CUSMA/USMCA Scorecard: More Poison Pills Revisited

This is the second half of our discussion and scorecard on the CUSMA/USMCA poison pills. For detailed discussion on dairy and dispute resolution, see our last column.

Autos: A Canadian Solution, a Qualified Win for both Canada and the U.S.

The opening U.S position on autos was that all NAFTA-qualifying vehicles must have at least 50% U.S. content, and 85% overall North American content. Both Canada and Mexico rejected this position. It was some lateral thinking by Canadian negotiators during the January 2018 round that led to a new approach. The Canadian concept entailed the use of a formula designed to ensure that a certain percentage of NAFTA-qualified autos are produced by “high wage” ($US 16 an hour or more) labour. This was intended to blunt the advantage that lower-average-wage Mexico had in auto production.

The auto issue was the single most important for the Trump Administration. The continuous threat of section 232 tariffs on auto imports from Canada and Mexico and tough U.S. pressure during the late summer bilateral negotiations saw Mexico give up its critical advantage. In the end, the three parties agreed to a five-year transition period after the agreement enters into force for the regional (North American) value content requirement for autos to increase to 75%, up from a current 62.5%. The agreement also requires that vehicle manufacturers source at least 70% of steel and aluminum from within the three countries and that 40% of the vehicle’s value to be made by high-wage labourers.

For its part, the United States agreed to a 60-day period during which the U.S. would refrain from imposing section 232 tariffs on Mexico and Canada, during which the parties can negotiate an “appropriate market-based outcome.” It also agreed to exclude 2.6 million finished autos and up to $US 32.4 B in production of autos and auto parts from future section 232 action. Canada currently produces just under two million light vehicles in total, and exports auto parts with a value of $US 16 B, so these quotas leave room for growth. The U.S. had agreed with Mexico that it would not levy section 232 tariffs on autos and auto parts so long as Mexican exports to the U.S. did not exceed 40% of its production.

Although the breakthrough in auto negotiations came about during the U.S. Mexico bilaterals, Canadian negotiators can take credit for the important creative approach that may have saved the whole agreement. Canadian negotiators and the country’s autoworkers were happy with the deal as the high-wage jobs in Canada’s vital auto sector have the same protection from the threat of losses lower-wage production in Mexico as their U.S. counterparts. Canada also negotiated a workable remedy in case of a section 232 action.

While the auto negotiations looked to be a “win” for both Canada and the United States, this comes with some qualification. For Canada, the agreement on autos has introduced potential ceilings that appear to legitimize managed trade and may limit long term future growth for Canada.More concerning perhaps is the implicit acceptance of the continued and future use of Section 232 action by the United States against Canada with a relatively weak remedy of a 60-day period of non-application during which the parties can attempt to negotiate an “appropriate market-based outcome”. (See above on dispute settlement.)

A more immediate and important qualification was apparent in late 2018 when General Motors announced that it would close four plants in the United States as well as its Oshawa facility. One reason given was over-capacity: too many cars and not enough customers. Perhaps as with Canada’s focus on Chapter 19, the Trump Administration’s sharp focus on the U.S. auto sector failed to take into account both matters of more current and future importance to the U.S. economy and the fact that today’s multinational enterprises are not bound by national policies or the politics of any one country. At the time of the announcement, many also pointed to the Trump Administration’s “America First” trade policy with costly high tariffs, production costs making exporting difficult, the cost to investment in the future of continued disruption and uncertainty. A qualified win for both Canada and the United States – for now.

Government Procurement: No Contest

The initial negotiating position of the United States on government procurement provided a stark example for the gulf between Canada and the United States and their respective visions of free trade. Canada has negotiated and improved access to European and Asian markets in the CETA and CPTPP in exchange for broad and reciprocal access to Canadian federal, provincial and municipal procurement. In contrast, the United States insisted upon maintaining and expanding its “Buy America” shelters for major government federal and state infrastructure projects and to limit the access to U.S. procurement on dollar-for-dollar basis—a major change in policy.

Given the large U.S. procurement market, the dollar-for-dollar cap meant limiting Canadian (and Mexican) participation in U.S. procurement to the equivalent of a couple months of a fiscal year. Reciprocal access based on market size, with Canada having access to approximately 10% of the U.S. market in return for giving the United States access to the total Canadian market, was unacceptable the Canadian negotiators. During the course of the negotiation, there was little discussion and no movement on this issue. It is likely that the early and continued inability to build any bridge on the issue and the lack of time after the U.S. Mexico bilateral session in late summer sealed the failure of Canada and the United States to reach any agreement. Canada decided that the best course was to simply remove the issue from the negotiations.

In the end, there are no provisions on government procurement under the USMCA between Canada and the United States. There is a chapter on government procurement but it only applies as between the United States and Mexico. When the new agreement comes into effect, Canada’s access to U.S. government procurement will be determined by the rules under the WTO Government Procurement Agreement (GPA).

The monetary threshold for the GPA is higher at $US 180,000 as compared to NAFTA’s $US 25,000, thus reducing Canadian companies’ opportunities to bid on the many small U.S. contracts. On balance, the GPA is broader in coverage than the NAFTA, which has no sub-central government coverage. Under both agreements, Canada covers the same federal government entities and government enterprises. In NAFTA, the parties opened the procurement of all services to their partners, except those that it lists as excluded. This negative list ensured coverage of new services that were not in existence when NAFTA was signed, such as cloud computing. By contrast, under the GPA, Canada and the United States only allow participation by foreign suppliers in the procurement of the services that it lists.

Canadian negotiators can point to the U.S insistence on its “Buy America” measures; the non-starter nature of its dollar-for-dollar position; Canada’s faith in the additional leverage of the multilateral approach through the WTO; and the ability to apply a higher threshold to potential U.S. suppliers to justify its strategy on government procurement. However, in walking away from the table, Canada failed to keep the status quo (“do no harm”) when it failed to maintain full access to this important multi-billion-dollar sector. Mexican negotiators, by comparison, were able to maintain the NAFTA disciplines vis-à-vis the United States. With respect to Canada, the Trump Administration’s priorities prevailed along with its step back from open market principles. In the context of negotiating objectives and results, the Unified States appears to have won on this matter and to have set a dangerous precedent for future trade negotiations.

From American Sunset to Mexican Sunrise

At the outset of the negotiations, the United States sought to set a five-year limit on the agreement unless all parties agreed to maintain the agreement. Canada and Mexico both took the view at the outset that such a clause was not acceptable as it would undermine the stability and confidence needed to encourage continued growth and investment in their respective countries. In any event, as NAFTA already contained a provision that allows any party to withdraw after six months’ notice, the sunset provision was seen as both unnecessary and provocative.

By the time of the G-7 discussions in the summer of 2018, this fifth pillar had become a bargaining chip. During the U.S.-Mexico bilaterals in summer 2018, the “sunset clause” was revised. The new agreement will remain in force for an initial set term of 16 years. In addition, there is a trilateral review after six years and at that time, the “clock” can be reset to re-start the 16-year term. This review is undertaken by a joint commission comprised of representatives of each party. This review every six years is repeated. If any parties do not agree, negotiations for an extension will begin and continue until there is three-party agreement on renewed terms. Otherwise, the agreement expires at the end of the 16-year term.

For the United States, this represented a major step back from its opening position. The 16-year term actually extends the agreement beyond the potential term of any one U.S. administration. This may help dampen the political pressure and make the review and term extension process more like the process of continuous modernization Canada championed at the outset of negotiations. Equally, future U.S. administrations could use the six-year review period to push for more concessions and make it a catalyst for continued pressure and discord. Or it could be redundant. Time will tell.

Mexican negotiators should be given the credit and the “win” for rolling back the “sunset clause” and coming up with an alternative that may be a catalyst to the building of an “ever-greening” process. The United States was rebuffed and Canada was essentially a beneficiary and did not win the point here.

Conclusion

In the end, the Canada-U.S. scorecard has one win for Canada (supply management), one win for the United States (government procurement), a joint win (autos), three losses for the United States (dispute settlement, supply management, and the sunset clause), and one loss for Canada (government procurement).[1]

Of course this scorecard is both subjective and relative. Over the next few months and years these assessments will change in terms of “winners” and “losers.” At this point, though it seems that there was more losing than winning and that early hopes of a step forward and a new and improved “NAFTA 2.0” were not realized.

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[1] The balance of our scorecard: a symbolic win for Canada on dispute settlement, and Canada as beneficiary but not credited with a win on the sunset clause.