Missed NAFTA Deadline Triggers Tariffs for Canadian Businesses

June 18, 2018

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The tweets fired off by U.S. President Donald Trump in early June capped the G7 summit with an exclamation mark.

Sent shortly after he departed meetings in Quebec, Trump’s posts not only withdrew the U.S. from a joint communique with other world leaders. They also ratcheted up the trade tension between Canada and the U.S. by calling out two key Canadian industries: dairy and auto manufacturing.

The backdrop is familiar to anyone affected by the North American Free Trade Agreement (NAFTA), which is being renegotiated by its three signatories: Canada, the U.S., and Mexico. The public dispute between Trump and Prime Minister Justin Trudeau signals both the urgency of the trade talks and the frustration of an apparent missed deadline.

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Has a NAFTA deadline passed?

When U.S. House Speaker Paul Ryan set May 17 as a NAFTA deadline, he brought a dose of reality to the long-simmering negotiations. Talks between representatives of Canada, the U.S., and Mexico had been progressing in fits and starts. Timelines were acknowledged but rarely broached.

Ryan’s deadline has passed, and so — most likely — has the added “wiggle room” he conceded negotiators could use.

The race against the clock reflected political and legislative realities south of the border.

American voters go to the polls in November in midterm elections that could weaken the current Republican control of Congress. The new legislators will take office in January, so the White House wants legislators to vote on a new deal by the end of the year.

Pushing new trade law through Congress takes time. Under the Trade Promotion Authority (TPA), U.S. legislators and the president himself must follow a set of timelines. The TPA is known as a “fast-track” but in practice is anything but. Even in mid-April, some trade experts expressed doubt that a deal would become law in 2018.

U.S. Senate Majority Whip John Cornyn has indicated that the window is closed.

“It looks like they are kicking it over to 2019,” he said. “I wish it had been handled earlier.”

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Is this what a trade war looks like?

While one deadline has likely passed, new tariffs have added urgency to these trade negotiations.

Trump first announced tariffs of 25% on steel imports and 10% on aluminum in March. At the time, he exempted Canada and Mexico from the tariffs — as long as the parties came to terms on NAFTA by June 1. When the calendar turned without a deal, Trump ended the exemption.

Canada has responded with its own set of tariffs. They target $16.6 billion worth of American goods, equal to the value of Canadian steel and aluminum exports to the United States in 2017. These tariffs affect not only aluminum and steel but also household goods such as ketchup. They are scheduled to take effect on July 1, 2018 — unless the U.S. government lifts its steel and aluminum tariffs.

“This is the strongest trade action Canada has taken in the postwar era,” said Foreign Affairs Minister Chrystia Freeland. Trudeau called it a “turning point in the Canada-U.S. relationship.”
Mexico has also hit back at U.S. protectionism with tariffs on items ranging from pork to steel to bourbon.

Meanwhile, the U.S. has also pursued tariffs against its trading partners around the world, part of Trump’s protectionist vision for the country. The list of countries to respond with their own tariffs continues to grow.

For Canada, the U.S., and NAFTA, the tit-for-tat trade measures threaten to pull the close trading partners into a full-scale trade war. At the very least, the rhetoric that has typified these negotiations has spilled over into real-world business consequences. While NAFTA remains, its terms are weakened by tariffs on key items.

What we know

Negotiators have reportedly closed nine of 32 chapters — up from the six covered when the seventh round of talks ended. In addition, small and medium-sized enterprises have reason to cheer, with negotiators having agreed to a new chapter designed to foster their trade across borders. Finally, negotiators continue to engage on important topics.

“The technical issues like customs facilitation and e-commerce are progressing well,” said Laura Dawson, director of the Canada Center at the Wilson Institute. “The sensitive sectors like agriculture and intellectual property are making slow headway.”

All this progress remains theoretical until a new NAFTA deal is signed.

Many of the NAFTA sticking points remain the same as they have been from Day 1. However, recent debate has focused on three major points:

  • Auto rules of origin. The U.S. wants vehicle parts to have 75% North American content, up from 62.5%. It also wants 40% of parts to be sourced from labour that is paid at least $15 per hour. Mexican auto factory workers average far less than that.
  • Supply management for dairy. Canada currently assesses tariffs on dairy and other products. Trump has railed against the duties, designed to protect Canada’s agricultural industry. Trudeau has staunchly defended it.
  • Sunset clause. The U.S. wants any NAFTA deal to expire after five years. Both Canada and Mexico have resisted the demand, with talks stalling in May after Vice President Mike Pence reportedly insisted on the sunset clause as a precondition for talks with Trudeau.

What we don’t know

As we have said from the start, the NAFTA negotiations introduce instability for Canadian business leaders and hinder planning. This uncertainty comes on the heels of tax changes for private corporations that increase risk for Canadian businesses. A recent BDO global survey of business leaders found that regulatory risk was their top blindside risk.

But NAFTA talks will continue, as confirmed by Foreign Affairs Minister Freeland. The now-24-year-old trade deal has smoothed the road for trade in all three NAFTA countries. For Canada, it now stands alongside a bevy of deals reached with other trading partners, such as the Canada-European Union Comprehensive Economic and Trade Agreement.

Some have floated alternatives to NAFTA. These include a “skinny NAFTA,” which would cover automotive vehicles among other areas, and declare a limited victory. The U.S. has proposed bilateral trade deals between each of the three countries — an idea rejected by Canada.

For the U.S., NAFTA is just one of several high-profile portfolios on the go. In foreign policy, negotiators are trying to unwind years of hostility with North Korea. Domestically, politicians are focused on midterm elections.

Mexico will run its own elections on July 1, and pundits expect leftist Andres Manuel Lopez Obrador to prevail. While he won’t take office until December, the change further complicates the NAFTA timeline.

“It would take about six to eight months to deal with the remaining technical issues under normal circumstances,” Dawson told BDO. “With the poison pills [such as the sunset clause and dispute settlement] and high degree of politicization added to the mix, the remaining time required to conclude the deal is anyone’s guess.”

To handle the NAFTA uncertainty, Canadian business owners need to analyze their operations and business environment, and consider all possible NAFTA outcomes. This NAFTA moment presents Canadian businesses with a generational opportunity to diversify and spread their business risk.

We remain committed to informing and steering our clients through these turbulent times.  

What’s next

The latest official round of NAFTA negotiations, Round 7, ended in early March, and no further rounds have been scheduled. Negotiations continue among the three countries in an attempt to break the deadlock.

To get help with managing the changing tariff landscape, contact our Customs and International Trade practice.

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Summary of NAFTA Round 1 Negotiations (Washington, August 16-20)
Summary of NAFTA Round 2 Negotiations (Mexico City, September 1-5)
Summary of NAFTA Round 3 Negotiations (Ottawa, September 23-27)
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