Author Archives: Lawrence Herman

About Lawrence Herman

Counsel on International trade and investment, global business transactions & public policy

Beyond NAFTA – A New Bilateral Trade Deal With the US?

I wrote an opinion piece in the Globe and Mail in January 2017, saying that a possible approach for Canada is to look beyond NAFTA as a three-way agreement and to consider a NEW BILATERAL TRADE DEAL with the US.

Given the problems in resolving Trump’s concerns over Mexico within the NAFTA as it is currently constructed, and given that Canada-US issues are qualitatively different than the Mexico-US issues, Canada might consider looking to Plan B – a totally new Canada-US trade agreement that brings the NAFTA up to date.

Click here for the Globe op-ed: https://tgam.ca/2kkqF9o

Even if the NAFTA can be rescued, the result will likely be essentially two separate agreements in any case, one for Canada and one covering Mexico.

Order and Disorder in International Trade

“You’re going to pay a very large border tax”.

That’s what President-elect Trump said at his January 11 news conference (if it can be called that) about US companies that manufacture abroad, repeating statements he repeatedly made on the campaign trail.

It seems fair to predict this blustering will become actual US policy post January 20th. We’re seeing American trade policy being made through press conferences and 140-character tweets, creating huge uncertainty and unpredictability in international trade.

What Mr. Trump is saying – on its face – contravenes every US legal obligation under international treaties, especially the WTO Agreement.

That Agreement contains sanctified rules that have been promoted and championed by every US administration since World War II – until now. Apparently, Mr. Trump has little regard for US legal obligations in ratified treaties.

We’ve gone from a reasonably orderly rules-based global trading system to one where there appears to be no rules as far as the incumbent president is concerned.

Think-tank analysis coming out of Washington seem to agree Trump could use executive authority to invoke one or another statutes to proclaim so-called border taxes to penalize companies he doesn’t like.

One view is that this would directly challenge Congress’ constitutional authority over trade and the raising of revenue and could result in litigation in US courts until the cows came home.

Leaving aside the internal US legal situation, threats to apply penalty-type taxes on imports from China, Mexico or other countries where US companies have manufacturing plants run counter to every known rule governing global trade.

First, there is the matter of bound duty rates, for 70 years under the GATT and now the WTO Agreement – and in all bilateral trade agreements the US has with others, Canada included. These are legal commitments. They can’t be unilaterally changed.

Bound duty rates make for stability in international commerce. These bindings are overlain with the fundamental rules of non-discrimination in international trade — Most-Favoured Nation or MFN treatment plus national treatment.

This means imports must be treated equally in all respects with domestic-made goods in terms of taxes, charges, rules and all other measures. WTO members have to provide equal competitive opportunities for imports in the local market.

These fundamental rules the US has steadfastly promoted for since the Bretton Woods agreements of the 1940s. They ensure order and stability in international trade.

Without them, global trading system starts to fall apart and chaos results, the kind of situation that shook the global economy in the 1930s.

The US has invoked these same rules time and again in bringing GATT and WTO disputes to challenge the least tinge of discriminatory treatment by trading partners that affect American exports.

As well as Mr. Trump’s threat to apply border penalties, there is an equally dangerous proposal under consideration in the US Congress.

This involves changes to the US tax system, set out in a tax reform bill tabled by House Speaker Ryan and Congressman Kevin Brady, Chair of the House Ways and Means Committee, replacing the present 35% corporate income tax with a “cash flow business tax” of 20 percent.

The Ryan-Brady bill would then tax all imports, regardless of source, through a 20% border tax designed to equal the cash flow corporate tax.

Like Mr. Trump’s threat of 35% border penalties, the Ryan-Brady bill would set international trade back decades. As Canadian press analyses have said, the idea would be highly damaging to Canada-US trade relations and indeed global trade generally. https://tgam.ca/2jjKPmN

It’s true that GATT/WTO rules, formulated largely by the US itself, allow countries to apply border taxes adjustments to equate with internal sales taxes applied to like products.

Under these rules, border tax adjustments (BTAs) can be used to tax imports – in addition to import duties – but only at the same tax rate applied to domestic purchases of the same kinds of goods.

This means that if a Canadian buys something through Amazon shipped from the US, HST is applied to the imported purchase – a legal BTA in accordance with GATT/WTO rules. It’s allowed because the same HST applies when the same good is bought in Canada.

The problem is the US doesn’t have an HST or a national VAT type tax. So they can’t use these GATT rules to apply a border tax because there isn’t any equivalent domestic tax.

The rules don’t allow border taxes on imported products to somehow adjust for corporate income taxes paid by domestic manufacturers. If every country did the same thing, the global trading system would unravel.

Both the president-elect’s threats of border penalties and the Ryan-Brady 20% tax proposals are thus cause for great concern. They have resulted in serious uncertainty about where international trade is heading.

If the American government ignores the obligations enshrined in international treaties, particularly the WTO agreement, that they themselves promoted and indeed formulated, the rules-based post-WWII multilateral trading system will soon start to crumble.

Maybe it has already.

Trump, Trade and the Canadian Dimension

With Mr. Trump’s election as president, every carefully orchestrated American policy (like China and Taiwan) and every nuanced and finely negotiated treaty (like the Iran nuclear deal) is up for grabs. That is equally true for trade agreements like the NAFTA, repeatedly slammed by Mr. Trump as the worst deal every signed by the United States.

One of the first things on the Trump administration’s trade agenda will be to demand (that’s right, demand) that the NAFTA be renegotiated. While Mr. Trump’s arrows are aimed at Mexico, Canada is directly in target range on a variety of fronts.

Even though Canada’s ambassador in Washington, David MacNaughton, made some mollifying comments about dealing with the new administration in a cooperative manner (Globe and Mail, 2 January 2017), my predictions are that the atmosphere around the table will be very stormy.

The trade policy team Mr. Trump is assembling is aggressively skeptical, if not hostile, to trade liberalization, especially if it entails any compromises by the United States.

The new trade policy trio, Wilbur Ross, Dan DiMicco and the new USTR, Robert Lighthizer, a senior partner at Skadden Arps, have been critical of US trade policy under Mr. Trump’s predecessors. China is seen as a particular menace. This is an indication of the kind of collective perspective they bring to the job.

Trade agreements are all about compromise and mutually-balanced concessions – but that means a willingness on all sides to pursue a common objective to emerge with a fair and workable deal. Mr. Trump seems allergic to this kind of arrangement. For him, and presumably his trade team, it’s a zero-sum game.

There has been discussion in Canada over the technical aspects of the US actually withdrawing from the NAFTA and whether Congress would have to approve that step. Whatever the answer, the fact is that the President has full authority to demand any treaty be opened up for re-negotiation.

It’s also illusionary to think that if the US were eventually to withdraw from the NAFTA that the pre-existing Canada-US bilateral Free Trade Agreement of 1988 would then simply take over. If the American administration is hostile to elements in the NAFTA, it seems obvious that the FTA will be on the table as well.

All of this makes for considerable uncertainty in Canada US trade relations. As I said in my 3 January 2017 opinion piece in the Globe and Mail, the times are a-changin’ and many aspects of the established order has been turned upside down. See the piece here. https://tgam.ca/2hNiN3o

Until the US agenda is fully fleshed out, the world at large and Canada in particular, will be waiting with some anxiety.

Trump and Trade – Whither NAFTA

As we try to come to grips with all the implications of the Trump ascendency, there are some important points for Canada to contemplate when it comes to bilateral trade matters.

First, Trump will move quickly to demand re-negotiation of the NAFTA and while his acrimony is focused on Mexico, as a trilateral agreement Canada will be directly and immediately involved. There’s no way around that. If Trump wants to open the NAFTA, it’s impossible for Canada to refuse to be at the table.

Second, re-negotiating the NAFTA means opening up parts of the deal that will directly concern Canada – such as duty-free entry or low tariff rates. You can’t raise duties on Mexican goods without changing the same duties on Canadian goods. Such as autos, chemicals, foodstuffs. You name it. That’s what happens under most-favoured-nation (MFN) treatment.

Third, while there’s a view that abrogating the NAFTA – assuming the Americans want to go that far – will then resuscitate the 1988 Canada-US Trade Agreement, it is almost certain that the US will want to change that agreement as well. If Trump as president is as aggressive on trade as he was on the hustings, there’s reason to be worried that he’ll re-jig the entire bilateral trading relationship with Mexico as well as Canada, meaning the old FTA is up for grabs as well.

Fourth, as was made clear during the campaign, regional trade deals like the TPP and the proposed US-EU agreement are effectively dead in the water. And there is unease about how the Trump administration will approach multilateral obligations under the WTO and whether it will show commitment, let alone leadership, in that critical forum as well.

Finally, with Republican control of both houses of Congress, Trump can move quickly to get his senior trade policy staff in place and won’t face lengthy delays of 9 or 10 months or more getting Senate confirmation of his nominees. And with Congressional control, getting trade bills passed (which will be needed to change the NAFTA and the FTA) won’t pose a significant challenge.

All of this means the lights will be on late on Sussex Drive (and on Bay Street) as policy makers and business leaders try to plan options and strategies as we enter this new and unsettled era in trade matters.

Rescuing CETA – Yes, It’s Possible

The investor-State dispute settlement (ISDS) part of the CETA is the focus of Wallonia’s objections to the deal. We can actually solve that roadblock.

ISDS was never a sine qua non for Canada. We replicated the NAFTA model (making some later improvements) without any real thought or analysis of whether the Canadian investment community saw ISDS as an essential part of the agreement – they don’t.

Why would they? There is no concern in the Canadian business community about risks of investing in France, Spain, Germany, Italy, Ireland or the UK (as long as it remains in the EU). There are significant Canadian investments in each of these countries and there’s never been an issue requiring investment protection.

The fact is that Canadian business doesn’t need, and never pressed for, foreign investment protection in any of these major EU economies.

And Canada already has bilateral foreign investment protection agreements (FIPAs) with many of the smaller EU members: the Czech and Slovak Republics, Hungary, Poland, Romania and Croatia. For those other EU countries where Canada doesn’t have these bilateral agreements, they can be negotiated (in my view, without much difficulty).

And I dare say, European companies never insisted on ISDS when it comes to investing in Canada.

Taking all of this on board, there’s definitely a way to rescue the CETA.  If the EU can do their bit and get their act together and get the Germans and Belgians to agree, we could remove the ISDS provisions with an agreed protocol that calls for its further review of those articles. Both sides could then agree to provisionally implement the critical parts of CETA, most importantly the tariff reductions that Brussels alone has control over.

Full ratification (with or without ISDS) could come later when all 28 EU members approve it under internal EU procedures. In the meantime, forward progress would be made in opening trans-Atlantic markets.

Some might argue that it’s too dangerous to open up an agreed treaty text because the consequences are unforeseen and could lead to the entire structure crumbling. But this really isn’t a renegotiation of the agreement. It’s a matter of removing a part of it for further study. And without embarking on some kind of rescue mission like this, the whole CETA venture could die anyway.

CETA is too important for both sides to have it go down in flames over a particular part of the agreement that neither side considers essential.

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Addendum: This proposal would side-track the ISDS part only but keep intact the other provisions in the CETA investment chapter, including the obligations on both Parties (meaning Canada and the EU member States) to ensure that foreign investors and their investments are treated in a non-discriminatory manner and on an equal footing with national investors.

The result would that Canada or the EU could still bring a Party-to-Party dispute to arbitration if these treaty obligations were not complied with. The proposal would also keep intact the proposed investment court which would handle these Canada-EU disputes.