From: Daniel Schwanen
To: The Honourable Chrystia Freeland, Minister of Global Affairs.
Date: August 30, 2018
Re: Let`s Grab the NAFTA Carrot
The US-Mexican agreement on key elements of a renewed NAFTA is a carrot dangled in front of Canada: the concrete possibility of an acceptable agreement on auto trade and of restoring reasonably predictable access to the US market for Canadian producers.
This is an attractive proposition, under the circumstances.
Yes, Canada should retain for itself the option to walk, leaving the US and Mexico to deal with the messy but not implausible situation in which the US Congress agrees to taking the US out of NAFTA and to the bilateral deal with Mexico.
The problem with that scenario is that the alternative is not the status quo – it is the “carmaggedon” imposition of enormous duties on Canadian auto exports to the United States. That is the real stick that the US is brandishing over Canada’s head right now.
However, it appears that we can have the carrot if we are willing to make some concessions that would make the stick go away, and that is the choice we should make, as the use of the US stick would potentially trigger tens of thousands of job losses in this country.
Yet, Canada also has some room to manoeuvre and some leverage to try to get the US to make the carrot more attractive.
The US and Mexico are pressing for an agreement for political reasons – and it would be a lot less messy to include Canada than to exclude it. Also, tariffs against Canadian products impose significant costs on the US economy. In short, our two partners still have an incentive to listen to serious Canadian proposals.
How should Canada use this room to manoeuver?
On autos, Canada needs to ensure that the content rules for duty-free content agreed to by the US and Mexico, extend to North America as a whole.
As we have written before, Canada should sign on to a higher de minimis threshold for small shipments crossing the border duty and tax-free, a threshold which is currently much lower in Canada than in the US or Mexico. It should also agree to lower its restrictions on trade in dairy and dairy products to a degree comparable to US trade restrictions in these products. While difficult politically, these moves would actually benefit Canada economically.
The Trump administration has been adamant about both these concessions. Conceivably, these changes alone would provide the president with his visible trade “wins” that would give it the excuse to agree to a deal.
A more difficult pill to swallow for Canada might be signing on to US proposals on pharmaceuticals – centered on longer patent protection for so-called “biologics,” and on copyright length and especially enforcement, and other intellectual property (IP) provisions now agreed to by Mexico.
In exchange for making concessions on some of the less problematic among these IP proposals, Canada could seek to hold on to some other “red lines,” including its ability to subsidize and place Canadian cultural content, though some of these red lines would end up thinner than it had originally hoped.
The “6-16” sunset clause agreed to by Mexico, if it means that the agreement will be reviewed every six years, and if it passes muster at that time the agreement stays in force for another 10 years, should be acceptable.
The current US Administration is adamantly opposed to the idea that NAFTA Chapter 19 dispute settlement panels should be able to demand revisions of antidumping and countervailing duties decisions made by domestic agencies, when these decisions appear contrary to the country’s own trade laws. But Canada is right to have seen these panels as a key achievement of the NAFTA – they give industry a fair chance to get relief from these duties when they are ill-imposed.
At a minimum, Canada should obtain from the United States, in exchange for suspending the Chapter 19 mechanism, a commitment that the two countries will work toward a North American fair competition regime, monitored by their respective competition authorities, that would minimize the threat of such duties between them, as I had suggested here: /intelligence-memos/daniel-schwanen-how-about-nafta-side-deal-part-two, coupled with a commitment to not impose new barriers to access to public procurement contracts.
While Canada may have been surprised by the bilateral US-Mexico agreement, it is unlikely that Canadian negotiators were surprised by the language around the agreement, or even by the overall compromises made by Mexico. Thus, it may be possible to reach a new trilateral NAFTA agreement in principle over the next three days. But Canada will have to give up some of its own protectionism and propose creative solutions to issues raised by the United States, in order to maintain its existing access to the most important market for Canadian products.
Daniel Schwanen is Vice-President Research at the C.D. Howe Institute
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
