Column

CUSMA/USMCA: The Poison Pills Revisited – a Scorecard

On November 30th, 2018, 16 months after the start of negotiations, the leaders of Canada, Mexico and the United States signed the Canada United States-Mexico-Agreement (“CUSMA”) or the United States-Mexico-Canada Agreement (“USMCA”)[1]. Signed on the margins of the G-20 Summit in Buenos Aires, the agreement is made up of 34 chapters and a dozen side letters. Ironically, it does not include the word “trade” in its title.

CUSMA/USMCA = NAFTA-Minus

In our previous article we addressed the continuing uncertainty that has been a central theme in the tough and sometimes divisive negotiations. The U.S. midterm result with the Democrats taking control of the House of Representatives, and the president threatening to withdraw from NAFTA and force Congress to vote on the new agreement early in 2019 make for continued uncertainty. This uncertainty and the underlying crisis in confidence that appears to be permeating the world’s largest economic trading bloc is part of the reason some are calling the new agreement a “NAFTA-minus.”

The Five “Poison Pills” and the Scorecard

Some commentators have concluded that the new USMCA is not much different from the NAFTA and that there is no need for any fuss. To others, the new agreement represents an important step backwards. A review of how the negotiators addressed some of the key issues helps in any analysis of the final results. As between Canada and the United States, important concessions at the end of the negotiations allowed each side to claim a win. In December 2018, we examined this end-game trade-off.

The Trump Administration was able to boast about realizing its key goal of improved access to Canada’s dairy market and delivered on its promise to the dairy farmers of Wisconsin and New York. The Trudeau Government was able to point to its ability to hold the line and get the United States to concede on the issue of the (then-NAFTA) Chapter 19 dispute resolution system for trade remedies.

Now several months after the conclusion of the agreement allows for some perspective on what was achieved and how the parties did in terms of their objectives at the outset. Below are some thoughts on a notional scorecard–subjective and limited to the Canada-U.S. perspective.

In August 2018, we reviewed the five pillars of U.S. policy regarding the NAFTA renegotiations:

  1. The complete elimination of Canada’s import tariff rate quotas (TRQs) over a 10-year phase out period.
  2. The complete elimination of binding dispute settlement including NAFTA Chapter 19.
  3. Revised rules of origin for autos with qualifying vehicles having at least 50% U.S. content and 85% North American content.
  4. The maintenance of “Buy America” provisions and limiting NAFTA partners’ access to the U.S. government procurement market on a dollar-for-dollar basis.
  5. A five-year “sunset clause” with the new trade deal automatically terminating unless all parties agree to its continuation.

Canada’s then-Trade Minister Chrystia Freeland rejected these pillars, calling them the “five poison pills.” In that the United States was unable to completely realize any of these stated objectives, one might conclude that it was the big loser in the negotiations. However, upon a closer look, it is not so clear.

In broad terms, Canada’s twin objectives were to preserve the status quo in terms of the existing NAFTA obligations (a “do no harm” approach) while introducing elements of its progressive trade agenda to a “NAFTA 2.0.” While Canadian negotiators were able to push back effectively against U.S. demands, the status quo was diminished in a number of important ways. With some with limited concessions from its partners, Canada’s progressive proposals were rejected. Some blamed the time and capital spent in their pursuit for hurting Canada in its ability to negotiate with respect to the five pillars/pills.

The Dairy vs. Chapter 19 Trade-off

Further analysis on these two key issues lead one to consider that Canada was actually the winner on the supply management issue and that its apparent win on Chapter 19 was tempered by how it addressed the current and potential future U.S. application of its section 232 national security provisions against Canadian goods and services.

Under the new agreement, Canada gave up access to just under 3.6% of Canada’s protected dairy market, as well as shares of Canada’s supply-managed agriculture sectors (eggs, chicken, turkey and broiler hatching eggs and chicks), and that was enough for the Trump Administration to 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 for dairy. However, the result falls far short of the U.S. stated goal of the elimination of supply management over a ten-year phase-out period.

Access to Canada’s supply-managed sector has long been a target of Canada’s trade partners and some concessions were inevitable if a deal was to be reached. However, Canada was able to stay within the margins it needed. While Canada’s dairy industry complained that the combined effect of access granted under the USMCA, CETA and CPTPP means it faces “death by a thousand cuts,” Canada’s negotiators can legitimately claim that they won the fight to preserve the supply management system. With Canada’s dairy market growing by about 1% per year and the government’s promise to compensate affected farmers, the domestic political damage has been minimized. Canada was able to preserve the fundamental framework and integrity of its supply management system and it was able to hold out on the issue until the end of negotiations and trade-off concessions for the preservations of the NAFTA Chapter 19 mechanism. Canada also negotiated a six-year phase-in period for dairy access.

For the Government of Canada, the domestic political damage appears to have been mitigated by the phase-in period and promise of government compensation. That, plus the fact that the rest of Canada’s agri-food sector—which is highly dependent on the open and integrated Canada-U.S. economy—escaped generally unscathed make this a win for Canada.

We would have marked this down as a significant win for Canada if it were not the U.S. negotiators’ success on certain key details—the most important being 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 current NAFTA-consistent protections that block U.S. exports of ultra-filtered milk to Canada have been a serious irritant for the U.S. industry. The opening of more access for U.S. producers of chicken, turkey and broiler hatching eggs, plus U.S involvement in the administrative of the system, lead us to conclude that its defence of supply management represented a modest win for Canada.

At the time, when the United Stated conceded the Chapter 19 issue to Canada, it was viewed as a big win for Canada. Canada held on to a concession it had won a generation earlier in the original Canada-U.S. Free Trade Agreement. Current U.S. Trade Representative Robert Lighthizer, a strong opponent of Chapter 19, was on record as claiming that it was an affront to U.S. sovereignty. Nevertheless, its provisions were preserved in Chapter 10 of the new agreement.

In addition, during bilateral negotiations with Mexico, U.S. officials backed off on the demand for the elimination of binding dispute settlement; state-to-state dispute settlement was preserved in Chapter 31. The investor-state mechanism in NAFTA Chapter 11 was scaled back with Mexico and eliminated as between Canada and the United States. Given its unpopularity and the controversy attached to Chapter 11, this is considered as a net positive for both Canada and the United States.

The final result on dispute settlement was no win for the United States, which failed in its goal of eliminating or substantially weakening all the relevant NAFTA provisions. Canada was able to point to the preservation of Chapter 19 provisions as a big win. NAFTA Chapter 19 allows companies to request the review of domestic countervailing and antidumping duties that is reviewed by independent supranational panels. When the FTA and NAFTA were negotiated in the 1980s and ‘90s, Canadian resource products, notably softwood lumber, and primary industrial goods were often the target of U.S. anti-dumping and countervailing duty determinations. The U.S. domestic adjudicatory process was generally viewed to be deficient and biased in favour of domestic industries. The Chapter 19 review mechanism became a non-negotiable requirement for Canada; a second-best solution to the elimination of trade remedies in the free trade area.

Canada made heavy use of Chapter 19, with almost 60 challenges between 1987 and 2000.

However, post-2000 there has been an important decline in Chapter 19 cases and it is now seldom used. This is in part due to the relative decline of Canada’s primary manufacturing sector, the highly integrated nature of the Canada-U.S. economy resulting in fewer trade remedies battles, and greater reliance on WTO rules. While Chapter 19 (as preserved in Chapter 10 of the new agreement) may have been an important symbolic win for Canada, its real value was overshadowed by Canada’s inability to eliminate or at least mute the application of U.S. national security measures.

Whereas when the FTA and NAFTA was negotiated, the biggest U.S. threat to Canadian business was the aggressive application of anti-dumping and countervailing duties, in 2019 it is the application and threat of application of section 232. Canada was unable negotiate the termination of U.S. duties on steel and aluminum as part of the final agreement–and those duties remain in place. Instead of an exception, the new agreement included a national security provision (Article 32.2), which is considered to be broader and less constrained than its NAFTA predecessor. Although a side letter does create a 60-day consultation before the United States can apply measures against Canada or Mexico (and guarantees levels of access in the case of autos), this provision only really normalizes the use of this new and potentially “lethal” trade measures. On dispute settlement in the end, there are no winners.

Stay tuned: the remaining poison pills (autos, government procurement, and sunset clauses) will be discussed and scored in our next Slaw column.

___________________________

[1] In Canada, the Canada United States Mexico Agreement (CUSMA)/Accord-Canada-États-UnisMexique (ACEUM); in the United States, the United States Mexico Canada Agreement (USMCA); in Mexico, Tratado entre México, Estados Unidos y Canadá (T-MEC)

Start the discussion!

Leave a Reply

(Your email address will not be published or distributed)