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A cyclist passes U.S. and Canadian flags placed side-by-side on the Eisenhower Executive Office Building next to the White House in Washington March 8, 2016. (KEVIN LAMARQUE/REUTERS)
A cyclist passes U.S. and Canadian flags placed side-by-side on the Eisenhower Executive Office Building next to the White House in Washington March 8, 2016. (KEVIN LAMARQUE/REUTERS)

ANDREI SULZENKO

What the U.S. NAFTA demands mean for Canada Add to ...

Andrei Sulzenko is a former Canadian trade negotiator and is currently Executive Fellow at the School of Public Policy, University of Calgary

Reports Thursday say the Trump administration is moving forward on setting out its NAFTA renegotiation objectives for Congressional review. Although still in draft form, there are no great surprises, and there may be more smoke and mirrors than fire below.

The highlight of the package is a proposed “safeguard” mechanism in cases where imports from Canada or Mexico cause or threaten serious injury to U.S. industry – seemingly fulfilling President Donald Trump’s “America First” threats. That’s interesting, because the North American free-trade agreement already has such a provision that works in tandem with safeguard provisions under the World Trade Organization (WTO).

The underlying principle of emergency safeguard action is that countries can impose a temporary tariff or another type of restriction such as a quota, subject to equivalent compensation in trade in other goods or services to the affected parties. For example, U.S. safeguard action on steel could be offset by better access to the U.S. market on agricultural products. If compensation were not offered, trading partners could take retaliatory measures of equivalent effect, say on wine imports from the United States.

In other words, there’s no free lunch; and that’s why safeguards are used relatively seldom. A U.S. push to change existing rules, say to lower NAFTA threshold levels for safeguard action, would be a non-starter, as Canada and Mexico would be better off under more stringent WTO provisions.

Other elements in the draft objectives are not particularly problematic for Canada.

The push on rules of origin, an arcane subject that determines eligibility for duty-free entry, could actually help all three parties. For example, in the controversial auto sector, NAFTA requires 62.5 per cent Canadian, U.S., and Mexican content. A higher content requirement would reinforce North American production, but not favour U.S.-based production as such. Indeed, one of the reasons behind Mr. Trump’s animus for the seemingly ill-fated Trans-Pacific Partnership (TPP) may have been the loosening of auto rules of origin at the behest of Japanese and other Asian suppliers.

The U.S. list also includes enforceable labour and environmental standards as well as provisions on digital commerce – ironically, issues that were addressed in the TPP. These should not be problematic for Canada.

With respect to agricultural products, Canada’s perennial defensive issue relates to our supply management regime for dairy and poultry products, which is an enormous ongoing tax on Canadian consumers. Canada agreed in the TPP negotiations to open the door a little (maximum of 1-1/2 to 3-1/4 per cent penetration of the Canadian market by imports). Renewed pressure from the U.S. should be welcomed by “middle class” Canadians. Even here, though, the U.S. does not have clean hands, with numerous agricultural restrictions and subsidies that impede Canadian competitiveness in the U.S. and third markets. Canada has, therefore, both offensive and defensive positions on agriculture.

Regarding the U.S. interest in greater access for government procurement contracts, again Canada has a strong offensive position vis-a-vis the U.S. market, particularly as it applies to the proliferation of “Buy America” proposals at both federal and state levels. That would make for an interesting discussion.

The most troublesome element of the whole U.S. laundry list is the apparent targeting of NAFTA’s Chapter 19 dispute-settlement provisions related to the application of anti-dumping and countervailing duties. Unlike emergency safeguard action, the imposition of anti-dumping (selling below fair market value) and countervailing (subsidized exports) duties does not require compensation because they are “unfair” trade practices if they cause material injury to domestic producers. It is, therefore, a favourite protectionist instrument, the most prominent of which has been the ongoing softwood lumber dispute between Canada and the United States involving allegedly subsidized Canadian exports.

When Canada and the United States were negotiating the original bilateral free-trade agreement (FTA) 30 years ago, this was the issue that nearly torpedoed a deal. Canada insisted on an independent adjudication mechanism because of too many instances of perceived protectionist bias in the rulings of the U.S. Commerce Department on the existence of dumping or subsidy and of the U.S. International Trade Commission (appointed by the president) on the question of material injury to domestic producers. Although case law over the intervening years suggests that the process has been fair and has worked well for all parties, Americans continue to smoulder about their loss of sovereignty in applying U.S. law.

A step back from the current provisions of Chapter 19, or scuttling it altogether, should be a non-starter for Canada (and probably Mexico), just as it was in 1987. Although there are similar provisions in the WTO, to which we could avail ourselves instead of the NAFTA provisions, the message for Canada would be “might trumps right” in interpreting the application of U.S. law. This is not a place we want to be with a protectionist administration and often cheerleading Congress.

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