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From NAFTA to the CUSMA/USMCA – a New Trade Template?

Part I. The New Deal and Continued Uncertainty

On September 30th, after 14 months of difficult talks, Canada and the United States announced the successful completion of their NAFTA re-negotiations. Whether the latest U.S. deadline was “real” or not, it is likely that both the Trump Administration’s threat that it would proceed with a U.S-Mexico agreement without Canada and the risk for the United States that such a bilateral deal would not pass Congressional review spurred both countries to make the last minute concessions that led to agreement in principle on the renamed United States-Mexico-Canada Agreement (“USMCA”) or the Canada-U.S. Mexico Agreement (“CUSMA”) in Canada. Ironically, the agreement that is made up of 34 chapters and a dozen side letters does not include the word “trade” in its title.

Five weeks after the negotiators agreed to the deal, U.S. voters went to the polls on November 6th. The mid-term results with the Democrats taking back the House of Representatives will bring further challenges and uncertainty. Now that Canada was able to salvage core elements of the NAFTA in the difficult and challenging negotiations, Canada’s number one international trade priority will now be to do what it can to ensure the ratification and implementation of the USMCA. As the Trump Administration seeks to obtain legislative approval in the context of divided and hostile Congress, there will be continued economic uncertainty over the future of free trade with our largest trade partner.

As we will set out in our three part analysis, the USMCA does not represent an overwhelming “win” for Canada or its trade partners. To many, the new agreement represents a “NAFTA-minus” with the biggest shortcoming for Canada being the failure to rein in the current and potential future U.S. applications of Section 232 “national security” tariffs. For the United States, the Trump Administration has boasted that the USMCA represents a great improvement with respect to dairy access and other issues. These claims are exaggerated.

The Breakthrough and Trade-off

Key last-minute concessions allowed each side to claim a “win.” The Trump Administration was able to point to improved access to Canada’s dairy market – a constant and public target for the president. The Trudeau Government was able to hang on to the existing NAFTA Chapter 19 dispute resolution system for trade remedies – Canada’s brightest “red line” issue. Upon closer examination these appear to be qualified “wins.” In the broader context, the damage caused to the bilateral relationship and investor confidence may outweigh these and other trade “trophies.” The implications for the future direction of the Canada-U.S. relationship and international commerce may render any gains found in the new agreement “Pyrrhic” in nature.

Some trade analysts and political commentators have concluded that the new USMCA is not much different from the NAFTA and that claims otherwise really amount to “much ado about nothing.” In fact, the new agreement looks to represent a step or two backwards and reflect a victory for a more narrow vision of international trade as a zero-sum game – one in which managed trade is the rule, with trade balances deciding winners and losers. This new direction runs counter to the idea that the pursuit of progressive, open and increasingly barrier-free trade is best way to build an admittedly imperfect but functioning and growing international trade framework.

In the North American context, the new agreement represents a limited win for the Trump Administration’s vision. For Canada, the push for its progressive trade agenda did not succeed, but its negotiators were able to hold off on the full force of most of the U.S. demands, push back against the world’s largest economic power, and maintain the essential tariff-free access to almost all of the U.S. market. The new agreement may represent a “NAFTA minus” to many, but Canada does find itself in a unique position with favoured access to the world’s largest market and membership in both the Canada-EU Comprehensive and Economic Trade Agreement (“CETA”) in Europe and the Comprehensive and Progressive Trans Pacific Partnership (“CPTPP”) in Asia-Pacific. This strategic position can be used to buttress and support a trade policy based on favoured access to a large part of the global market. The future challenge for Canada is to help and encourage Canadian business to take full advantage.

The Key Trade-offs

The headlines at the close of the negotiations focused on Canada’s concessions on supply management and the U.S. last-hour agreement to maintain Chapter 19 dispute settlement. We will examine the other important trade-offs in in our next two articles. We start here with the “end-game” trade-offs on supply management and Chapter 19. As many predicted at the outset, improved access to Canada’s dairy, chicken, and other supply-managed markets for U.S. producers was the price Canada had to pay for sealing the deal and for maintaining the NAFTA’s existing dispute settlement regime for trade remedies.

Getting to the point at which agreement was possible was not that simple, but Canada’s “give” of access to just under 3.6% of Canada’s protected dairy market as well as shares of Canada’s other supply-managed agriculture sectors (eggs, chicken, turkey and broiler hatching eggs and chicks) was enough for the Trump Administration to consider that it could declare victory. The United States did achieve a slightly better result (factoring breakthroughs in the other sectors) than the 3.25% Canada gave up in the CETA and CPTPP. However, the result fell well short of the U.S. stated goal of the complete elimination Canada’s supply management system over a ten year phase-out period.

The combined effect of access granted under the USMCA, CETA and CPTPP has the dairy industry claiming it faces “death by a thousand cuts”. However, Canada’s negotiators can legitimately claim that they won the fight to preserve the supply management system. Canada negotiated a six-year phase-in period for dairy access and Canada’s dairy market is growing by roughly 1% per year. In addition, the Government of Canada has announced that it will compensate supply management farmers affected by the USMCA measures. In the end, the most important element in the “win” for the United States was the elimination of Canada’s Class 6 and Class 7 quota and pricing system—a move that opens the market for more U.S. specialized dairy products (such as milk protein concentrate, skim milk formula and infant formula) to be imported into Canada.

The supply management and other concessions Canada made were enough for the U.S. negotiators to concede on NAFTA Chapter 19 provisions in the new agreement. At the outset of the negotiations, the United States had targeted the independent dispute resolution provisions in NAFTA as unnecessary and as a serious incursion on U.S. sovereignty. Actually Chapter 19 does not provide full dispute resolution, as parties are limited to seeking an administrative review of domestic anti-dumping and countervailing duties decisions. Nevertheless, it had long been a target of many U.S. politicians who balk at the idea of any non-U.S. managed process that could be used to review and overturn U.S. trade court determinations. The Canadian perspective on the damage caused to its producers – particularly with the export of resource products like softwood lumber – was that the U.S. process was highly politicized and unduly biased. This made Chapter 19 provisions a condition precedent to the signing of the original Free Trade Agreement in 1988 and the NAFTA in 1994 – “red line issue” for the USMCA.

Just as the Trump Administration was able to claim a “win” for U.S. dairy farmers, the Trudeau Government was able to claim that it had faced down the United States and maintained the applications of Chapter 19 provisions and the independent dispute settlement mechanism so critical to create balance with a larger and more powerful trade partner. ­­­­­­­­­­­­­­­­­­­­­­However, just as a U.S. “win” on supply management must be qualified, Canada’s preservation of Chapter 19 provisions came at certain costs that must be factored into the overall assessment. It appears that by holding out on this key issue until the end—one that Canada was highly vocal about—U.S. negotiators were able to squeeze out a series of important concessions. It is also arguable that Chapter 19 is much less important now than back during the FTA and NAFTA negotiations. Canada’s manufacturing base—so strategic back then in the trade remedies context—has shrunk and the use of Chapter 19 has seen an important drop-off.

Moreover, while the Chapter 19 “win” is an important matter of principle and remains of some strategic importance, the cost in negotiating capital Canada used may have been a factor in its failure to obtain an exemption from current and potential future Section 232 tariffs or to otherwise adequately address the issue – and it is clear that Section 232 is the Trump Administration’s new international trade weapon of choice.

Uncertainly – The Biggest Challenge – Where to Now?

For Canada and Mexico and, to a lesser extent, the United States, the overriding priority is to end the uncertainty that the tough and often acrimonious and high-pressure negotiations have created. For Canada, the most important objective remains maintaining the basics of the trade agreement that underpins the world’s two most integrated economies and the related business and investor confidence. However, it appears the uncertainty will continue. At this point, the three parties have completed the detailed task of reviewing the text—the “legal scrub.” This process highlighted further problems and controversy, as it was reported that U.S. negotiators have tried to use the process to make further changes in the U.S. favour. In any case, the parties were able to address the issues and scheduled the formal signing of the agreement on November 30th in Buenos Aires at the G-20 summit.

Now the focus turns to the United States and the Trade Promotion Authority Act of 2015, which governs the process of U.S Congressional review and approval of the USMCA. The Trump Administration must provide the final draft of the agreement to Congress thirty days before the legislation is introduced. Once the legislation is introduced, to both houses simultaneously, Congress has ninety sitting days to push the package through to completion, including committee reviews and ultimately an up-or-down floor vote. There is no timeline on when the Trump Administration must trigger the process.

The U.S mid-term results have re-introduced a new element of uncertainty. Canada’s full-court press offensive will refocus on the new Congress, which will either give the USMCA a thumbs-up or hand the Trump Administration a big defeat. The current “lame-duck” Congress will not address the USMCA and it will be the new Congress (sworn in on January 3, 2019) that will take on the review. The House of Representatives is now under the control of the Democrats and on that side of the aisle there has been some sharp criticism that the labour and environmental provisions are not tough enough. The Democrats have begun signalling their initial positioning on USMCA, calling for changes to the agreement’s provision that would require at least 30 percent of the labour used to build each car in Mexico to be done by workers earning at least $16 USD per hour that would account for inflation. As the Democrats are traditionally the party that is more opposed to trade liberalization, and given the level of political animosity, early approval of the USMCA is unlikely. Uncertainty will continue.

USMCA Scorecard

 In our next article we will take a more detailed look at the trade-offs that led the parties to strike a deal and provide a “scorecard” vis-à-vis the five new pillars (or the five “poison pills”) in relation to what the negotiators achieved.

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