Renegotiating NAFTA: Round 6

February 12, 2018

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Round 6: January 23-29, 2018, Montreal

The sixth round of NAFTA talks began amid reports of increasing pessimism in Canada’s trade community about the agreement’s future. For months, U.S. President Donald Trump had threatened to walk away from the landmark treaty. Now rumours spread that he would give the required six months’ notice to withdraw at the earliest opportunity — perhaps at his State of the Union address. The rumoured announcement never came.

The rhetoric that has marked these talks continued through the sixth round. In his closing statement, U.S. Trade Representative Robert Lighthizer took issue with a trade challenge launched by Canada against the U.S. with the World Trade Organization, calling the challenge “a massive attack on all our trade laws."

The filing, published two weeks before Round 6 began, cites anti-dumping and anti-subsidy duties used by the U.S. The topic is a contentious one between the two countries, with Canada repeatedly objecting to duties levied by the U.S. against its softwood lumber industry.

What we know

Negotiators from the three countries closed a chapter on anti-corruption and made progress on other key areas — such as customs and trade facilitation, telecommunications and digital trade. The most challenging issues remain: dispute resolution mechanisms, rules of origin for cars and agricultural points of controversy such as Canada’s supply management system that supports its dairy farmers.

Canada diversifies its trade approach

With NAFTA’s future uncertain, the federal government has in effect adopted the first rule of any successful business: diversification.

First came the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). The agreement, which came into force September 21, 2017, opened a market of around 500 million people to Canadian businesses — almost dwarfing the 325-plus million people in the U.S. CETA gives tariff-free access to more than 98 percent of Canadian goods, up from the 25 percent that previously enjoyed such access.

Then, as negotiators hunkered down in Montreal, Canada joined 10 nations in announcing an Asia-Pacific trade pact. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will increase Canadian access to such markets as Japan, Australia and Chile. The official signing is scheduled for March.
The CPTPP will offer significant benefits to Canadian exporters — despite lacking U.S. involvement. It combines with CETA and other agreements Canada has signed with South Korea and South American nations to adjust a balance of trade that has traditionally tilted heavily toward the U.S.

Canada’s growing web of trade alliances gives Canadian businesses a measure of safety in case NAFTA is terminated. Including CETA, firms operating in Canada now have preferred market access to 45 foreign countries. These markets comprise over 1.2 billion consumers and over US$41.4 trillion of global GDP, according to the IMF World Economic Outlook in 2017.

“There are signs [NAFTA ending] would not be a long-term catastrophe for Canada,” said Dean Elliott, managing partner for BDO’s Central group, in a recent BDO webinar about NAFTA. “Without NAFTA tying Canada to our close geographical neighbor, Canada could pursue agreements with other global partners.”
Canadian trade representatives continue to set their sights abroad. Next up for Canadian: potentially deeper ties with the Pacific Alliance. Created in 2011 by Chile, Colombia, Mexico and Peru, the alliance has invited Canada and several other countries to become associate members. The second round of negotiations concluded in early February.

To protect borders or to open trade

The CPTPP news is particularly rich in symbolism. Last January, U.S. President Donald Trump withdrew from the original 12-nation pact, the Trans-Pacific Partnership (TPP). The move signalled the American government’s current preference for protectionist policies at a time when Canada’s leadership favours trade liberalization.
Veteran trade advisors see an unusual dynamic in the current NAFTA negotiations.

“While most trade talks are about further liberalizing trade between countries,” said Adam Taylor of Export Action Global, “the U.S. fixation on reducing its trade deficit means the NAFTA 2.0 negotiations are less about free trade and more about managed trade.”

NAFTA and uncertainty

NAFTA remains a key trade agreement for the country’s business community.

Sixteen of Canada’s 20 largest cities sit within a 1.5-hour drive of the U.S. border, so it only makes sense for the two nations to continue their historic trade relationship. Under NAFTA, Canadian-based businesses have access to nearly 482 million consumers, including Mexico, with a combined GDP of over US$21 trillion, according to the IMF.

For many Canadian businesses, the uncertainty surrounding the negotiations has itself limited their ability to plan.

That was also the position of senior leaders from the three countries’ plastics industry, who attended Round 6 of the talks and issued a joint call for action.

“The plastics industries of the U.S., Canada and Mexico all stand to benefit greatly from an updated NAFTA,” said Canadian Plastics Industry Association President Carol Hochu. “Right now many businesses are waiting to see how the negotiations conclude before making new investments. A show of progress would give them the green light to plan for future growth.”

Despite the length of these negotiations, some observers caution that NAFTA success is hardly out of reach. The key NAFTA sticking points were always going to be resolved — if they are resolved — towards the end of negotiations.

“If you remove the rhetoric,” said Fion Anastassiades of Export Action Global, “NAFTA is moving along at the regular pace. If anything, it is helped by having scheduled negotiations, as opposed to other trade deals that feature a bunch of rounds and then nothing.”

The moderate progress of Round 6 has given hope to some business groups.

“While it’s clear that the trade partners still have some difficult issues to work through, it is encouraging to see that there has [sic] been some positive developments over the past week,” said Dan Kelly, president at the Canadian Federation of Independent Businesses. “We’re especially pleased that talks to revamp the NAFTA trade deal will continue.”

With the agreement still in limbo, Canadian businesses need to analyze their operations and consider all possible NAFTA outcomes. The pact that has supported many Canadian companies may yet be saved. Still, business leaders can steal a page from the government’s script by diversifying their business relationships. Canada’s newest trade agreements offer businesses significant opportunity — whatever NAFTA’s fate.

What’s next

Round 7 of negotiations will take place in Mexico City from February 26 to March 6, 2018. Round 8 is scheduled for March in Washington, D.C.

The initial March deadline to complete the NAFTA negotiations has been extended. Further talks are expected throughout the summer and could continue to 2019.

Listen to our NAFTA webinar to hear more on NAFTA talks and on how you can prepare for their impact on your business.

We surveyed Canadian business leaders to ask about the NAFTA renegotiations and the opportunities, risks and planning considerations they had identified. To read the report click here.

For more information about NAFTA, sign up to receive the latest NAFTA updates or contact us today.

Additional NAFTA insights:

NAFTA 2.0: Key Issues and Next Steps
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)
Summary of NAFTA Round 4 Negotiations (Washington, October 11-15)
Summary of NAFTA Round 5 Negotiations (Mexico City, November 17-21)
Renegotiating NAFTA: Are We There Yet?
NAFTA Renegotiation Impact on Immigration
NAFTA Renegotiation Impact on the Retail Industry
NAFTA Renegotiation Impact on Government Procurement