Update on NAFTA Renegotiations

Torys Quarterly: The Future of Business in Canada

An informal eighth round of negotiations regarding the North American Free Trade Agreement (NAFTA) took place in Washington D.C. the week of April 9.

While Canada, Mexico and the U.S. have made some limited progress regarding North American content requirements for automotive parts, significant obstacles to reaching a revised agreement remain. Such obstacles include thorny political files for the parties, upcoming midterm elections in the U.S. this fall, and a presidential election in Mexico this summer.

How We Got Here

The first round of NAFTA renegotiations began in August 2017 after several months of the U.S. President threatening to withdraw from NAFTA. Seven formal rounds of negotiation have since been held with some progress being made. An informal eighth round took place the week of April 9, and the parties have planned another informal meeting in Washington D.C. on April 19. Despite increased pressure to conclude a deal, none of the major contested issues have yet been agreed.

Canada’s Approach to Negotiations

Canada’s approach has been to protect the free trade fundamentals of NAFTA while pushing to modernize the agreement and make the agreement more progressive. Canada’s Comprehensive Economic and Trade Agreement (CETA) with the European Union, and the recently signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are two examples of the type of agreement that Canada is hoping to achieve.

Current State of Play

Although draft texts of chapters have not been released by the parties, news reports and public announcements by Canada, Mexico and the U.S. provide some guidance on the chapters that have been settled, those that are close to being settled, and those where more work remains to be done.

What Isn’t Settled

Several challenging areas of negotiation remain. These include:

  • Automotive parts rules of origin: the current U.S. proposal is to require 65% to 75% of materials, depending on how critical the component, to come from North America to qualify for tariff-free treatment. The most critical auto parts would require 75% North American content, and the least critical parts would require 65%. In either case, this would represent an increase from the current rule requiring a 62.5% North American content. However, higher wages paid in production facilities could count as credit towards meeting the content requirement. This is the big-ticket item in respect of which the parties are closest to reaching agreement.
  • Procurement: The current U.S. position limits Canadian and Mexican businesses’ access to the U.S. public-procurement market to amounts that are equal to the dollar amount of Canada and Mexico’s procurement markets. This would sharply decrease the opportunities available to Canadian businesses in the U.S. procurement market.
  • Investor-state dispute settlement (ISDS): The NAFTA includes protections for investors of one of the three member states that make investments in the territory of another member state. While the protections for investors are predicted to remain in any renegotiated NAFTA, the U.S. has said that it wants the ability to opt-in to the binding arbitration mechanism used to enforce those protections. Canada and Mexico’s current position is that they can have a binding arbitration mechanism only between themselves. This issue remains in flux. Several prominent Republican congresspersons recently sent a letter to the U.S. Trade Representative indicating that he could lose key congressional support if ISDS is not included in NAFTA.
  • Dairy: Canadian dairy supply management has previously been raised by the U.S. President and the Senate Minority leader as an issue, and the U.S. has stated that it wants to end Canadian supply management within a decade.

There are few details available about the status of negotiations for the chapters on intellectual property, labour and the environment.

What’s Settled

Chapters on the following matters are reported to have been settled:

  • small and medium enterprises (SMEs);
  • transparency and anti-corruption;
  • competition;
  • regulatory practices and public administration; and
  • agricultural hygiene and safety.

The settled chapters cover topics that are largely uncontroversial. For example, the chapter on SMEs includes the goal of increasing SME access to the parties’ markets, including through various cooperative activities and information sharing. The anti-corruption chapter (a new addition to NAFTA) is reported to have strong anti-corruption measures, including a dispute resolution process for enforcing these measures. This mechanism may benefit foreign investors seeking to be on equal footing with local businesses.

What’s Almost Settled

Chapters on the following matters are reported to be near-settled:

  • energy;
  • State Owned Enterprises (SOEs);
  • telecommunications;
  • digital trade, customs and trade facilitation; and
  • financial services.

The inclusion of an energy chapter in NAFTA is a relatively new development. While little information exists on the content of this chapter, its contents may have a significant impact on how foreign investors approach and behave in the newly reformed Mexican energy sector.

Going Forward

While negotiation deadlines and proposals appear to be in constant flux, there has been a noticeable shift in recent months from an expectation that President Trump would withdraw the U.S. from NAFTA to an expectation that a revised agreement will be reached. Despite this, it is difficult to predict when this is likely to occur or whether the parties will reach some form of agreement-in-principle on key issues before the elections described above take place. If significant progress is not made in the short term, it is widely expected that negotiations will slow during the election period, and agreement may not be reached until 2019 at the earliest.

While renegotiating the NAFTA, the Government of Canada has also focused on making headway with other trade agreements. For example, Canada and 10 other countries, including Japan, Australia and Mexico, recently signed the CPTPP. The CPTPP still needs to be ratified, but key Japan and Mexico have already initiated the ratification process. Canada is also a member of the CETA with European Union member states, and has a free trade agreement with South Korea. As a result of these agreements, Canadian businesses are well-positioned to diversify their markets since they have free trade access to the Americas, Europe and the Asia-Pacific region.

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