Renegotiating NAFTA: Round 4

November 14, 2017

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Optimism gave way to heightened tension during round 4 of NAFTA renegotiations as new U.S. proposals aimed at delivering on President Trump’s America First agenda took Canadian and Mexican negotiators by surprise. President Trump, in an effort to bolster the U.S. position, threatened to kill the trade deal that has set the course for economic development in Canada, Mexico and the U.S. over the past 20 years.

During this round of talks, the U.S. formally presented Buy American policies in auto manufacturing, an opening up of Canada’s protected dairy market, eliminating NAFTA’s dispute resolution system, and introducing a sunset clause that would allow a new NAFTA to expire after five years. All landed with a thud on the desks of Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Secretary of Economy Ildefonso Guajardo Villarreal. 

Minister Freeland said the protectionist policies would “turn back the clock on 23 years of predictability, openness, and collaboration under NAFTA. In some cases, these proposals run counter to World Trade Organization rules.” She called the proposals “troubling”. Her U.S. counterpart, Trade Representative Robert Lighthizer, said he was “surprised and disappointed by the resistance to change from our negotiating partners on both fronts,” Villarreal said all three countries face a "lose-lose-lose" scenario if they don’t engage in a more constructive approach to talks.

On a more positive note, this round of talks did see the completion of a chapter on competition which substantially updates the original NAFTA and “goes beyond anything the United States has done in previous free trade agreements” (as stated in a press release from the Office of the U.S. Trade Representative).

What we know

According to a trilateral statement published following the negotiations, all three negotiators have “substantively” completed the chapter on competition and have made progress in the areas of customs and trade, digital trade and regulatory practices. However, few details were released to the public. The Ministers also acknowledged publicly they have significant gaps to overcome and are giving themselves more time before the next round of discussions in order to better address those gaps and assess all proposals.

Sticking Points

Rules of Origin

Since the first round of negotiations in August, U.S. Trade Representative Lighthizer made it clear the U.S. wants to increase the North American content requirement and add a specific American content requirement for goods and services to be entitled to preferential tariff treatment under NAFTA. In round 4 of talks, he offered specifics with respect to automotive manufacturing.

The current rules of origin require that vehicles must have at least 62.5 percent North American content to qualify for duty-free travel between Canada, the U.S. and Mexico. The U.S. has proposed an increase to 85 percent North American content and 50 percent U.S. content for cars manufactured in Canada and Mexico, but it wants U.S. manufacturers exempted from the rule.  

Dairy

Towards the end of the talks, the U.S. put forward an aggressive proposal that would see the system of supply management that protects the Canadian dairy market ended within a decade. Citing a source with direct knowledge of the negotiations, CBC reported the U.S. wants Canada to give up almost one-third of its market share in milk to the U.S. This proposal is 10 times what Canada conceded in the Trans-Pacific Partnership trade agreement. The Dairy Farmers of Canada called the U.S. demands “outrageous”.

Dispute resolution

The U.S. also wants to overhaul NAFTA’s dispute resolution process both between states and between investors and states. Currently, binational arbitration panels are allowed to make binding decisions on complaints about illegal subsidies and dumping. The new proposal would allow countries to reject the ruling of independent panels on state-to-state disputes. This change would mean the panels play more of an advisory role and lose much of their power. The U.S. would also like to make the investor-state dispute settlement process voluntary, with investors and states choosing to opt-in, or not. This would curtail the ability of companies to sue governments when legislation impacts profits negatively. 

Sunset clause

In a week full of surprises--and non-starters--the U.S. also introduced a sunset clause that would see NAFTA automatically expire after five years unless the three member countries voted to renew it. This is a particularly problematic proposal for businesses because of the uncertainty it brings.

Technology

Entering round 4, there was optimism that the three nations would have completed chapters on digital trade and telecommunications, among other topics, but talks came to a near halt after the U.S. introduced the proposals outlined above.

To provide context: NAFTA and the tariff-free movement of goods between Canada, the U.S. and Mexico has helped fuel the tech industry’s growth--a fact well understood by tech leaders. In broad strokes, the industry is largely in favor of advancing a new NAFTA that would address a few key issues. The industry would like to see the free flow of data to accelerate digital trade; a more global marketplace with North America joining a broader international agreement to eliminate tariffs on a range of IT goods; an alignment of cybersecurity standards between Canada, the U.S. and Mexico; the enhanced mobility of top talent between the three member countries.

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What’s Next

Round 5 of negotiations will take place in Mexico City from November 17 to 21, 2017. Additional negotiating rounds will be scheduled through the first quarter of 2018.

For more information on NAFTA, contact us today or read our other 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)
NAFTA Renegotiation Impact on Immigration
NAFTA Renegotiation Impact on the Retail Industry
NAFTA Renegotiation Impact on Government Procurement