ENERGY UNLIKELY TO BE FRONT AND CENTRE IN LOOMING NAFTA TALKS BUT ANYTHING POSSIBLE
To panic, or not to panic, is a predicament faced by Canadian business leaders after the United States this week outlined its desired outcomes from a renegotiation of the North American Free Trade Agreement.
Canadians have reason to worry, particularly when it comes to the Americans’ intent to do away with the dispute resolution mechanism used in five separate instances to resolve softwood lumber disputes, each of which sided with Canada.
At this point, it appears the U.S. wants to have disputes resolved through its court system, which would be neither efficient, desirable or cost-effective for Canadian companies.
In Alberta, concerns centre primarily on areas of energy. The original NAFTA agreement had what amounts to a paragraph on energy matters, written at a time when security of supply was top of mind.
In simple terms, Canada promised to keep the taps on and to supply the U.S. with the oil and natural gas it needed. Technology has since unlocked vast reserves of both commodities south of the border, reshaping the North American energy market.
Moreover, Mexico wasn’t party to the resource agreement since its energy sector was still government-run. Before its constitutional amendments in August 2014, the Mexican market was closed to outside investment.
Any new agreement from a NAFTA renegotiation would include Mexico’s energy resources.
“NAFTA’s biggest impact on the energy sector will probably involve bringing Mexico into the deal. They are going to have to dismantle the investment barriers as well as remove the import and export licences required for certain energy products,” said Laura Dawson, director of the Wilson Center’s Canada Institute in Washington, D.C.
“They will also have to figure out whether to do all of this at once or on a phased-in basis.”
More broadly, what hasn’t changed is that the focus on continental energy security — if not energy self-sufficiency — remains a priority for the United States, which should be seen as positive in Alberta.
Dawson said Canada’s oilpatch should be relieved in terms of what was tabled this week.
“Some of the warning shots fired against the oil and gas sector in the run-up to the release of the U.S. NAFTA mandate did not materialize in U.S. pre-negotiation language,” she said.
“Earlier, there had been statements from the president suggesting that Canada was an unfair trader in energy. There were also suggestions that the relatively problem-free export of Canadian oil to the U.S. could be held hostage for gains in other sectors.”
The focus of the U.S. document is to preserve and strengthen North American energy trade, Dawson said.
What may prove challenging is how potential changes to rules of origin could affect Canadian companies with operations in the U.S., especially those in the infrastructure realm. This will mandate the extent of sourcing from American suppliers, which could include engineering, construction and legal services, among others.
As Dawson points out, the U.S. position contains a lot of ‘Buy American’ language. She doesn’t expect to see Canadian companies gain increased access when it comes to bidding for contracts. What could happen instead, is stronger reciprocal agreements negotiated between Canada and Mexico.
The fact NAFTA will be updated to include the digital world will improve the process of trans-border transactions.
“This will make cross-border transactions for businesses — including the energy services sector — much easier and more transparent,” said Dawson.
One area that could benefit Canadian consumers is the prospect of duty relief on goods bought online and imported into Canada.
The U.S. wants the exemption raised from $20 to $800. Canadian retailers would not welcome this change, but it would be a big win for consumers.
As negotiators prepare for an Aug. 16 start, it’s important to consider the U.S. position tabled this week is only an opening salvo. If this is a true negotiation, the more likely outcome is something less draconian than first presented.
Where this process is sure to differ from others before it is the involvement of the U.S. Congress, which has not been engaged to this degree since the days of president Gerald Ford. This time, 16 congressional committees will be involved. Nothing will be negotiated off-line or out of sight.
It’s also important to think of timelines.
With U.S. mid-term elections happening in November 2018, it won’t likely be sitting members who ratify the revised agreement, should one be reached. Moreover, it’s fair to expect the Congress will look much different, after those mid-term elections, than it does today.
As the New York Times recently reported, various state officials have reached out to their Canadian counterparts to reassert their commitment to a strong trading relationship. In football terms, they look to have called an ‘end run’ play.
Mexico’s presidential election cycle kicks off with primaries later this year, followed by the July 1, 2018 vote. Andrés Manuel López Obrador, the leading contender to replace President Enrique Peña Nieto, has his own brand of populism that includes a protectionist stance with respect to trade. It’s therefore in the best interests of all parties that the negotiations proceed smoothly, leaving any a new agreement a fait accompli for the incoming president.
Yet most observers expect the negotiations to be long and difficult.
Given the complexities of renegotiating an agreement of this magnitude, it’s hard not to wonder whether the NAFTA negotiations have the potential to be an exercise in futility, which would only increase uncertainty for markets and investors.
To borrow from Shakespeare’s Macbeth, these negotiations could be the modern incarnation of a tale, told by an idiot, full of sound and fury, signifying nothing.