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Experts question why the Trump administration favors eliminating Chapter 19, which would harm U.S. agricultural exporters. Here US corn, one of the top agricultiral exports to Mexico. (Photo: Nebraska Corn Board)
Thursday, August 3, 2017

US NAFTA Goals: Mixed Reactions

Talks to modernize NAFTA could turn it into a gold standard, one expert says.

Inter-American Dialogue

The administration of U.S. President Donald Trump on July 17 released a 17-page list of its objectives for the upcoming renegotiation of the North American Free Trade Agreement, or NAFTA. The document, which the Trump administration sent to Congress, makes reduction of U.S. trade deficits a top priority while also incorporating elements of the Trans-Pacific Partnership agreement, which Trump abandoned after taking office in January. The objectives also include elimination of the Chapter 19 dispute settlement panel, a system whereby governments can argue legal claims about unfair trade practices. What do the proposals listed on the document mean for Canada and Mexico as they strategize how best to negotiate with the Trump administration? How are the talks most likely to shake out, and how close will the White House get to achieving its objectives for NAFTA? Who stands to gain or lose the most from Trump’s newly stated objectives for the trade accord?

Arturo Sarukhan, board member of the Inter-American Dialogue and former Mexican ambassador to the United States: Unlike Shakespeare’s Mark Antony, Trump not only did not bury the TPP but also ended up praising—albeit obliquely via the published NAFTA objectives—the agreement that he killed upon entering office. To a great extent, those objectives include 21st century rules-based trade disciplines of the TPP. Furthermore, it seems apparent that regarding many of the issues, the administration hasn’t yet decided what to do—or isn’t showing its hand—so some of the USTR’s objectives may possibly be placeholder language. The administration’s vagueness could also be indicative of relevant disagreements between different agencies and departments over specific issues (USTR vs. Treasury on currency manipulation, for example). Apart from common Canadian and Mexican concerns over the administration’s decision to seek the elimination of Chapter 19, its intent to get rid of NAFTA’s so-called global safeguard exclusion (which curbs the ability to impose measures on others) might also generate pushback from Washington’s two North American partners. And while the majority of topics listed do follow the format of traditional international trade negotiations (and are similar to the TPP process) and may well be generally consistent with Canada and Mexico’s own objectives, the lengthy list and the inclusion of several controversial issues, such as unfair trade practices, might trigger lengthier negotiations than what political wisdom would counsel. Nonetheless, one should never let a good crisis go to waste. Beyond the slash-and-burn rhetoric of President Trump and his mercantilist obsession with trade deficits, both of which might still derail an agreement, the kick-off of the first negotiating round on Aug. 16 could, much like the TPP, provide us with an opportunity to modernize NAFTA, turning it into a gold standard, 2.0 free trade agreement. U.S. officials promising to ‘do no harm’ to NAFTA should realize—also in Shakespearean terms—that ‘tis a tide we should not lose.

Carlo Dade, director of the Trade & Investment Centre at the Canada West Foundation: The Summary of Objectives for NAFTA was the administration’s response to priorities, for any U.S. trade negotiation, set by Congress under the 2015 TPA legislation. As such, there was not much new in the submission, and hence little that Canadian and Mexican negotiators have not already seen and dealt with in TPP negotiations. An obvious exception is the call to eliminate Chapter 19 dispute settlement mechanisms. With NAFTA as a repeat of TPP negotiations around a less crowded table, the United States will, among other objectives, revisit negotiations such as access to the Canadian market for dairy, eggs and poultry and raising de minimis limits, where it feels it got a bad deal under the TPP. The United States will also seek to resurrect TPP disciplines for copyright and intellectual property. For Mexico and Canada, concessions made in the TPP negotiations are not the starting point for NAFTA talks; the clock is reset and bargaining starts from zero. The irony here is that if, as expected, the other TPP countries proceed with ratifying the agreement, Canada and Mexico will have the benefits of those TPP provisions that the United States wants in NAFTA, but U.S. companies will not. This will give Canadian and Mexican companies a competitive advantage in Asian markets, and will reduce pressure on their negotiators to make concessions at the NAFTA table. At the least, it should shift pressure to the United States, especially as U.S. agriculture will lose market share in Asia. If Canada and Mexico take a ‘re-negotiate everything’ stance, or threaten to do so, negotiations would have to extend past the hoped-for end-of-year deadline and run into the 2018 Mexican and U.S. elections. Given the roughly 300+ days needed for notifications and waiting periods under the TPA, a deal could conceivably be pushed into the 2020 U.S. presidential election cycle, leaving President Trump to run on an unfulfilled NAFTA re-negotiation process. If this is indeed the case, then the pressure is on the United States to make concessions to get a deal done quickly.

Gary Horlick, Washington-based international trade lawyer: Chapter 19 allows (but does not require) exporters to appeal Canadian, Mexican or U.S. antidumping or countervailing duties to neutral bilateral panels rather than local courts. As such, support for it has been publicly stated last month by almost every major U.S. agricultural group, including beef, pork, chicken, corn, wheat, soy, rice and dairy. The main push for deletion of Chapter 19 seems to come from U.S. producers of steel pipe, and from the Trump administration. Of the 47 (including three appeals to Extraordinary Challenge Committees, made up of retired appellate judges) cases against the United States under Chapter 19, 36 have been unanimous, meaning a 5-0 vote by a panel made up of experienced lawyers, at least two and often three of which are American (or at least 1 and often 2 retired U.S. appellate judges). No NAFTA panel decision result has been 3-2 split along nationality lines. And the claim (usually by the losing party) that Chapter 19 claims are biased or ‘weird’ is not supported by the facts. The Trump administration may be treating Chapter 19 as a bargaining chip, although it is odd to take a position that so clearly would harm U.S. agricultural exporters.

Rogelio Ramírez de la O, president of Ecanal in Mexico City: The Trump administration’s objectives in a revised NAFTA suggest that discussions could be very specific, in contrast to the discussion in 1992-1993, when free trade across the board was generally expected to yield large welfare gains and GDP growth for the three countries as well as upward convergence of Mexican wage rates and living standards. Based on the experience of this agreement and at least a partial skepticism of unqualified free-trade benefits, this time around the U.S. objectives appear as corrections to problems, at least in the case of trade with Mexico, apart from some new areas that are to be included. For example, incorporating labor standards in the core agreement should address claims of U.S. parties that current Mexican unions do not always provide freedom in collective negotiations, resulting in unduly low wages—a big problem. In the strengthening and increasing rules of origin and monitoring sensitive imports from non-NAFTA countries, Mexico is again at the center of the argument, because of high import content, in some cases Asia-originated, in many Mexican exports to NAFTA. In the case of eliminating Chapter 19 of the current agreement, the United States wants to have enough latitude in future investigations of dumping or unfair trade. The request that parties’ submissions in dispute settlements and resolutions and hearings be open to the public may not be welcome in Mexico. Similarly, the criminalization of government corruption is entirely a new ingredient. Insofar as the negotiation is dominated by these themes, it will be difficult to Mexico, even though they sound reasonable for ‘free and fair’ trade. In that case, Mexico should negotiate for time to meet some of the most difficult commitments.

Julissa Reynoso, partner, and Michael A. Fernandez, associate, at Winston & Strawn LLP: The NAFTA Renegotiation Objectives, recently released by the United States Trade Representative (USTR), suggest that the White House is seeking increased protections of U.S. digital trade and commerce, tougher intellectual property enforcement, and new requirements that state-owned companies operate in a commercial fashion. However, the extent of the changes as proposed by the USTR and the likelihood of them being implemented remain largely unclear. In addition to seeking changes to the substantive provisions of NAFTA, the USTR wants to modify the treaty’s dispute settlement mechanisms. In that regard, the NAFTA Renegotiation Objectives express a clear desire to eliminate Chapter 19, which installs a separate arbitration process for resolving disputes over antidumping and countervailing duties. Chapter 19 has resulted in a number of trade decisions adverse to the United States, including on softwood lumber. Unsurprisingly, Canadian Prime Minister Justin Trudeau has come out strongly against the elimination of Chapter 19. Given Canada’s position, it is unclear whether the United States will be able to achieve this particular objective. In conjunction with the proposed changes to Chapter 19, the White House has also proposed strengthening consultation obligations and making the dispute settlement process more transparent. These broad ideas reflect points considered during the Trans-Pacific Partnership negotiations. The NAFTA Renegotiation Objectives, however, do not make clear whether the transparency requirements apply to disputes under Chapter 11 or Chapter 20. Whether these changes can be easily negotiated also remains to be seen. In summary, the NAFTA Renegotiation Objectives leave a host of open questions and are likely to generate uncertainty with the many interested parties impacted by NAFTA.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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