Author Archives: Lawrence Herman

About Lawrence Herman

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

An Illuminating (but Short) History of Canada-US Trade Relations

The threat of Mr. Trump ending the NAFTA negotiations, including the possibility of him sending a notice of US withdrawal from the treaty itself, prompts a brief but interesting review of US-Canada trade relations over the last 150 years.

In may come as a surprise to learn that the US has only terminated one trade agreement in its entire history. And that was a trade agreement with Canada.

The 1854 Reciprocity Treaty was the first free trade agreement ever concluded by the United States. Canada was still a British colony then, so the treaty was negotiated and signed in Canada’s name by the British government. It provided for access of American and Canadian fishermen to each other’s coastal waters and created duty-free trade in fish, grain, poultry, eggs, lumber and a range of other non-manufactured commodities.

While the Reciprocity Treaty wasn’t anything like NAFTA or other free trade agreements we know today, it was a remarkable achievement for its time. In those days, customs duties were much more important than they are today, so duty-free trade really meant something, even if it was confined to basic commodities. The preamble used the following wording about both Parties being,

“ . . . desirous to regulate the commerce and navigation between their respective territories and people, and more especially between Her Majesty’s possessions in North America and the United States, in such manner as to render the same reciprocally beneficial and satisfactory . . ”

Unfortunately, the treaty’s days were numbered because of deteriorating relations between the US and Britain, mainly over the Alabama incident.

The Alabama was a Confederate gunboat. It had been built by a British shipyard, delivered to the Confederacy (over protests by Washington) and then raided Union coastal shipping during the early years of the American Civil War.

The fact that Britain allowed the Alabama (and other British-built gunboats) to be delivered to the South in spite of that country’s legal neutrality didn’t sit well in Washington when the war ended. As well, there was a perception that Britain had lent other forms of tacit support to the Confederacy because of its need for cotton from southern plantations to supply British textile mills.

Anger over all of this, plus a movement in the US to annex Canada, was running strong, so in 1866, the US abrogated the treaty. The interesting point about this is that President Johnson, who had assumed office when Lincoln was assassinated, required the approval of Congress to do so. There are some constitutional lessons here that are relevant in 2018.

To restore good relations and help calm things down, the US and Britain concluded the 1871 Treaty of Washington, providing for an international tribunal to settle the Alabama claims, which eventually awarded Washington $15.5 million in compensation. The treaty also resolved pestering disputes over the Atlantic fisheries and drew the Canada-US maritime boundary line off the west coast in the Strait of Juan de Fuca.

Now fast forward a few decades to another interesting episode in the early years of the 20th century. The bitterness of the post-Civil War period had long dissipated and there was general goodwill between the two countries, allowing Canada (under the Laurier government) and the US (under the Taft administration) to conclude a second Reciprocity Treaty in 1911.

In sending that treaty to Congress for approval in January of that year, President Taft expressed fine sentiments about the importance of good relations between the US and Canada:

“The guiding motive in seeking adjustment of trade relations between two countries so situated geographically should be to give play to productive forces as far as practicable, regardless of political boundaries. . . . an exact balance of financial gain is neither imperative nor attainable. No yardstick can measure the benefits to the two peoples of this freer commercial intercourse and no trade agreement should be judged wholly by custom house statistics.”

In the end, Congress approved the 1911 treaty but, as fates would have it, the Canadians rejected it. Laurier and the Liberals lost the bitterly fought 1911 election, the Reciprocity Treaty being one of the main issues in the campaign. Western Canada was in favour, eastern Canada largely opposed. Borden and the Conservatives campaigned vehemently against reciprocity and won, the Toronto business community carrying an anti-free trade banner with the rallying cry, “No Truck or Trade with the Yankees.”

And here matters stood for several decades. While there was an intermittent effort by the McKenzie King government to conclude a trade deal with Washington in the late 1930s, nothing came of it. In 1965, there was renewed forward movement with the conclusion of automotive free trade in the ground-breaking Auto Pact.

However no all-encompassing trade talks occurred until President Reagan and Prime Minister Mulroney launched an historic set of bilateral free trade negotiations in the mid-1980s. In a statement of vision, Ronald Reagan said this in presenting the final outcome – the 1988 Free Trade Agreement – to the Congress in January 1988:

“The U.S.-Canadian free trade agreement is the culmination of 18 months of strenuous negotiations between our governments. . .  Frankly, I think we’ve come up with a winner, a winner for people on both sides of the border. Canada and the United States are already each other’s largest trading partners. . . . The economic health and national security of our countries are linked. This well-honed treaty will build on these ties that already exist and open up tremendous new potential.”

The rest, as they say, is history.

 

POST NAFTA WORLD

This op-ed piece by Lawrence L. Herman was published on-line in the Toronto Globe and Mail on 11 January 2018 and was in the print version the following day. https://www.theglobeandmail.com/report-on-business/rob-commentary/the-post-nafta-world-is-starting-to-take-shape/article37572664/

Below is a copy of that article.

Are we entering the post-NAFTA world? It certainly looks that way.

The markets finally woke up to this Wednesday, after sleepwalking for the past year, as bond yields and stock prices sank and the dollar took a hit on news that the Trump administration is preparing to pull the NAFTA plug, maybe even before the next round of negotiations slated for Montreal at the end of the month.

Markets have a way of ignoring facts, or at least taking a rosy view in complex situations of government-to-government trade policy. In this case, the somnambulism was based on misplaced optimism that trade negotiators would be able to solve the NAFTA problems, blithely ignoring the significance of Mr. Trump’s repeated declarations that the agreement was the worst deal in history and constantly threatening to walk out unless the US got what it wanted in the renegotiating process.

Canada’s move to take the US to the World Trade Organization over its abuses of globally-agreed rules, made public yesterday, is a clear signal that the NAFTA exercise is up against the wall and that the US is preparing to trigger the 6 month withdrawal notice. It’s an indication that Plan B is now operative, as Barry McKenna rightly observed yesterday.

Taking the Americans to the WTO diverts the matter from the NAFTA turf, where the Americans hold most of the cards, and moves it to an international forum where all parties are equal and where judgments over whether the rules are being followed will be determined by a neutral panel.

It’s what the multilateral system was designed to do – level the playing field, removing the case from a stacked negotiating forum where a powerful bully dominates and relying on the WTO’s judicial body to dispassionately review one member’s complaint against another.

Canada has outlined a whole litany of US “nullification and impairment” measures affecting Canadian trade extending over decades, including the US refusal to fully implement WTO panel rulings, saying that those decisions only cover past importations and only those particular products, leaving the impugned measure in force for future cases.

By bringing its WTO case now, the Trudeau government recognizes that the NAFTA can’t be repaired and that US trade actions will only escalate with full encouragement under Mr. Trump’s protectionist America First agenda. Canada is showing that it has offensive as well as defensive strategies.

There are risks here, many of which were discussed in this paper yesterday. The first will be the inevitable souring of our bilateral trade relations. As Andrei Sulzenko has written in this space, trade remedies are viewed by Americans as the commercial equivalent of the constitutional right to bear arms, meaning there will a highly-charged and aggressive counter-attack by the Trump administration.

This has already begun, with Robert Lighthizer, the US Trade Representative, slamming Canada’s WTO request as a “broad and ill-advised attack on the U.S. trade remedies system.”

The Trudeau team needs to be steely-eyed in weathering these assaults. Whatever vitriol might light up twitter accounts, the Canadian complaint is totally within WTO rules and the right of any member to seek redress where another member nullifies or impairs its benefits under the WTO Agreement.

This will be Canada’s biggest ever WTO case, an epic battle taking years to get resolved. In the meantime, Canadian business needs to adjust to a likely post-NAFTA world. Even the earlier 1988 bilateral Canada-US FTA, which remains in force in the background, could be in Mr. Trump’s crosshairs. Terminating US participation in these treaties will mean ending current and future binational panel reviews, including softwood lumber, all which will be diverted to the US domestic court system.

On the less negative side, a world without a Canada-US trade agreement won’t stop ongoing trade or business between our two countries. Japan, the EU, China and indeed most of the world do business with the US without bilateral trade agreements. There will be an adjustment period but in the end Canadian trade will recover.

The longer-term spillover impact on the bilateral relationship in a post-NAFTA world is difficult to assess. Luckily, that relationship is robust enough to weather strains and irritants and has shown itself to be surprisingly resilient in spite of political and economic disputes in particular areas, some of which have been pretty contentious.

The problem until all of this gels will be ongoing market uncertainty, compounded by the battle shaping up in Washington over whether Trump can legally withdraw from NAFTA without congressional approval. The debate over Congress’ role will be further complicated by the impending US mid-term elections as well as constitutional litigation over the respective roles of the White House and Congress regarding abrogation of trade agreements.

So, while there’s a lot of drama surrounding Canada’s WTO case and all of its strategic implications, the centre-piece in all of this is the NAFTA and the critical events unfolding over the next few weeks. We’re in for uncertain times in a post-NAFTA world.

 

 

NAFTA SCENARIOS UNDER MR. TRUMP

Here are some comments on the various possibilities for Canada-US trade relations as we move into 2018, overlain with the threat of Mr. Trump terminating US adherence to the NAFTA.

Regarding the resurrection of the 1988 Canada-US Free Trade Agreement (FTA), it’s true it remains suspended but not terminated as a bilateral treaty. It could re-enter into full legal effect if the US withdraws from the NAFTA early next year, should Mr. Trump trigger Article 2205 (the 6-month notice requirement). However, the re-entry of the FTA into full legal force wouldn’t be automatic: Canada would have to agree to that as a matter of treaty law.

One of the main red-line positions in the NAFTA negotiations is the US demand to end the Chapter 19 panel review process. The bilateral FTA has virtually the same panel review chapter and if the FTA were to re-enter in force after US withdrawal from the NAFTA, the FTA panel system would then also be applicable as part of that treaty. The question is whether the Trump White House be prepared to accept that.

The interesting point here is that the FTA panel system has a 5-year sunset provision (with an automatic 2-year extension) under Article 1906 thereof, something rarely mentioned by policy commentators and the media.

The FTA panel process already ran for 5 years (1989-1994) before the NAFTA entered into force. Thus, if the FTA snapped back into operation, its binational panel process would then at most have 2 operational years left. Maybe the US could accept this.

Should this scenario unfold, the softwood and aircraft subsidy and any other cases initiated under NAFTA Chapter 19 would presumably continue to the end even if US treaty obligations under the NAFTA were terminated.

After US withdrawal from the NAFTA was completed, any new panel reviews would take place under the bilateral FTA – until the sunset provision ended the process.

The 1988 FTA has the same 6-month withdrawal provision (under Article 2106). If the binational panel system as well as other parts of the FTA are as abhorrent to the Trump administration as the NAFTA, the White House could end US adherence to the FTA and trigger US withdrawal from that treaty at the same time as invoking withdrawal under NAFTA Article 2205.

Of course, none of this is 100% clear. But the various possible scenarios make for interesting speculation as we move forward into 2018.

 

Dealing with Dictators

Canada doesn’t need a US-style Magnitsky Act to deal with putative dictators like Nicolas Maduro of Venezuela, Vladimir Putin of Russia, Robert Mugabe of Zimbabwe or others.

We could easily deal with Maduro or any situation involving the trampling of basic human rights and democratic principles with a few tweaks to the Special Economic Measures Act.

SEMA was passed in 1992, twenty-five years ago, and hasn’t been updated since. It’s true, as spokespersons at Global Affairs have said, the legislation doesn’t allow Canada to apply sanctions as the US has done in response to recent developments in Venezuela.

Reflecting the international context of a bygone era, section 4 of SEMA says:

 The Governor in Council may, for the purpose of implementing a decision, resolution or recommendation of an international organization of states or association of states, of which Canada is a member, that calls on its members to take economic measures against a foreign state, or where the Governor in Council is of the opinion that a grave breach of international peace and security has occurred that has resulted or is likely to result in a serious international crisis,

(a) make such orders or regulations with respect to the restriction or prohibition of any of the activities referred to in subsection (2) in relation to a foreign state as the Governor in Council considers necessary; and

(b) by order, cause to be seized, frozen or sequestrated in the manner set out in the order any property situated in Canada that is held by or on behalf of

(i) a foreign state,

(ii) any person in that foreign state, or

(iii) a national of that foreign state who does not ordinarily reside in Canada.

Section 4 was worded that way because, at the time, the international community didn’t believe there was a need to counter actions within countries that were offensive or abusive but not peace-threatening.

So because the Venezuelan situation isn’t a “grave threat to international peace and security”, SEMA doesn’t allow the cabinet to impose sanctions or asset freezes on Maduro and his cohorts as the US has done.

A simple change to section 4 could be made, bringing into the 21st century by giving the federal cabinet the power to sanction persons (individuals or entities) in cases where the Governor in Council (in legal parlance) is of the opinion that unacceptable acts like corruption, criminal behavior or human rights violations have occurred or are likely to occur within foreign countries.

A few words such as “. . . or serious human rights abuses, corruption or infringement of democratic principles . . . “ inserted in section 4 would do the trick. Easily done.

Last May, the Commons Foreign Affairs Committee unanimously supported changes to SEMA along these lines. It’s not clear why the Trudeau government hasn’t followed through with a draft bill.

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.