This was an op-ed piece of mine published on May 9, 2014, in the Financial Post.

Lawrence L. Herman: If a TPA bill is ever passed, Obama’s authority will likely be on a tight leash

This was an op-ed of mine in the on-line version of the Globe and Mail (Toronto), 29 April 2014. It elicited many comments.

Approval of Keystone XL suffers delay after delay. Whether one is for or against, it’s obvious the project has become hostage to the unpredictable forces of American politics.

It’s hard to get a handle on how the project is being evaluated by the Obama administration. Is it environmental factors that count, including arguments over Alberta’s oil-sands, or is it energy security or American jobs that are critical?

Both TransCanada, as the pipeline’s proponent, and the Canadian government have played Keystone as best they could, insisting that the project meets all the required technical criteria and that Washington’s decision should be based on those considerations alone.

But Washington being Washington, it’s never as clean or neat as that. Politics are inseparable from the process of pipeline approval, more so in Keystone than in many others.

Because these political games seem so intertwined in the decision-making process, as this troublesome and vexing matter continues, including obscure deals and trade-offs between the White House and the Congress, there are international legal issues that come into play as reflected in the North American Free Trade Agreement.

Article 1105 of investment chapter of the NAFTA, entitled “minimum standard of treatment”, says that the US is required to accord all Canadian investors (i.e., TransCanada) “treatment in accordance with international law, including fair and equitable treatment and full protection and security.”

Should Keystone ultimately be turned down, the question will be whether the US has met the “fair and equitable treatment” obligation – what insiders call “FET”. If authorization is refused, would TransCanada – and indeed the Canadian government – have a NAFTA case based on the failure of the US to discharge that obligation?

The FET standard is central to hundreds of investment protection treaties around the world. It’s been invoked in countless of international investment disputes over the two or three decades.

Keystone’s ultimate future should be judged on proper regulatory criteria applied to similar pipeline projects in the US, including legitimate economic factors and technical and environmental assessments with credible underpinning.

But the more Keystone is caught up in political games and the more TransCanada’s application is treated differently from similar applications and denied normal timeliness, transparency and fair procedure, the more weight is given to the argument that the US is in contravention of its NAFTA obligations.

Of course, in any NAFTA arbitration the question always will be: what does fair and equitable treatment mean in legal terms?

One of the unresolved controversies is whether FET is limited to the customary international law standard, the content of which is illusive and difficult to prove, or whether FET can have independent meaning and take into account, for example, administrative law requirements of due process, transparency, fairness and equity.

The governments of Canada, the US and Mexico prefer to link FET to the higher customary international law standard and in 2001 issued an interpretative bulletin stating that the NAFTA FET standard was the standard recognized under customary international law.

But NAFTA tribunals are not necessarily bound by that statement and could arrive at a different conclusion based on their own reading of the NAFTA. For example, in a recent arbitral award (Waste Management Inc. V. Mexico), the NAFTA tribunal held that the FET standard included requirements of due process and natural justice beyond what was recognized in customary international law.

While other NAFTA investment arbitration awards have taken the more restrictive customary international law approach, NAFTA panels are not bound by precedent and can reach conclusions that depart from those of their predecessors.

At this point, all of this is in the realm of legal theory. The main point, whether under the international law standard or under an independent standard, is that the more that arbitrary factors enter the picture and the more Keystone is politicized, the more force there is to the argument that US is in breach of its NAFTA obligations, not only to TransCanada as the investor, but to Canada itself as a treaty party.

There are now 41 individuals listed as designated persons plus three Russian banks. This extends the scope of the sanctions that were promulgated in March.

For Canadian businesses, the critical part of the sanctions is the following:

3. It is prohibited for any person in Canada and any Canadian outside Canada to

• (a) deal in any property, wherever situated, held by or on behalf of a designated person;
• (b) enter into or facilitate, directly or indirectly, any transaction related to a dealing referred to in paragraph (a);
• (c) provide any financial or other related service in respect of a dealing referred to in paragraph (a);
• (d) make any goods, wherever situated, available to a designated person; or
• (e) provide any financial or related service to or for the benefit of a designated person.

Particularly significant in the prohibition are the important words, “facilitate, directly or indirectly, any transaction . . . “ that relates to property held “by or on behalf of” one of these designated persons.

Care must be taken to be doubly sure that business transactions do not run afoul of the ever-widening sweep of the net.

Just a note to state what is pretty obvious – be extremely cautious in dealing with Russian businesses and banks.

A note on problems in the Trans-Pacific Partnership trade negotiations.

The Obama administration still doesn’t have legal negotiating authority – called Trade Promotion Authority or “fast track” –  something only the Congress can provide. And Congress is so far NOT moving ahead with the required legislation.

Canadian officials keep saying “Don’t worry. Be happy. It’s just a formality”. I don’t believe that.

I’ve been saying for months that it doesn’t make sense to negotiate with the Americans when they haven’t got the green light from Congress.

We don’t even know if the light will be green or orange – or maybe even red.

Finally, official Washington is starting to admit the truth. Here is a report from World Trade On-Line posted yesterday. It’s a wake-up call.

 A senior adviser to President Obama last week publicly acknowledged that the administration is in a tough position because the lack of Trade Promotion Authority (TPA) makes it hard to conclude ongoing trade negotiations such as the Trans-Pacific Partnership (TPP), while at the same time complicating TPA passage since members of Congress are reluctant to approve a bill without knowing the content of any future trade deals that would be covered.

 This was confirmed by Commerce Secretary Pritzker and Ag Secretary Vilsack in the same report. World Trade On-Line says that those comments contradict previous statements by Obama administration officials about the lack of TPA not being an obstacle in the TPP negotiations.

My view is that even if TPA is passed, it will likely not be until AFTER the mid-term US elections this fall. And my other prediction is that any TPA will require Congressional oversight over each step in the negotiations.

This would mean Canada and the other TPP countries are in effect negotiating with the Congress and not with the Obama administration.

The whole point of fast-track – going back to the 1970s – was to overcome that problem.

As widely known, Canada has applied sanctions against Russia as a result of that country’s aggressive actions in Crimea. The Canadian  sanctions flow from a law called the Special Economic Measures Act, which gives broad authority to the federal cabinet to apply sanctions where it 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.”

The new sanctions don’t apply across the board to dealings with Russia or Russian companies. Rather, as a means of pressuring President Putin, they target only those high-profile persons – individuals and entities – specifically designated in the regulations. The sanctions prohibit Canadian individuals and companies anywhere in the world from:

• dealing in any property held by or on behalf of a Russian designated person, or facilitating or providing financial or other related services in respect of such a dealing;
• making any goods available to such designated person; and
• providing any financial or related services to or for the benefit of such designated person.

Causing, assisting or promoting the above prohibited activities is likewise an offense under the Russian sanctions.

The sanctions are a bit of a moving target. The government can add names to the list of designated persons as they deem necessary, as they did on March 21^st by adding Aktsionerny Bank Russian Federation (also known as Bank Rossiya) to the list. So care must be taken to monitor changes to the sanctions list.

It will also be important to take special care not to be caught unwittingly by these measures. Of particular note is the prohibition against dealing with or assisting in the provision of all kinds financial “or related services” “to or for the benefit of” a designated person. Commercial activities “for the benefit of” a designated person could be interpreted broadly.

According to media reports, many business dealings are being affected by the potentially wide sweep of these measures.  Financial dealings are on hold. Expectations are that this crisis will persist. There is no doubt Canada-Russia business is going to suffer.

Here is a piece I wrote as an op-ed in the Financial Post on 25 February 2014.

Lawrence L. Herman: Big Three stall Canada-Korea trade deal

The tug-of-war in Canada’s long-delayed trade agreement with South Korea, reported regularly in this newspaper, continues. It’s not a happy story.

Pulling in one direction are the Canadian branches of the Detroit Three, led by Ford Canada, joined by the Canadian auto-workers represented by Unifor.

Pulling in the opposite direction are a wide array of manufacturing industries, the aerospace and agrifood business and the financial community.

Canada’s Detroit Three have been lobbying against the Korean trade deal for years – a deal that Canada was on the verge of signing in 2008.

In the meantime, in 2011, the U.S. went ahead and signed its own free trade agreement with Korea, stealing a march while Canada dithered. Ironically, the U.S. deal was fully supported by the Detroit Three.

Since then, U.S. exports to the Korean market have grown, while Canadian exports have plummeted. As Michael McCain of Maple Leaf Foods has lamented recently, Canada’s agriculture and food exports to Korea alone have dropped from more than $1-billion to just over $300-million, a loss of more than 70% over the past two years.

Economic studies have shown that the Korean agreement would have resulted in $1.6-billion annually in trade gains for Canada, with benefits spread fairly evenly east and west.

Recognizing the economic and strategic importance of getting the deal done, the Harper government negotiated further adjustments to meet the auto industry’s concerns and now wants to finally sign the trade pact.

Yet it appears that the Canadian Detroit Three, Ford Canada particularly, continue to oppose the agreement. The president of Ford Canada recently described the U.S.-Korea agreement as a “disaster” for American auto makers, urging the Conservative government not to make the same mistake as the United States.

This is pretty odd, given the support of the Detroit Three for the U.S.-Korea deal. In December 2010, Ford’s president & CEO said that Ford “applauds” the agreement. He congratulated the Obama administration for its “tireless efforts” in getting the deal done.

Then on January 25, 2011, in testimony before the U.S. House Ways and Means Committee, Ford’sVice President of International Governmental Affairs said his company “strongly encouraged” the Congress to approve the agreement.

It’s true that the Korean agreement hasn’t led to a flood of U.S. cars going to that country. But the U.S.-Korea deal only entered into force in 2012 and it’s impossible to judge the long-term economic benefits after only one year of operation, let alone to describe it as a disaster.

Even if we take its first 12 months, U.S. exports to South Korea of such items—including aircraft, autos, wines, soybeans and orange juice—rose 4.1%. American-made auto exports to Korea went from $340-million in 2011 to over $800-million in 2013.

Now let’s look at some Canadian numbers.

Canada produces over 2.6 million vehicles each year, 85% of which are exported. Independent studies done both for Canada’s trade department and for Industry Canada have shown that removing the 6.1% duty on Korean vehicles will have almost no impact on Canadian production.

While, yes, the deal will modestly increase the number of Korean vehicles we import – by a mere 1.6% of total Canadian sales – these studies also show that a trade deal would leave annual Canadian production basically untouched, reducing the number of Canadian-made vehicles by an imperceptible .04%.

There are other aspects of the story that are lost in the rhetoric. For one thing, of the 124,000 vehicles Korean manufacturers shipped to Canada (2010 data), close to a third entered duty-free from the U.S. anyway, where they’re now being made.

In any case, this is not just about cars and trucks.

Canada is a country with long-term economic and trade interests in the Asia-Pacific region. Quite apart from the direct trade benefits, cementing this agreement with South Korea will have political significance and reinforce Canada’s engagement in that part of the world.

It will also provide an established framework for the conduct of our commercial relations and a dispute resolution process to resolve differences, something we don’t have now.

In 2013, the U.S. Congressional Research Service did an in-depth study of the impact of the U.S.-Korean agreement and signalled that its rejection or indefinite delay would have called into question the viability of trade agreements as a serious U.S. tool to strengthen economic ties with its major trading partners.

That point applies with equal force to Canada.

Lawrence L. Herman, Herman & Associates, is a Senior Fellow at the C.D. Howe Institute, Toronto.

There was an excellent article by Barrie McKenna in the Globe on February 9, 2014, pointing out the importance of the Obama administration getting trade negotiating authority from the Congress, called Trade Promotion Authority or “TPA”. That authority expired in 2002 and hasn’t been renewed. A new TPA bill has been introduced in both the Senate and the House of Representatives but is highly contentious and is very much caught up in the toxicity of partisan politics in Washington these days.

I wrote about the TPA and how it impacts on negotiations with the US in an earlier blog (www.hermancorp.net). I noted that without TPA, other countries, Canada included, were negotiating in the Trans-Pacific Partnership exercise on a large amount of faith with the American team. The reason is that no-one yet knows what kinds of conditions Congress will attach to TPA legislation, assuming the bills even get out of the morass of committee deliberations. My prediction is that Congress will set out some very onerous terms for the US administration to bring back a TPP agreement that will be approved.

A bit of history here. Under the US constitution, any treaty signed by the US executive must then obtain Congressional approval for the US to ratify the treaty and be legally bound by its terms. Remember the League of Nations episode, where the Wilson administration signed the treaty in 1919 but the Congress refused to approved it. The result was that the US remained outside the League for the duration of that body’s existence.

One of the serious problems as well was that, to give approval, Congress often required major changes to a signed treaty. This meant that countries, Canada included, that reached a negotiated deal with the US, then had to agree to make more concessions to get the deal through the Congress. In other words, the US got two kicks at the can. This was a particular roadblock to treaty negotiations with the Americans for many years.

To remedy the problem in trade talks, the concept of fast-track was developed in the 1970s. It was an arrangement by which the Congress agreed to give the Executive Branch full authority to negotiate and sign trade agreements with the proviso that the Congress could not insist on changes being made to that agreement later. All Congress could do under fast track was to approve or disapprove the agreement in its entirely. No changes could be insisted on.

Fast track worked well in the Uruguay Round negotiations in the 1990s, leading to the 1994 WTO Agreement. However, the last fast track bill expired in 2007. The Obama administration needs TPA renewed for the Pacific trade talks.

But fast track renewal is hitting stormy weather in Washington. Many in the Senate and the House, notably but not only on the Democrat side, are bent on changing the very concept. Instead of a clean bill, there are efforts to tack on many terms and conditions on Obama’s negotiating authority, meaning that the US team will come to the negotiating table with a long list of a priori demands to meet Congressional conditions. That will cause a lot of TPP countries a lot of angst.

Not only that. There is a move to include a requirement for full Congressional oversight during the Trans-Pacific negotiations. If this gains traction and is included in the final TPA bill, “oversight” will really mean that, once again, countries will be negotiating, not with the US executive branch, but with the Congress. This would be untenable and, in my estimation, could torpedo the talks. So all TPP countries should follow these twists and turns with interest and with some anxiety as the TPA bills tortuously wend their way through the Congressional maze.

The problem when you have a Canadian Trade Minister like Ed Fast inundating us with press releases all the time is that, when something really noteworthy is issued, it tends to get less attention than it merits.

This may be true of a couple of highly significant reports the Trade Department recently issued, which have not been commented on in policy circles as much as should have been. Pity. These reports give a valuable picture of where Canada stands in international trade, and more significantly, where the Conservatives see Canada going. I would have expected more informed comment on these.

One can quibble over some of the details. And yes, one can claim that all this is just more typical Conservative propaganda. But that does a disservice to the value of these documents.

The first one, “Canada’s State of Trade”, was released late in December. Prepared by economists in the Trade Department, it is a finely prepared report and tells us virtually everything we need to know about Canada’s place in the global economy. While it only has full data up to the end of 2012, it shows in raw numbers how Canada has slipped in relative terms in this highly competitive world.

The second document, “Global Market Action Plan” is the more significant in policy terms. It provides a defined roadmap for Canada’s trade and investment objectives and priorities in meeting these challenges. It talks about “economic diplomacy”, the government’s guiding principle in focussing trade, investment and Canadian business interests, as part of a new global strategy.

Unlike the mushy stuff often issued by the Department previously, this is a welcome change – a proactive and focussed document. It avoids the overly wordy and bureaucratic gobbledegook of similar reports. It does a fine job in identifying Canada’s major target markets with a strategic approach for exploiting those markets. In conjunction with the merging of CIDA into the newly titled Department of Foreign Affairs, Trade and Development, this report says how trade, investment and international development should be pursued consistent with hard Canadian economic interests.

For any one involved in international trade and trade policy, you can’t really understand the direction Canada is going under the Harper government’s international business and economic strategy without reading these documents.

The Trans-Pacific Partnership (or TPP) trade negotiations, the biggest floating trade game on the planet, will be re-engaging in earnest this year, having missed their 2013 deadline, an impossible goal to begin with.

Should the talks succeed, Canada and all TPP participants will gain from the effects of reduced barriers and other market-opening measures, especially for services and investments. But there are dark clouds that threaten this deal, whether in 2014 or later.

With the spectre of the failed WTO Doha Round hovering in the background, the TPP agenda is unfortunately over-layered with extreme complexity. As well, many of the twelve participating countries have deeply entrenched and diametrically opposed positions, all of which is frustrating consensus.

Second, the talks are over-weighted by the dominance of the United States, which has a highly aggressive agenda of its own. This doesn’t set the stage for the normal give-and-take and consensus building in trade talks.

Another problem, at least up to now, has been the lack of President Obama’s trade negotiating authority – which must be bestowed by the Congress.

Officially called Trade Promotion Authority or TPA (but more often called “fast-track”), negotiating authority is absolutely critical for the American team. Fast-track authorizes Obama to conclude a deal but prevents the Congress from later demanding that provisions be re-negotiated as a price for its approval. Under fast-track, the only thing the Congress can do is accept the deal as signed or reject it entirely.

Without fast-track authority, there’s no guaranty that any Trans-Pacific deal struck with the Americans will get the necessary Congressional approval. No country would be foolish enough to sign off on any agreement with the US in the absence of the fast-track guaranty.

The long-delayed fast-track bill was to be introduced in both the Senate and House of Representatives this week, but is again being held up by partisan wrangling, hostage to the toxic political atmosphere in Washington.

It’s unusual that the TPP negotiations have proceeded thus far without the American team having fast-track authority. Other TPP countries have been negotiating basically on faith, assuming that fast-track will one day be forthcoming.

An unfortunate development is that the chair of the critical Senate Finance Committee, Max Baucus of Montana, has been designated by President Obama as the next US ambassador to China. With Baucus’ impending departure, a major force in channelling fast track through the Congress will be gone, causing uncertainties over the ultimate fate of the legislation.

There’s another problem. While fast-track, if it comes, will give the US negotiators the required mandate, the price for getting that mandate through Washington’s byzantine legislative maze will be the tacking on by Congress of many conditions for fast-track approval. Those conditions will cause a lot of angst for a lot of other TPP countries.

All of this feeds concern that a final trans-Pacific deal can be successfully pulled off. Concerns are not assuaged by the fact that at each negotiating session there are more than 1,500 officials in attendance. That sends shudders, reminding us of the over-burdened WTO Doha Round negotiations in the Doha Round which, after 10 years of effort, ultimately collapsed under their own weight.

One of the lessons learned in the WTO talks, however, is that smaller, pragmatic trade deals can be achieved, less ambitious in scope but still important to global business. Witness the recent WTO agreement on trade facilitation – border procedures – reached at the WTO Bali meeting last December.

While a large-scale and broad-based TPP deal would be a huge step forward and in the collective interests of all participants, including Canada, there are these clouds across the Pacific that raise concerns that a comprehensive ptrade deal will be achievable.

Given the gathering clouds, it may be timely for Canada and the other Pacific countries to consider a more pragmatic course, to pull in their collective horns, and to pursue a smaller but more realistic set of objectives. It’s not in anyone’s interest to see the TPP talks drag on forever or collapse in disarray.

Without clear, meaningful movement and a realistic possibility of success in TPP over the next few months, less ambition and a more pragmatic focus by trans-Pacific governments will be needed.

http://opinion.financialpost.com/2014/01/10/darkening-clouds-threaten-trans-pacific-partnership-deal/