US, Canada Ramp Up NAFTA Negotiating Pace After US-Mexico Draft Deal

13 September 2018

Negotiators from the US and Canada have met repeatedly over the past fortnight, including this week, in the hopes of finalising a deal to modernise the North American Free Trade Agreement (NAFTA) after Washington announced that it had reached a bilateral accord with Mexico, the other NAFTA party. 

Leaders from the US and Mexico announced on 27 August that their negotiators had clinched a preliminary deal, following one year of formal negotiations to update the North American Free Trade Agreement (NAFTA). US President Donald Trump has since filed a notice of intent to Congress of his plans to sign the deal with Mexico, “and Canada, if it is willing,” by the end of November. 

Whether Canada, the third NAFTA partner, will take part in the revised deal remains the subject of open speculation, given the various sticking points that reportedly remain in the negotiations. Mexico and the US spent much of July and August negotiating bilaterally without Canada, tackling subjects such as how to handle rules-of-origin for automobile trade.

According to comments reported by Politico, Canadian Foreign Affairs Minister Chrystia Freeland has lately stated that talks between Ottawa and Washington are now in “a continuous negotiation phase,” while expressing optimism that a trilateral deal is within reach. 

The three parties had previously aimed to clinch a trilateral deal ahead of Mexico’s general election on 1 July, though this was an informal target, and not the first that they have missed since launching negotiations last year. The US-Mexico announcement means that outgoing Mexican President Enrique Peña Nieto will be able to sign the deal before leaving office in early December. He will be succeeded by President-elect Andrés Manuel López Obrador. 

Mexico-US text: preliminary details emerge

Auto parts and their rules of origin were a key issue for US and Mexico negotiators in the final days and hours, and had been credited as being one of the most challenging subjects in the negotiations overall. 

Under the original NAFTA, 62.5 percent of automobiles had to be manufactured using regional content. Under the revised agreement, the US’ proposed target was 75 percent, with an additional 70 percent of all steel components to originate from the region. 

Moreover, the two sides have agreed to derive between 40 and 45 percent of the overall value of each car from high-wage jurisdictions, where employees make a minimum salary of US$16 an hour, which had been flagged by Mexican negotiators as a challenging hurdle to overcome given wage disparities between and within the North American nations.

A separate factsheet published by the Office of the US Trade Representative also touts a series of other provisions in the preliminary US-Mexico deal, praising its anti-corruption and trade enforcement terms. 

It also highlights the planned deal’s provisions to tackle theft of trade secrets; its various provisions on copyright protections; rules on geographical indications (GIs) for several foodstuffs, such as “comprehensive standards for protection against issuances of GIs that would prevent United States producers from using common names”; and a chapter on digital trade that would institute a moratorium on duties on electronic transmissions, among other provisions. 

The factsheet also says that the US and Mexico have agreed to robust standards on labour and environmental protections, such as protecting workers’ rights for collective bargaining or tackling illegal wildlife trade, while claiming that these rules will be “fully enforceable.” It does not clarify whether these chapters are subject to dispute settlement or how they would be otherwise enforced. 

Dairy, trade remedies dispute mechanism take centre stage in US-Canada talks

Canada and the US have their own challenges to overcome as bilateral negotiations continue over issues such as dairy policy and a dispute settlement chapter focused on trade remedies, as well as conflicting views on intellectual property rights protections for pharmaceuticals and enshrining into NAFTA an exemption for Canada’s cultural industries.

The US has said that it would like to see Canada allow for increased dairy market access. Dairy production approaches have historically differed widely on both sides of the border, as the US still provides state aid to dairy farmers while Canada uses a supply management system involving minimum price thresholds, production controls, and other measures.

Some US farm groups, as well as US Agriculture Secretary Sonny Perdue, have stressed that improved dairy market access in Canada will be key going forward. Canadian Prime Minister Justin Trudeau has pledged to keep his country’s supply management system intact, while indicating some negotiating flexibility to answer the US’ market access concerns, according to comments reported by Global News. 

In addition, NAFTA’s Chapter 19 special appeals process on the imposition of anti-dumping and countervailing duties also remains a contentious subject for the two countries. While the US has pushed for dropping the chapter, it remains to be seen whether a revised version of the system will be enacted, or if it will be eliminated entirely. Trudeau has been adamant that the trade remedies dispute settlement rules must remain in place in order to ensure strong trade law enforcement. 

Stakeholders share mixed views of US-Mexico deal, lawmakers question TPA compatibility

News of the US-Mexico preliminary deal has drawn a mixed reaction from key stakeholders, indicating a challenging road ahead for enacting the trade agreement into law. Many US lawmakers, for example, have been hesitant to welcome the deal until Canada’s level of involvement is made clear. 

“Preserving and improving NAFTA will ensure that American families will continue to benefit from lower prices, better jobs and increased productivity, while also ensuring that the 25-year-old agreement maintains the leadership of American businesses, manufacturers, farmers and ranchers. To achieve that goal, a final agreement should include Canada,” said Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, upon news of the US-Mexico deal. 

Ron Wyden, the Oregon Democratic Senator who serves as ranking member on the same panel, called the US-Mexico deal “half-baked” last week while insisting that the final version must include Canada. 

“You can’t fix NAFTA without fixing issues with Canada: from dairy and wine to red tape on small shipments and new digital commitments, to eliminating NAFTA's unconstitutional review of our trade remedy laws that has benefited Canada, and more. Cutting Canada out is surrendering on these issues,” he said on 4 September. 

While Trump and Peña Nieto could sign a deal before December, US lawmakers will not be able to vote on the new deal until 2020, when a new Congress takes office. Trump has also hinted repeatedly that pulling out of NAFTA remains a possible backup plan, should the process falter. 

Should the US move forward bilaterally with Mexico, questions have also emerged from some American lawmakers as to whether this would be in line with how the NAFTA negotiations were notified under Trade Promotion Authority (TPA). 

This is the legislation which delegates trade negotiations to the US executive branch, subject to negotiating objectives outlined by Congress and to various consultation, transparency, and notification requirements. It also allows for final negotiated trade accords to be subject to “fast track” voting procedures, where deals are given a straight up-or-down vote without amendments, so long as they are in line with TPA. 

According to a blog post by Peterson Institute for International Economics (PIIE) non-resident senior fellow Gary Clyde Hufbauer, this could become even more contentious depending on the results of the US midterms, should Democrats take power in one or both chambers of Congress, given that new leadership could argue that TPA does not apply to a bilateral US-Mexico deal. 

ICTSD reporting; “Will Chapter 19 kill NAFTA? Time is running out to find solution,” FINANCIAL POST, 6 September 2018; “NAFTA dairy talks not about axing supply management but studying ‘the bigger picture’: Republican,” GLOBAL NEWS, 9 September 2018; “Canada needs NAFTA’s Chapter 19 to protect against rule-breaker Trump: Trudeau,” GLOBAL NEWS, 5 September 2018; “Dow chief, NAM leader talk about trade, tariffs,” CRAIN’S, 9 September 2018.

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