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Tariffs, taxes, money (and morals): A guide to next week’s NAFTA 2.0

Tariffs, taxes, money (and morals): A guide to next week's NAFTA 2.0

Briefing highlights

  • A guide to NAFTA negotiations
  • Markets at a glance
  • Magna posts stronger profit
  • Telus posts smaller-than-expected profit
  • CPPIB carves out deals


NAFTA 2.0

There's so much at stake for Canada as trade negotiators head into talks to rewrite NAFTA next week.

Observers generally don't expect Canada to get sideswiped, though the threat is certainly there in this uncertain climate.

That's because Canada has a fairly equal trade relationship with the U.S. And while there certainly have been disputes, from softwood lumber to wine, the relationship isn't a fraught one. Not only that, the U.S. has come out ahead when you add services to goods trade.

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And where goods alone are concerned, Canada's relationship pales in comparison to those of other countries.

"In 2016, the goods trade deficit (both petroleum and non-petroleum) totalled $737-billion, with China accounting for nearly half the shortfall," Bank of Montreal deputy chief economist Michael Gregory said of the U.S. gap.

"This is almost five times more than the next largest contributor, Japan (at 9.4 per cent)," he added.

"Germany accounted for slightly more of the deficit than Mexico, but the shares are comparable (8-per-cent range). Canada came in 15th at 1.5 per cent. As an economic bloc, the euro area's share was 17.1 per cent, much larger than NAFTA's 10.1 per cent. So even if NAFTA trade shortfalls were sliced in half, the U.S. would still be running $700-billion-plus deficits."

The Office of the United States Trade Representative outlined its objectives for the talks in a mid-July document promising that "if we succeed in achieving these objectives – maintaining and improving market access for American agriculture, manufacturing, and services – then we look forward to a seamless transition to the new NAFTA."

And here's what the USTR had to say about Mexico and Canada in the accompanying statement: "Since NAFTA was implemented in 1994, the U.S. bilateral goods trade balance with Mexico has gone from a $1.3-billion surplus to a $64-billion deficit in 2016. Market access issues have arisen in Canada with respect to dairy, wine, grain and other products – barriers that the current agreement is unequipped to address."

Based on the document, here's a guide to some of the flash points from Mr. Gregory and his BMO colleagues, senior economists Aaron Goertzen and Alex Koustas:

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Agriculture

The Trump administration wants to cut or kill tariffs and barriers still in place on its exports.

"The specific mention of 'dairy' in the press release and 'price undercutting' in the objectives likely reflects the recent controversy over milk protein concentrate in Canada," said Mr. Gregory, Mr. Goertzen and Mr. Koustas.

"However, America also has a long-standing beef with Canada's supply management system for dairy and poultry and eggs (domestic supply and pricing are influenced by way of production quotas, which are reinforced by strict tariffs that keep most foreign products out of the Canadian marketplace)."

Source: Giphy.com

Also an irritant is a B.C. measure to allow only local wines on certain grocery store shelves.

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What to expect?

"If recent trade negotiations are any guide (and keep in mind they were undertaken by the previous government), it is likely that Canada will offer some concessions on supply management while leaving the overall system intact."


De minimis threshold

Google Translate doesn't do Latin. Fortunately, I had to take it in high school. Unfortunately, you think I remember anything about a language that was already dead when I was forced to study it almost half a century ago? Fortunately, de minimis is defined in online dictionaries.

It means trivial or insignificant, though trade negotiators sure don't see it that way. In the context of NAFTA, this is the threshold for shipments coming into the country without being hit by levies.

Here's what the USTR wants:

"Provide for streamlined and expedited customs treatment for express delivery shipments, including for shipments above any de minimis threshold. Provide for a de minimis shipment value comparable to the U.S. de minimis shipment value of $800."

At $20, (Canadian), the "value of shipments that are allowed to enter Canada duty- and tax-free is … among the lowest in the world, and the Canadian government has already been considering raising it," the BMO economists said.

"Lifting the shipment value would be negative for government coffers but positive for consumers and importing businesses (and Canada-U.S. trade relations)," they added.


Rules of origin

What the USTR wants:

"Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America … Promote co-operation with NAFTA countries to ensure that goods that meet the rules of origin receive NAFTA benefits, prevent duty evasion, and combat customs offences."

This is largely aimed at the auto industry, BMO said, a huge issue for all three countries.

"Under current NAFTA provisions, certain parts and inputs in the auto assembly chain are subject to more rigorous 'tracing' to determine the origins of all of the components in a given part," Mr. Gregory, Mr. Goertzen and Mr. Koustas said.

"However, this process only applies to a list of items that was established decades ago, suggesting that a number of newer materials and components could slip through the more stringent tracing supervision process as it is currently constructed," they added.

"Broadening the scope and re-examining the formulas used to calculate regional value content will likely be the first step: A given method could add or subtract up to 10 per cent of domestic content from a part, according to the Automotive Parts Manufacturer's Association."


Data flows

What the USTR wants for financial services:

"Ensure that the NAFTA countries refrain from imposing measures in the financial services sector that restrict cross-border data flows or that require the use or installation of local computing facilities."

The broader version on data flows is similar.

"This partly reflects the concern about Canadian regulations requiring certain data be accessed only from Canada and stored only in Canada, which, it's argued, restricts the ability of U.S. cloud computing companies to compete for business north of the border," the BMO economists said.

"Cited by the USTR is the federal government's requirement that any company bidding for its recent contract to modernize its e-mail system couldn't take data out of Canada," they added.

"Privacy rules in British Columbia and Nova Scotia dictate that personal data collected by a public body must only be accessed from, and stored in, Canada."


Trade action and settling disputes

As BMO put it, the USTR was "not mincing words" here. What the Trump administration wants:

"Eliminate the NAFTA global safeguard exclusion so that it does not restrict the ability of the United States to apply measures in future investigations. Eliminate the Chapter 19 dispute settlement mechanism."

Putting disputes to a panel rather than a court is a biggie for Canada, BMO noted.

"Advocates for retention argue that it expedites trade dispute resolution (delay can be costly) and it reduces the politicization of U.S. trade law application," the economists said.

"Last month, Prime Minister Trudeau said it is 'absolutely essential' that a renegotiated NAFTA include a dispute settlement mechanism, which, like 30 years ago, could be Canada's red line," they added, referring to the hard stance Ottawa took on this issue in the Canada-U.S. trade deal that preceded NAFTA.


Government procurement

This is a big one for the USTR, whose bottom line is this:

"Establish fair, transparent, predictable, and non-discriminatory rules to govern government procurement in the NAFTA countries, including rules mirroring existing U.S. government procurement practices."

Actually, there's more: It wants to exclude state and local governments and retain certain "preferential purchasing programs" for women and small and minority-owned businesses, as well as for key defence contracts.

Also excluded would be "Buy America" rules "on federal assistance to state and local projects, transportation services, food assistance, and farm support."

BMO noted that the U.S., Canadian, state and provincial governments all operate under what's known as the WTO Government Procurement Agreement.

"These governments still erect some procurement barriers for select expenditures that are specified in the GPA, and local/municipal governments aren't included," the BMO economists said.

"So while some procurement barriers are permissible under WTO rules, Canada's concern is that 'Buy America' could cast a discriminatory tone over all U.S. procurement."

What also caught my eye was the USTR's desire to "maintain broad exceptions" for procurement for national security, protection of intellectual property, protection of human, animal or plant life or health, and "measures necessary to protect public morals, order or safety."


NAFTA morals?

Actually, I was intrigued by the mention of morals. To the point of going searching for actual laws.

In Canada, for example, you can't exhibit a "disgusting object" or pretend "to exercise or to use any kind of witchcraft, sorcery, enchantment or conjuration."

You also can't do anything "intended to alarm Her Majesty." (That's not necessarily a morality issue, just something I stumbled upon.)

In Toronto, specifically, you'd better watch your mouth in a public park, where it's illegal to use "profane" language. (You also can't have sex in the park, which works out well because, in winter, you'd be banned from saying it's @$# &% cold out, anyway.)

As for the U.S., you're not supposed to flirt in Haddon Township, New Jersey, whose ordinance promises punishment for "whoever accosts or approaches any person of the opposite sex unknown to such person and by word, sign or gesture attempts to speak to or to become acquainted with such person against his will."

Hockey and baseball fans should be on their best behaviour in Massachusetts, where there's trouble for anyone who "directs any profane, obscene or impure language or slanderous statement at a participant or an official in a sporting event." (Can you imagine a Leafs game?)

You also can't can't make noise in a public library. Well, everyone knows that. But in this case, it's among the "crimes against chastity, morality, decency and good order." (I couldn't find any reference to what happens if you do it quietly.)

Source: Giphy.com


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