Author Archives: Lawrence Herman

About Lawrence Herman

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

Canada’s NAFTA Strategies – Play Hardball

An op-ed piece of mine in the Globe and Mail Report on Business, outlined the implications of the USTR’s statement of the Trump administration’s NAFTA renegotiations and Canada’s possible response.

CANADA WILL HAVE TO PLAY HARDBALL on US NAFTA DEMANDS

Globe and Mail, 17 July 2017

LAWRENCE L. HERMAN © 2017

So we now know what the American objectives are in the forthcoming NAFTA renegotiations.

Some of what was sent by the US Trade Representative to the Congress July 17th [Monday] isn’t a big surprise, having been signalled before and in its initial fast track notice tabled with the Congress last May.

There’s a lot about modernizing NAFTA, improving the agreement to add provisions on trade in services, digital commence, intellectual property and even reference to establishing “strong and enforceable environmental obligations” and other things that, subject to careful reading, could be acceptable as a basis for negotiations.

However, there are at least four major bombshells, signalling an extremely aggressive stance by the Americans, making it difficult to Canada to accept the document as a basis for negotiations.

The first – not unexpected – is the US objective to eliminate the binational panel system in Chapter 19 of the NAFTA, the system that was first painfully negotiated in the bilateral Canada-US Free Trade Agreement in the 1980s and later replicated in the NAFTA. Canada made many compromises as part of the FTA talks to get the binational panel system accepted by the US side.

For the Americans to now seek its removal is a major assault on a fundamental Canadian interest and could effectively scuttle the talks.

The second attack – also part of the negotiated deal under the FTA/NAFTA – is the US objective to remove all restrictions on Buy America preferences at the state and municipal level, including on all federally funded program for a huge array of local projects.

What the US is seeking here effectively is a wholesale carve-out of preferential programs that run up against some of the key principles of open trade and GATT-based non-discrimination. Talk about trade distortion, these Buy America preferences will allow it in spades.

The third salvo is the US objective of removing the right of Canada (and Mexico) to be excluded from US safeguard actions against imported goods. Safeguards are global import restrictions that apply when US industries are being injured by an unexpected flood of imports that are neither dumped nor subsidized. Under the NAFTA, Canada and Mexico are exempted from such actions unless their exports “contribute importantly” to the injury caused to US producers. The US wants that out.

The fourth bombshell is the objective to reduce or eliminate barriers to US investments “in all sectors” in the NAFTA countries. This is an aggressive demand and suggests the US wants an end to Canada’s restrictions on American investments in such things as telecommunications, health care, education and cultural industries.

These four areas together comprise an extremely tough set of US objectives that go to the heart of the trading relationship and represent an assault of existing NAFTA rules as far as Canada is concerned, putting the very underpinning of the deal in play.

There are other parts of the USTR notice that could be contentious but possibly less so in comparison to these four items. These stated American objectives alone will make it difficult for these talks to get off to a smooth and friendly start.

I appreciate that some of this may be an over-dramatic reaction. Assessing all of this in a less hurried and more deliberate manner will be important. After all, the July 17th document is a statement of ideal objectives on the part of the US government. These don’t have to be taken as diktat or an end-game by either Canada or Mexico. We have to get to the table with the Americans and start some horse-trading as the dynamics unfold over the next several months.

The US Congress will also be weighing in to the process. As pointed out in a recent C. D. Howe report, over the last several decades, the Congress has re-asserted its jurisdiction in trade matters and will have an important voice in the NAFTA negotiations, and possibly a moderating one.

Perhaps some of the more egregious parts of the USTR’s position will be toned down once Congressional committees have a look. Canada has been solidifying contacts and enlisting supporters on Capitol Hill that could help to curb some of the most aggressive positions the USTR has tabled.

What also must not be lost in all of this, of course, is that we are talking about negotiations. Canada and Mexico don’t have to accept the US position as the basis for the negotiating agenda. The federal government will have the opportunity to set out its own set of objectives for the talks and Canada can be equally aggressive in making clear to the Americans where its fundamental NAFTA interests lie.

What unfolds over the next weeks and months for Canada-US relations in the long haul will be critical.

 

NAFTA – Everyone’s Chattering

There’s no end to the advice – well-intended on not – that Foreign Affairs Minister Chrystia Freeland and her team are getting from NAFTA experts and non-experts, far and wide.

Interest and engagement over NAFTA and other trade issues amongst Canadians these days thanks to Mr. Trump is probably unprecedented. But one has feel sympathy for ministers and senior officials in Ottawa trying to digest all of this unsolicited advice.

Let alone trying to make some sense of where NAFTA is going in advance of any request from the Trump White House to sit down at the table.

I’m as much at fault as anyone else in offering gratuitous views on strategy and tactics in this period of Never-Land, in advance the US triggering the start of re-negotiations under the Fast-Track system, supposedly set for August 18 or thereabouts.

We’ll see if that time-table holds. Remember, it takes Two-to-Tango (or three in the case of the NAFTA).

That means that even if the Trump team sends Canada and Mexico a request to start the talks, this isn’t a demand and a take-it-or-leave it proposition to arrive in Washington the next day with a negotiating team.

There will be inevitable to-ing and fro-ing before the negotiating framework and agenda can be settled. This will take time. Probably the actual business of negotiating won’t start in earnest until sometime later in the fall.

Whenever they do start, I’ve predicted that these will be tough and nasty, even with some soothing comments here and there from USTR Lighthizer and Commerce Secretary Ross.

That being said, the negotiating process will be fluid, with lots of horse-trading and the inevitable give-and-take. And much of this will, perforce, be behind closed doors. That’s how trade negotiations work.

It’s clear that the skilled and battle-hardened trade team in Ottawa is continuing to work up Canada’s own set of NAFTA demands and planned counter-thrusts. These are people that are probably the best and most experienced trade negotiators anywhere. Canadian interests will be fiercely defended.

For the rest of us, as engaged as we are, it would be wise to let matters unfold a bit. The Canadian government is doing a top-notch job of showing how important the NAFTA is to the United States. Let’s see what Trump & Co. put on the table to get a better sense of where all of this is going.

 

NAFTA and Beyond – Canadian Trade Strategies

As Canada enters the difficult and contentious NAFTA negotiations with the US, here are some thoughts in a Globe and Mail op-ed piece on some elements for Canada’s overall trade strategies, not forgetting either the Trans-Pacific Partnership Agreement (which has been signed by all countries, even the US) and the World Trade Organization Agreement, where Canada has a lot at stake as well. The Globe article is here: https://tgam.ca/2shQ0Yw

NAFTA Negotiations – Alternative Ways to Settle Disputes

Here is a short piece published by the C. D. Howe Institute, 24 May 2017, suggesting some options for Canada in NAFTA negotiations if the US demands removal of the existing binational panel system (in Chapter 19) for dumping and subsidy cases.

While not advocating that Canada should give in, the article suggests how State-to-State mechanisms in NAFTA Chapter 20 could be re-jigged to provide a possible and effective alternative.

Using NAFTA Chapter 20 CDH 24 May 2017

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.