Renegotiating NAFTA: Round 5

December 2017

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Round 5: November 17-21, 2017, Mexico City

In an effort to cool tensions and remove the weight of politics from discussions, Canadian Foreign Affairs Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Secretary of Economy Ildefonso Guajardo Villarreal did not attend Round 5 of the NAFTA talks. Instead, the ministers, who had already met separately at the Asia-Pacific Economic Cooperation leaders’ meetings in Da Nang, Vietnam, instructed their NAFTA chief negotiators to focus on advancing discussions on tabled proposals.

It has been reported that the move came at the suggestion of Lighthizer and reflects a shift in attitude on the part of the U.S., which has taken a zero-sum game approach to negotiations to this point. In Round 4, Lighthizer demanded that a new NAFTA should reduce the U.S. trade deficit, include a sunset clause to allow for the review of the pact after five years, eliminate the dispute resolution system, open up Canada’s protected dairy industry and insert Buy American policies into auto manufacturing. The response was immediate: both Canada and Mexico rejected the one-sided protectionist policies.
 

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What we know

In order to build momentum towards an agreement, Round 5 of negotiations focused on more technical aspects of the pact. To that end, the three negotiating teams progressed on a variety of technical files and are nearing resolution on less controversial chapters such as digital trade, food-safety measures, regulatory practices, customs procedures and telecommunications. Consistent with previous rounds of negotiation, no details were made public.

However, on the more substantive, politicized and controversial policies such as automotive rules of origin, the Canadian dairy industry, dispute resolution and the sunset clause, no progress has been made.

“While we have made progress on some of our efforts to modernize NAFTA, I remain concerned about the lack of headway,” said U.S. Trade Representative Robert Lighthizer at the conclusion of the fifth round of talks. “Thus far, we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement. Absent rebalancing, we will not reach a satisfactory result … Our teams will be meeting again next month in Washington. I hope our partners will come to the table in a serious way so we can see meaningful progress before the end of the year.”

While the U.S. approach to NAFTA has not changed and President Trump continues to threaten to terminate it, a growing number of American business and industry groups are organizing to defend NAFTA. The National Small Business Association, a nonpartisan advocacy group, supports NAFTA.

"The majority of small- and midsize exporters say they are more likely to enter a new market if it is covered under a free trade agreement with the U.S.,” said Molly Day, vice president of public affairs for the group. “Furthermore, just 5 percent report actually being hurt by free trade agreements."

A few key facts:

  • On October 10, more than 300 American boards of trade sent President Donald Trump a letter outlining the benefits of NAFTA and urging him to maintain the agreement.
  • On September 24, in an open letter published in the Wall Street Journal, Thomas J. Donohue, the Chair and CEO of the United States Chamber of Commerce, argued that exiting NAFTA would be catastrophic on the economic, political and national security fronts.
  • According to the American Enterprise Institute, 38.9% of Michigan’s GDP depends on trade, with 65% of the state’s exports bound for Canada and Mexico. Eliminating NAFTA would put 366,000 jobs at risk.

 While U.S. businesses are mobilizing to save NAFTA, Canada is developing contingency plans should NAFTA talks fail.

“Our approach is to hope for the best and prepare for the worst and Canada certainly is prepared for every eventuality,” Canadian Foreign Affairs Minister Chrystia Freeland stated at the conclusion of the recent round of talks.  A recent survey by BDO shows that one-third of Canadian businesses are working out their own contingency plans to address trade without NAFTA.

Sticking points

Various issues continue to challenge negotiators, including these two U.S. proposals:

Canada’s dairy supply management system

Canada did not put forward a counter-proposal to the U.S. call for ending the supply management system that protects the Canadian dairy industry. The Dairy Farmers of Canada has called the U.S. demands “outrageous.” In response to the proposal, Canada is focusing on the benefits of NAFTA for all three nations: 

  • Every year, US$85 billion in agricultural trade flows between the three nations.
  • Canada and the U.S. are each other's largest trade partner for agriculture and food, with bilateral agriculture trade reaching $62 billion (US$47 billion) in 2016.
  • Mexico is Canada's fourth largest export market for agriculture and agri-food, with $1.7 billion worth of agri-food products shipped in 2016.

 We heard further details on Canada’s view of the U.S. dairy industry proposal at BDO’s recent Ontario Agriculture Road Show.

According to Doug Forsyth, Executive Director of Strategic Trade Policy at Agriculture and Agri-Food Canada, the government remains focused on its trade policy objectives and outcomes beneficial for Canada’s entire agriculture sector. This includes preserving supply management; maintaining, protecting and expanding the sector’s market positions in key markets; accessing new opportunities for growth from trade agreements and addressing obstacles to bilateral trade.

Automotive rules of origin

The U.S. has proposed that fully 50 percent of parts for cars manufactured in Canada and Mexico must come from the U.S. What’s more, it is demanding that automotive makers transform their supply chains within a year to meet the new standard—a standard so onerous the Alliance of Automobile Manufacturers reported to a Senate hearing that no vehicle produced today could meet it.

What’s Next

Round 6 of negotiations will take place in Montreal from January 23 to 28, 2018. Additional negotiating rounds will be scheduled through the first quarter of 2018. In the meantime, the ministers will continue their work in intersessional meetings in Washington, D.C. in mid-December and will report back to chief negotiators on the progress achieved. The deadline to complete negotiations has been extended to March 2018.
 

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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)
NAFTA Renegotiation Impact on Immigration
NAFTA Renegotiation Impact on the Retail Industry
NAFTA Renegotiation Impact on Government Procurement

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.