NAFTA renegotiation—Canada should brace for a troubling list of demands
Last week, the newly appointed U.S. trade representative, Robert Lighthizer, wrote to Congressional leaders in both the House of Representatives and the Senate to officially give notice that President Trump will initiate negotiations regarding changes to NAFTA. This notice officially triggers a 90-day consultation period required before renegotiation of NAFTA can begin.
The letter offered few specific details about what the U.S. administration will seek to achieve through renegotiation other than that any new deal should do a better job of protecting U.S. factory workers and should be updated to reflect new technologies. However, there have been a number of specific complaints, and even U.S. trade actions, in recent months that offer some signals as to how U.S. renegotiation targets might affect Canada.
For example, President Trump called Canada’s system of supply management for dairy products a "disgrace."
The renewal of import tariffs against Canadian softwood lumber sales in the U.S. is itself a trade issue but highlights a potentially broader U.S. renegotiation demand; namely, that “snapback” provisions be allowed whereby a country could reinstate duties on a product if imports hurt its producers. A U.S. call for such provisions might be coupled with a demand to modify the current trade dispute procedure. Specifically, U.S. Commerce Secretary Wilbur Ross has hinted that U.S.-initiated claims of illegal trade subsidies and dumping of products be heard by U.S. courts rather than by NAFTA tribunals.
Other issues likely to form the U.S. renegotiation agenda include tightening North American content rules to discourage sourcing car parts and other inputs from Asia or, perhaps, even implementing specific quotas for U.S. made parts to be used within NAFTA.
Digital services also seem to be on the Trump administration’s radar, particularly restricting the right of a member country to insist upon local storage facilities for digital information. And the U.S. is also likely to demand changes to Canada’s patent laws, particularly as they apply to protecting data from trials of new biological drugs.
Canadian foreign investment restrictions affecting telecommunications and “culture” industries, as well as Canadian broadcasting regulations favouring Canadian-produced entertainment content, may also be raised by U.S. negotiators, especially given the emerging role of the Internet as a delivery mechanism for programming content.
In short, the U.S. is likely to approach the renegotiation process with a substantive and potentially politically troubling list of demands for Canadian negotiators to handle. In the relatively short space of time until renegotiation starts, Canadian policymakers should make hard calculations about the demands Canada will make at the negotiating table, as well as the U.S. requests that might actually be in Canada’s economic interests to accede to. The latter arguably include dismantling supply management programs for agricultural products, eliminating restrictions on inward foreign direct investment in protected sectors such as telecommunications, and allowing for the free flow of digital information across borders. Efficiency enhancing initiatives such as reducing trade-restricting regulations in the two countries and facilitating labour mobility through an updated and streamlined NAFTA visa program might also have traction, if championed by Canadian negotiators.
The troubling broader background to the upcoming NAFTA negotiations is a perceived need on the part of President Trump to claim a clear “win” and show his political base that he can deliver on his populist trade platform that helped him win the presidency.
Using the renegotiation of NAFTA to demonstrate his populist bona fides might have greater urgency for Trump given the apparent backing away by his administration (as a quid pro quo for China's assistance in dealing with North Korea’s nuclear weapons program) from pre-election promised trade actions against China. The rising tide of political nationalism in Mexico in reaction to Trump’s promised wall that Mexico would supposedly pay for will also amp up tensions surrounding upcoming trade negotiations.
Given this background, along with the Trump administration’s stated preference for bilateral trade deals, it’s quite possible that the initial round of negotiations will not go well, and that the parties won’t conclude a successful trilateral renegotiation of NAFTA. In this case, Canada could find itself renegotiating the Canada-U.S. Free Trade Agreement (FTA) with the U.S., since the FTA would arguably be legally activated given the demise of NAFTA.
Were this to happen, it would put economic pressure on Mexico to strike its own bilateral trade deal with the U.S. The result would be a "hub-and-spoke" trade law arrangement, with the U.S. as the hub and Mexico and Canada as spokes.
Avoiding a hub-and-spoke North American trade regime was an important spur for Canada to join NAFTA negotiations in the first place. While Canadian trade negotiators will have their hands full just dealing with bilateral trade issues, they also bear some burden of trying to ensure a truly trilateral “updated” trade regime.