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Canada’s lead NAFTA negotiator criticizes U.S. proposal as Freeland heads to Washington

Steve Verheul, Canada’s lead NAFTA negotiator, gestures to media during the a round of free-trade talks in Mexico last November.

Carlos Jasso/REUTERS

Canada's lead NAFTA negotiator is taking public aim at American bargaining positions, saying the proposal for government procurement is the "worst offer ever" made by the United States at the trade table.

In an unusual intervention, Steve Verheul, an assistant deputy minister at the department of Global Affairs, spoke to an Ottawa audience Tuesday about the renegotiation of the North American free-trade agreement that began last August at the request of U.S. President Donald Trump.

"The U.S. offer on government procurement … is the worst offer ever made by the U.S. in any trade negotiation. It would leave us in a position where the country of Bahrain would have far better access to U.S. government procurement markets than Canada would, or Mexico would," he told a Canadian Global Affairs Institute conference.

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Washington has said it wants to cap the amount of work available to Canadian or Mexican companies at the sum total of what their governments make available for U.S. firms to bid upon. This could hurt Canada and Mexico because the U.S. government purchasing market is valued at more than US$500-billion while the combined Canadian-Mexican market is about US$90-billion, the Washington-based Information Technology Alliance for the Public Sector has estimated.

International trade lawyer Larry Herman said Mr. Verheul's public comments are not typical for a civil servant and he believes this was designed to send a message. "It is exceptional that a public servant would have been so blunt during the course of negotiations," Mr. Herman said.

He said he expects a senior official such as Mr. Verheul would have cleared such remarks beforehand with the Canadian government "and was intended to deliver a public comment on the difficult state of the negotiations."

Mr. Verheul's remarks came on the eve of Foreign Affairs Minister Chrystia Freeland's latest trip to Washington where she will meet on trade with members of the Trump administration and Senate – a visit that takes place as the threat persists that Mr. Trump may withdraw from the North American accord.

Ms. Freeland's office said Mr. Verheul's comments echo concerns previously raised publicly by the minister herself. Last October she told Global News the government procurement proposal from the U.S. was "really disappointing."

Potential trouble spots continue to arise in the Canada-U.S. relationship. Mr. Trump has complained about Canadian trade and threatened a tax on foreign imports – he offered no details – and on Tuesday, U.S. Trade Representative Robert Lighthizer made a point of saying NAFTA talks are going "particularly well with the Mexicans."

A day after complaining that "Canada does not treat us right," Mr. Trump on Tuesday repeated a call to penalize countries he says are mistreating the United States. "I say we should have reciprocal taxes," he told a trade roundtable with members of Congress at the White House. "We have countries that are taking advantage of us."

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Mr. Trump continued: "They're charging us massive tariffs for us to sell our product into those countries. And when they sell to us: zero. We charge them zero. We're like the stupid people and I don't like to have that any more."

He also criticized Canada over trade disputes involving softwood lumber and ultrafiltered milk. "Canada has treated us very unfairly on timber and lumber," he said. "And not easy on Wisconsin [dairy] farmers."

The White House later played down the remarks, telling The Canadian Press "there is nothing formal in the works right now."

The U.S. President's threats are compounding the unease hanging over Canada's export-dependent economy, adding to the uncertainty over the fate of NAFTA, a new U.S. advantage in business tax rates and much more aggressive enforcement of U.S. trade laws.

The weight of all that uncertainty is causing companies to "sit on their hands" or invest elsewhere, said Dennis Darby, president and chief executive of Canadian Manufacturers & Exporters, a trade association. "We're running our manufacturing output at 85-per-cent capacity, which is the point where you would normally add capacity," Mr. Darby explained.

Toronto-Dominion Bank warned in a report Tuesday that the combination of U.S. tax cuts and uncertainty over NAFTA could lead to a "slow bleed" of investment from Canada to the United States. The marginal effective tax rate on investment in the United States is now 18.8 per cent versus 20.3 per cent in Canada, including federal and local taxes. As recently as 2016, Canada had an eight-percentage-point edge over the United States.

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In January, the Bank of Canada warned that trade uncertainty may already be scaring away investment. In its latest Monetary Policy Report, the bank said new foreign direct investment into Canada has declined since mid-2016, especially from Europe but also from the United States – "a possible sign of the effects of the uncertainty around trade policy."

And Bank of Nova Scotia has factored in a penalty of 0.2 of a percentage point into its 2018 growth forecast for Canada owing to "this prolonged period of uncertainty about the future of NAFTA."

On Tuesday, the U.S. Commerce Department announced that it has launched an investigation into alleged dumping of large-diameter welded pipe in the U.S. market by Canada and five other countries. The Trump administration has now launched nearly 100 trade cases since taking office – several of them targeting imports from Canada. The case follows a string of earlier U.S. complaints involving Canadian lumber, newsprint, solar panels and aircraft, and the United States is contemplating duties on imported steel and aluminum.

In his speech, Mr. Verheul said the three NAFTA countries have made "fairly limited progress over all" after six rounds of negotiations – a result that is "less than we might have anticipated."

He said a major factor is the lack of the Americans' willingness to bend during negotiations – a situation he attributed to the Trump administration. Mr. Trump campaigned against NAFTA in the 2016 presidential race, threatening to tear it up if he couldn't extract a better deal for U.S. workers.

"The main issue is we have seen limited U.S. flexibility even on fairly easy issues. They do not come to the table – our counterparts – with a lot of flexibility. This is being driven to a large extent from the top, from the administration," Mr. Verheul said. "We could close a lot more chapters if the U.S. negotiators had more room to move."

Mr. Verheul recounted how NAFTA countries have closed, or concluded, three chapters that deal with what he called peripheral matters such as small- and medium-sized enterprises, competition policy and anti-corruption. He said countries are "quite close" on other subjects such as telecommunications.

He said Canada and Mexico are facing "even more challenging" problems with what the Canadian government has described as extreme proposals from the Americans, including a "sunset clause" that would terminate the deal in five years unless all three countries agreed to keep it.

Difficult talks remain on auto rules of origin. Washington is proposing all vehicles made in Canada and Mexico contain 50-per-cent U.S. content, on top of boosting the required amount of North American content in NAFTA-zone autos to 85 per cent from 62.5 per cent.

Mr. Verheul said the Canadian government believes this proposal would backfire. "[It] would actually have the opposite effect to what the U.S. is looking to achieve. We think it would drive production offshore – out of North America – rather than improve it in North America."

Asked how Canada believes it can best respond to U.S. intransigence, the NAFTA negotiator said the answer is to remain at the negotiating table as long as possible and keep pushing for a deal that benefits all countries, not just the United States.

"I don't think we have any choice but continue to stay at the table, continue to put forward Canadian ideas, Canadian paths forward and impress upon the U.S that [it] cannot be a winner-takes-all agreement," Mr. Verheul told reporters. "There is not going to be a lot in this for Canada or for Mexico if the benefits just go to the U.S."

Mr. Verheul said Tuesday that Canada will take a wait-and-see approach to the tax mentioned by Mr. Trump. "Although the statements were made … we're not necessarily seeing a lot of concrete action behind that. So we'll wait and see whether there is anything real to that."

Canada, Mexico and the United States will reconvene in Mexico City in late February for a seventh round of NAFTA talks.

U.S. President Donald Trump said trade deals are stacked against the United States saying that he can't continue to let other countries "rob us blind." Trump singled out China, Japan South Korea and NAFTA members Canada and Mexico. The Associated Press
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