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u.s.-canada trade

As a seasoned international trade lawyer, she never would have thought it possible.

“I can honestly say that what I talk about now, I would have never conceived of talking about two years ago,” said Cyndee Todgham Cherniak of the Toronto-based legal and tax firm LexSage. Even during her time teaching law at the University of Windsor, “I said, NAFTA will never be reopened,” but now, “I’m eating crow.”

So, here we are, rejiggering the continent’s complex trade regulations (and there are few human endeavours more complicated than trade rules) to try to answer the basic political rhetoric about saving jobs, primarily coming from the Trump administration.

Yet, the renegotiation of the North American free-trade agreement is bringing forward what lawyers and experts describe as a new way of measuring the country of origin of a manufactured good or product. It is a new way of addressing the rhetoric, since it tries to speak the same language, with an emphasis on wages and jobs.

The approach has been talked about for years, part of a movement internationally to upgrade how skilled labour is measured as an input in the making of a product. The Organization for Economic Co-operation and Development and the World Trade Organization have their joint Trade in Value-Added initiative promoting the approach, complete with a snappy, explanatory video on the OECD website.

But with the NAFTA talks, this new approach is an attempt to answer the heated, often erratic, rhetoric.

Open this photo in gallery:

A crane transports vehicles on a container ship at the Port of Oakland in California. Currently, a car made with a certain percentage of North American-made parts versus overseas parts qualifies for special NAFTA treatment. The value-added argument, however, suggests the advanced North American skills that go into designing and building the car should be considered, too.Ben Margot/The Canadian Press

“It’s all about American jobs. And then Canada can say, the rising tide raises all the boats. If we’re going to bring jobs back to the rust belt, Canada is just on the other side of the lake, let’s bring more jobs back [to Canada] too,” Ms. Todgham Cherniak said, illustrating the running political dialogue.

This thinking has coloured the NAFTA renegotiations. Trade specialists normally exist in a sea of mathematical formulas, cryptic spreadsheet and acronyms such as HTS (harmonized trade schedule) and RVC (regional value content). And any new system for measuring the origin of goods would likely be no less complicated than the current system. Yet, this new approach emphasizing skilled labour seeks to look at manufacturing and services in terms of value added, measuring the value that North American jobs add to a good in a much more complete way.

Said simply, current NAFTA rules focus on whether a good qualifies for special tariff treatment generally based on what components of the good are made in Canada, the United States or Mexico. It also factors in any parts made overseas. A good that meets a minimum percentage of locally manufactured parts then qualifies for preferential NAFTA treatment.

These current rules also revolve around the concept of tariff shifts, which basically means that one part assembled to another part is turned into a fancier, completed good of higher value. This can be measured as well in terms of the regional value content (RVC) of the good, which also takes into account the value added. A blend of tariff shift and RVC is common.

However, the new approach sees a good as more than just a collection of parts. It would also measure the good much more in terms of the engineering, design skills, services and creative know-how that go into it. In this sense, it would measure the value added more fully, proponents of this approach argue. Canada and the United States typically add more to the ultimate value of a good with their skilled labour than what is normally recorded by current trade rules, they say.

Open this photo in gallery:

Stored rolls of steel outside the ArcelorMittal Dofasco plant, an integrated steel producer, in Hamilton.Peter Power/Reuters

NAFTA and the previous Canada-U.S. free-trade agreement are a quarter century old, noted Ms. Todgham Cherniak. Back then, she explained, trade rules followed more of a transactional mindset: A car is made with a certain percentage of North American-made parts versus overseas parts, and that ratio could qualify the car for special NAFTA treatment. But now, the argument is that this isn’t enough, and that the advanced North American skills that go into designing and building the car aren’t immeasurable inputs, but indeed can be quantified by the wages and the actual cost of that North American labour.

“The push is away from that transactional way of looking at things, a component-based way at looking at things, and saying, ’What is the value added? What is Canada contributing, our engineers, our advanced technology?’ ” said Laurie Tannous, special advisor at the Cross-Border Institute at the University of Windsor. “The same with the U.S. So, [it’s] looking at the labour, not the general labour, but that white-collar level of advanced technology.”

This is also happening at a time when trade itself is becoming more highly engineered, with automation moving toward ever more streamlined customs controls at the border. The rules will always remain complicated, the paperwork taxing, and the threat of audits by customs agencies ever present, say trade experts, but customs is fast becoming more automated, driven by the fact that trade data itself is such a valuable commodity, Ms. Tannous said.

The obvious question is where to draw the line in terms of measuring the contribution of engineers, designers, managers and creative professionals? What about general labour and line jobs? The argument or the hope, say proponents, seems to be that a fuller measuring of the value of skilled labour could have the knock-on benefit, in the case of the auto sector, of keeping more component and parts manufacturing in Canada and the United States. At least it would more accurately convey a truer trade picture, they say.

It could also, though, substantially alter NAFTA trade rules, during what is seen as already complicated and politically charged negotiations. So, is this broader, value-added approach seriously on the table in the NAFTA talks?

“I’m not part of the negotiations, but from the people that I know who are, who are involved, that’s what we’re hearing, that there’s a push toward it: A bifurcated rules of origin,” in other words, a continuation of the percentage approach to parts and components, and yet the emergence in the talks of the new, broader, value-added approach, Ms. Tannous said.

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