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A Step Towards the New NAFTA, Part 1: End Game or a Cease Fire?

On May 17, 2019, Canada and the United States announced the settlement of the cross-border steel and aluminum trade conflict. Both countries agreed to eliminate tariffs on their cross-border trade in steel and aluminum products. Mexico and the United States also settled the issue in the same way–with the reciprocal elimination of the tariffs.

We recall that in spite of the then-ongoing NAFTA re-negotiations, the Trump Administration imposed tariffs on steel and aluminum imports of 25% and 10%, respectively, from Canada in June 2018. This action was pursuant to section 232 of the Trade Expansion Act of 1962 on the basis that such imports posed a threat to the national security of the United States. (For further background see Steel, Aluminum, and the WTO’s Pandora’s Box of National Security Part 1 and Part 2.)

Once the United States agreed to remove the section 232 tariffs, Canada agreed to end its its retaliatory tariffs, put in place in July 2018 against imports of U.S. steel and aluminum and in addition to a range of strategically selected products. Canada’s retaliatory tariffs, the persistent lobbying effort led by Prime Minister Trudeau and Foreign Minister Freeland, and pressure from the U.S. business sector may have helped lead to this breakthrough.

However, most trade observers agree that the major impetus was the U.S. Administration’s desire to have the new NAFTA—the Canada-U.S.-Mexico Agreement (‘CUSMA”)—ratified and implemented by the three parties. Although both Canada and Mexico signed in November 2018 along with the United States, both on the text of the new agreement, both made it increasingly clear that they would not take the steps required to ratify and implement the agreement while the U.S. section 232 tariffs remained in place.

Many in Canada considered the removal of the section 232 tariffs without the maintenance of residual quotas or export restrictions—the usual U.S. demand—as an important “win.” However, we note Canada accepted “snap back” provisions which meant that tariffs could be resumed on a product-by-product basis in the event of a “surge” of imports of steel and aluminum beyond historic levels due to imports from third countries. In order to address concerns regarding trans-shipments, both countries agreed to implement measures to “prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices […] and prevent the transshipment of aluminum and steel made outside of Canada or the United States to the other country.”

Although the “snap back” previsions are reciprocal, Canada has essentially committed to stepping up monitoring of imports of third country steel into its market to ensure there is no trade diversion and increased transshipment through Canada into the United States. Both countries have agreed to terminate their respective WTO challenges on the use of the national security rationale for steel and aluminum tariffs.

Given the real risk of a negative result and jurisprudence on this subject, this is likely to the benefit of the United States. In the give and take of the negotiations, Canada gained the U.S. agreement to “cap” any “snap back” tariffs at 25% for steel and 10% for aluminum. In turn, Canada conceded that retaliatory tariffs be limited to matching products.

It seems clear the primary goal for the U.S. Administration in reaching this agreement on this “cease fire” on steel and aluminum is the ratification of the CUSMA in Canada and Mexico and the vocal and active support of both trade partners in its efforts to win Congressional approval. It helps that its own NAFTA 2.0 strategy has put Canada in a unique position in this regard.

However, it is not clear that this will be enough to get the three countries to the finish line. Moreover, some trade observers are concerned that the price for the steel and aluminum breakthrough represents only a “cease fire” with an important condition and the acceptance or further moves away from the principles of free trade.

More on this point in a follow-up article.

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