What it will take to get NAFTA negotiations back on track

By Yves Faguy June 14, 201814 June 2018

 

Harsh language rarely helps the cause. Emphasizing a more positive intention is generally the best way to get parties to agree to a deal.  That was the subtext of the message delivered yesterday by Public Safety Minister Ralph Goodale who, in an interview on a Fox News business, made the case that Canada still wants to make a deal to update the North American Free Trade Agreement. 

It didn’t go unnoticed that Goodale squeezed in some heartfelt compliments to U.S. President Donald Trump for reaching an agreement with North Korean leader Kim Jong Un in Singapore this week.

Hopefully, the change in tone will get Canada and the United States back on track to find a resolution to their fraying trade relations after the Quebec G7 Summit, says Clifford Sosnow, a lawyer and partner at Fasken Martineau DuMoulin, based in Ottawa and Toronto.

The other major challenge, he says, is figuring out what the end game is for the Trump administration.

The difficulty, says Sosnow, is that domestic politics is driving so many of the issues. President Trump is understandably worried that Republicans may lose the House of Representatives in the upcoming midterm elections, to be held in November. If they do, a majority Democrat Party could be tempted into starting impeachment proceedings against the president. That would significantly complicate matters for Trump in pursuing his political agenda.

“It’s possible that one of his long-term end games is creating leverage,” says Sosnow.

The administration might agree to give a pass on auto tariffs based on a national security assessment, provided Canada gives ground on auto rules of origin or agrees to make concessions on access to our dairy markets.

That would give the president some ammunition in seeking re-election in 2020 as he could claim to have defended the auto industry, as well as American workers and farmers.

“Is that part of his long-term strategy?” says Sosnow. “Perhaps.” At this stage of the game, he says, it’s a bit like Kremlinologists during the Cold War guessing at the internal politics of the high members of the Soviet government. “We just we get little bits and pieces and we try to piece them together.”

Canada faces its own domestic pressures. Indeed no major political party wants to be seen to be caving in on supply management, for fear of appearing weak.

The challenge for Canada, says Sosnow, is figuring out what tools we have at our disposal to bring about a more positive “negotiation atmosphere” that gets us closer to a NAFTA agreement.

Since the announcement that Canada will no longer be exempt from steel and aluminum tariffs, Ottawa has indicated it will retaliate U.S. tariffs with its own dollar-for-dollar tariffs, beginning on July 1. “But the United States economy is 10 times that of the Canadian economy,” Sosnow points out. “And so on a dollar-for-dollar basis it’s a tenth of the impact.”

That’s why the Canadian government is also targeting those industries that could make life difficult for Republicans running for office in November.  But that’s a risky and uncertain strategy, says Sosnow. “It implies that through these particular tariffs we are going to selectively push certain districts to vote Democrat. And there are a lot of unknowns associated with that.”

Sosnow also raises concerns that Canada and European tariffs – supposedly imposed tit-for-tat – “may be susceptible to a counter challenge by the United States that they may be in violation of WTO or even the NAFTA.”

What’s important to keep in mind, he adds, is that all the elements in Canada’s trade spat with the U.S. are connected to the NAFTA negotiations.

Canada has to look at all possible mechanisms to make sure negotiations get back on track, he adds, preferably away from the glare of media attention. ”Those mechanisms need to remove themselves right now from the public eye because I do think that the temperature needs to be toned down.”

It means, ultimately, recognizing that everybody has to put a little bit of water in their wine to come to an acceptable agreement on “some admittedly difficult issues” in the NAFTA negotiation.

With respect to investor-state dispute settlement, both Canada and the U.S. have said they would like to get rid of it; however Mexico is opposed because investors find it attractive.

The Canadian government recently conceded some access to the country’s dairy, poultry and egg markets in the trade deal with the EU and its updated Pacific trade pact.  Sosnow suggests that Canada can offer up marginally better access, perhaps to the U.S. so that Trump could claim a win  — “something sufficient for the president to say, “I went to bat for the dairy farmers and I got something better than any other country got.”’

The biggest issue, however, remains U.S. demands for a five-year sunset clause, which Canada has so far categorically rejected. Sosnow argues that there will have to be some movement on agreeing to some mechanism for periodic review of the agreement. “One of the ways of getting to the middle ground is every five to seven years or every five to ten years — choose your number — there is an examination of the NAFTA.”

Sosnow points out that NAFTA already contains notification provisions to withdraw from the trade agreement. So negotiations ought to focus, he says, on what procedures and processes around withdrawal should look like. “In addition to that, can we also add on to that mechanisms to examine the question is the NAFTA still working in the light of changes in the economy? And what’s the process and procedure for addressing those changes?”

Sosnow is cautiously optimistic that harsh rhetoric is already being scaled back on both sides, and will ultimately lead again to constructive dialogue.

But the challenges posed by domestic politics are real and they involve some strong and raw emotions.  “When you’re dealing with human beings worried about jobs and worried about managing change in competitive environments, perception is important,” says Sosnow. “You have to deal with those perceptions.”

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