back the clock on 23 years of predictability, openness, and collaboration,” and Mexico’s economy minister, Ildefonso Guajardo, warned, “We must understand that we all have limits.”

Widely described by analysts as “bombshells” or “poison pills,” the potentially deal-breaking proposals concerning dairy, automotive content, dispute panels, government procurement and a sunset clause are being strongly opposed by both Mexico and Canada.

Automotive Components

The Trump administration wants U.S. content in automobiles to be at least 50% to qualify for NAFTA’s zero tariffs. A companion push is to raise the minimum value of automotive components sourced within the three countries from the current 62.5% to 85%. Furthermore, the U.S. is seeking for this policy be phased in within one year, a request that automakers say would be impossible.

Supply Management

The U.S. asked for 10 times more access to Canada’s dairy market than what had been agreed upon under the Trans-Pacific Partnership and called for the complete elimination of tariffs on all supply managed products to be phased out over the next 10 years, a move that would affect all dairy, poultry and eggs. The supply management request follows an earlier request for a de-facto veto over Canadian milk-classification decisions, which in the case of diafiltered cheese-making products has advantaged Canadian producers.

Dispute-Resolution

The Trump administration wants to radically overhaul the dispute resolution and enforcement systems of NAFTA. Changes proposed by the U.S. would transform the rarely used state-to-state dispute resolution process of Chapter 20 into an advisory one and the controversial investor-state dispute settlement provisions of Chapter 11, under which companies can sue the governments when legislation has a negative impact on profits, into a voluntary arbitration system, meaning countries would have to opt-in. Regarding Chapter 19, which allows Canada and Mexico to bypass the U.S. judicial review process when the U.S. government imposes antidumping and/or countervailing duties, Washington wants to see it eliminated altogether.

Buy American

The U.S. wants to severely curb access to public works contracts for Canada and Mexico with far stricter “Buy American” rules that, by Canadian calculations, would give Ottawa and Mexico City combined “less access to the U.S. government procurement market than Bahrain currently enjoys,” according to Foreign Affairs Minister Chrystia Freeland.

Sunset Clause

The U.S. has requested a termination clause that would end NAFTA after five years, unless all parties agree to extend the agreement, a move that opponents – including most business and industry groups in all three countries – argue would remove any certainty and stability for companies wanting to make long-term investment decisions under NAFTA’s rules.