Summary of NAFTA Round 3 Negotiations

October 2017

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Round 3: September 23 to 27, 2017, Ottawa

The year-end deadline for a new NAFTA is fast approaching but little progress has been made in the first three rounds of talks. The latest meeting saw no discussion of the most contentious issues, namely, Rules of Origin and Chapter 19, on the Review and Dispute Settlement in Antidumping and Countervailing Duty matters. The one bright spot in this iteration of talks was the unanimous agreement that SMEs are key contributors to all three economies and should be recognized as accordingly in the modernized NAFTA.

What we know

According to a trilateral statement published following the negotiations, Canadian Foreign Affairs Minister Chrystia Freeland, Mexican Secretary of the Economy Ildefonso Guajardo Villarreal and United States Trade Representative Robert Lighthizer are now working from consolidated texts in most areas and have made “meaningful advancements” in the areas of telecommunications, competition policy, digital trade, good regulatory practices and customs and trade facilitation. Consistent with the previous two rounds, few details have been made public.

All three governments put through proposals in the area of market access to government procurement opportunities and how businesses might be able to bid on government contracts beyond their own borders. They will start to unpack these initial offers in round 4.

The most substantive advances came in the area of SMEs. The modernized NAFTA will include a chapter on how to support and develop these economic engines by stimulating and enhancing information sharing between SMEs in the three countries and the creation of a NAFTA Trilateral SME Dialogue, which will involve the private sector, non-government organizations and other stakeholders. The negotiators are also looking at customs and trade facilitation, digital trade, and good regulatory practices to help grow SMEs in all three countries.

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Sticking Points

Rules of Origin

Right out of the gate, in the first round of negotiations in Washington back in August, U.S. Trade Representative Robert 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. He revisited Rules of Origin in round 3 but has yet to offer any concrete numbers.

Paul Boucher, BDO’s Special Advisory Services Lead said, “Changes to the Rules of Origin content percentages will have the single most important impact on automotive suppliers and related manufacturing companies. The move from a North American content formula to a country specific content formula will actually increase the overall cost of components.

Additionally, the integrated supply chain that has been developed over decades providing an efficient, low cost source of high quality parts will be compromised which will add additional costs to system. The increased costs of supplying automotive components will ultimately be paid for by the U.S. consumer when they purchase a vehicle.”

If we look at auto manufacturing, under the existing rules of origin, vehicles must have at least 62.5 percent North American content to qualify for duty-free movement between Canada, the U.S. and Mexico. A review of several reports in the U.S. suggests Americans want to raise that to 70% with a specific U.S. content requirement ranging from 35% to 50%. They also want to add steel and electronics to the list of auto parts that must meet Rules of Origin requirements.

In an article in the Windsor Star the day after round 3 concluded, Flavio Volpe, president of the Automotive Parts Manufacturers’ Association in Canada, reported his members were “not worried” about the U.S. ‘America First’ strategy because he believes the Trump administration recognizes that “America First hurts American interests and American corporate investments... The last thing you want to do is hurt your own.”

The tightening of content rules is aimed at preventing products made by third-party, low-cost countries benefitting from the ‘Made in North America’ label. However, it also touches on a shared concern of both Canada and the U.S.: less stringent labour standards and lower pay in Mexico. In Ontario, which has just raised the minimum wage, this is a real source of contention. Mexico has drawn investment based on weak union rules and capitalizing on low wages. This area of discussion was a gap in the initial agreement, and there is still no clear way forward. Canada has said it will come forward in support of its unionized workers in negotiating NAFTA.

Chapter 19

The context: NAFTA’s Chapter 19 is a dispute settlement process that allows binational arbitration panels to make binding decisions on complaints about illegal subsidies and dumping. Canada is determined to keep Chapter 19 in the new NAFTA. The U.S. (which has lost many of these cases) is set on eliminating it.

With tensions around Chapter 19 already high, at the midpoint of Round 3 discussions, the U.S. Commerce Department announced a 220 percent tariff on Canadian aerospace behemoth Bombardier’s C Series jets imported into the U.S. Since January, the U.S. has been making good on its ‘America First’ promise with a significant spike in anti-dumping and countervailing cases against its G20 trade partners.

The U.S. Commerce Department’s astronomical duty on Bombardier only reinforces Minister Freeland and Canada’s position to keep the dispute-settlement mechanism in the new NAFTA, which could extend NAFTA negotiations well beyond the December 2017 deadline.

What’s Next

Round 4 of negotiations will take place from October 11 to 15, 2017, in Washington, D.C. In the interim, negotiators plan to complete work on competition issues.

There are local town-halls hosted by Parliamentary Secretary to the Minister of Foreign Affairs, Andrew Leslie, scheduled for October 10th at the Town Hall at the Munk School of Global Affairs, and October 11th at the Town Hall at McMaster University.

BDO would also like to get your take on how negotiations are going. Have your say by taking part in our survey: NAFTA – What are Canadian Businesses Thinking About?