NAFTA redo high-stakes poker
Canada has as much to lose as Trump and the U.S. have to gain
On Oct. 1, 1987, days before the U.S. and Canada signed their biggest-ever trade deal, then-Prime Minister Brian Mulroney shocked the Americans by walking away from the negotiating table.
It was a high-stakes gamble designed to ensure the Free Trade Agreement contained a dispute-settlement mechanism — what Mulroney called his essential condition — that would give Canada a way to resolve trade conflicts outside U.S. courts.
The David-and-Goliath move worked, and two days later the countries reached an agreement.
Thirty years later, Prime Minister Justin Trudeau is arriving at the same crossroads as his predecessor. The U.S. confirmed last week that among its top objectives in upcoming negotiations on the North American Free Trade Agreement — which superseded the FTA in 1994 — is the elimination of the Chapter 19 dispute-resolution mechanism that Mulroney went to such lengths to preserve.
“Things like getting rid of Chapter 19 dispute-settlement panels, that’s not small bean. That’s a biggie,” Derek Burney, Mulroney’s chief of staff during the FTA talks and a key player in NAFTA negotiations, said in a telephone interview last week. “We wouldn’t have the trade agreement if we didn’t get that dispute settlement.”
Burney also zeroed in on why the Canadian side was willing to risk so much to get the mechanism into the FTA: “We don’t trust their trade-remedy tribunals.”
The first round of NAFTA renegotiations begin Aug. 16, with representatives from the U.S., Canada and Mexico gathering in Washington. President Donald Trump has threatened to withdraw from NAFTA if Mexico and Canada don’t agree to more favorable terms for the U.S.
NAFTA’s Chapter 19 dispute-resolution mechanism allows review by independent, binational panels — instead of judicial review by domestic courts — in antidumping and countervailing duty cases.
Since NAFTA came into force, Canada has been involved in about 73 panels over items such as cattle, magnesium, hot-rolled steel, color-picture tubes, greenhouse tomatoes and super-calendered paper, according to the website of the NAFTA Secretariat, which is responsible for managing Chapter 19 proceedings.
But given that in the last decade Canada has only initiated three cases under the provision, Robert Wolfe, professor emeritus at Queen University’s School of Policy Studies in Kingston, Ontario, questions whether Chapter 19 is essential.
Wolfe suggests Canada may want to consider bluffing, and when push comes to shove, give in on Chapter 19 in exchange for something better, gaining concessions on Trump’s Buy American rules, which restrict the ability of Canadian companies to bid on U.S. government contracts.
“If you had to choose between a real restraint on Buy American and keeping Chapter 19, I’d yell and pound the table and give up Chapter 19,” Wolfe said. “A lot more Canadian jobs might benefit from stopping discriminatory government procurement in the U.S.”
Wolfe says cross-border supply chains are much more prevalent, and a company that is part of such an arrangement would be shooting itself in the foot by taking a trade-remedy action against its partner. He cites the motor vehicle industry, saying “you’re not going to see anti-dumping between Canada and the U.S.,” because the bits and pieces of the cars go back and forth over the border so many times.
Chad Bown, senior fellow at the Washingtonbased Peterson Institute for International Economics, said in a July 19 report the Trump administration’s goal under NAFTA negotiations is to make it easier to restrict imports from Canada and Mexico. That’s “worrisome” because it could eliminate any new trade liberalization gains or reverse previous inroads, and likely lead to a situation where Canada and Mexico respond in kind against U.S. exports.
By 2016 only 1.3 percent of imports from NAFTA partners were covered by U.S. antidumping and countervailing duties versus 9.2 percent of Chinese imports and 2.7 percent of imports from the rest of the world, Bown wrote. He predicts Trump’s barriers could more than quintuple the level of Canadian imports covered by trade remedies to 6.6 percent.
NAFTA, which many people thought would lead to widespread job losses, is now much more popular in Canada than the other two countries. A Pew Research survey found 76 percent of Canadian respondents felt the pact has benefited their country, versus 60 percent of Mexicans and 51 percent of Americans.
NAFTA is also credited with having had measurable and positive effects on everything from trade flows and investment to employment and productivity. A 2014 study on the effects of NAFTA by the Peterson Institute estimates Canada is $50 billion richer each year in additional gross domestic product because of expanded two-way trade under NAFTA.