NAFTA Redo – Trade Lawyer’s View
The purpose of this article is not to paint a detailed picture of NAFTA but rather share a Canadian trade lawyer’s perspective on the evolution of a 25 year-old agreement that was recently modernized for the 21st Century.
It’s fair to say that NAFTA received very little attention over the course of its lifespan, until the 20th anniversary came along in 2014 that is, only to fall quickly out of the spotlight once again for the next couple of years. Until an election promise came along. And then NAFTA suddenly became the poster child of everything that had gone wrong in America.
Back in 1989, Canada and the USA had taken a step in the right direction. Recognizing that the two Northern neighbors had such a natural fit for commerce, a trade deal would help cement the relationship. It should be said that both countries had been early adopters and supporters of the GATT multilateral system in the late 1940s, but they would certainly be able to dive deeper in trade liberalization and commit that to paper. Hence the Canada-US FTA was introduced and paved the way for greater predictability in international trade in North America, reduced costs at the border and improved competitiveness on the world stage.
Then it was the year of the three amigos in 1994. Bringing Mexico into the equation presented a challenge but additional opportunities as well. A few more chapters were added to the agreement and side agreements were reached on labor and the environment. Meanwhile the WCO multilateral system slowly came to a grinding halt. Bilateralism became the new focus in America and elsewhere.
And then the 2017 US elections came along. NAFTA apparently had to be either dramatically improved or thrown in the shredder. After more than a year of grueling negotiations behind closed doors, the self-imposed deadline of September 30th had apparently been met and a joint statement confirmed that an agreement had been reached.
Autumn leaves and November signings
What quickly followed was the (not so) impressive signing on November 30 during the G20 Summit in Buenos Aires. Those images stood in stark contrast to the 1994 pictures taken in San Antonio, Texas. The 2018 smiles looked nothing like the 1994 celebration of something big that was about to happen; instead they were the sigh of relief smiles that seemed to indicate “let’s turn that page and move on with our lives”.
And then the worst agreement in history was suddenly hailed as the new benchmark for future agreements to be measured against. However calling it a “brand new deal, the most modern up-to-date agreement in history” is a farce; even a reference to NAFTA 2.0 is a bit of a stretch. If this were a software upgrade it would be more like an incremental NAFTA 1.2.
Law practitioners who have been intimately involved with NAFTA over the last 25 years or so don’t feel there’s so much to cheer about. Many of the compliance obligations and the hurdles of securing free trade benefits are still there. We all know too well that many companies have gladly forgone the benefit of NAFTA and simply pass tariff costs down the line: it should be no surprise that consumers regularly pay embedded tariffs at the cash register. This would have been the perfect opportunity to make free trade great again and make it work for importers and exporters at the ground level. Alas, most will still be struggling with cumbersome certification procedures and difficult compliance audits for which they are ill prepared.
Be that as it may, all of us working in the trenches of free trade will have to get acquainted with the latest nuances of the new text and update all those NAFTA PowerPoint slides with new acronyms (USMCA, CUSMA, T-MEC). On that note, CAMUS might have been a better acronym: Albert Camus was a French philosopher and author whose views contributed to the rise of the philosophy of absurdism and who wrote an essay called The Rebel. But I digress.
The new and improved deal
First things first: NAFTA had long eliminated tariffs on originating goods traded across North American borders for quite a while. Tariff elimination is, of course, the main objective of any free trade agreement and that milestone had already been reached years ago. So what was there left to accomplish? Well, reaching a new NAFTA deal was looking at tariffs backwards: avoid reintroducing them. And so looking at tariffs from that angle, this new reverse goal was reached and the November 30th signing puts ink to paper to that effect. Even if we couldn’t take a step forward we’ve at least accomplished one thing: avoid taking a step back. Nowadays in the international trade arena, standing still is most often considered a step in the right direction.
Aiming for greater North American content in qualifying goods was central to the discussion. Certainly the auto sector was of great concern to the US: an increase from 62.5% to 75% regional content resulted from the negotiations. That said, rules of origin continue to be as complicated as ever from the point of view of importers and exporters who have an on-going obligation to monitor their compliance with the rules and document that compliance.
Other noteworthy changes include, in no particular order:
- Rules of origin De Minimis While the auto sector will experience greater regional content, the general rule allowing non-originating input tolerance will grow from 7% to 10%, which aligns to a certain degree with other similar tolerances found in other FTAs.
- Dairy Much has been said about Canada’s market access restrictions for dairy. The so-called supply-management system has been under severe attack throughout the negotiations. In the end, Canada conceded to grant a supplementary quota allocation to US-origin dairies. More importantly though, the elimination of a special quota category for milk protein concentrates might have a greater impact in this sector for trade between Canada and USA.
- Investments Generally speaking, investor-state dispute provisions in FTAs remain a very popular subject for debate among trading partners. This nearly killed the deal so to speak during the last stretch of CETA discussions between Canada and the EU. In the new NAFTA, the old Chapter 11 investor-state dispute resolution process will be phased out over the next three years between Canada and the USA: there will be no more access to an impartial tribunal to review government rulings that affect their investments.
- Import clearance de minimis Given the importance of on-line shopping and the relentless flood of imports resulting from cross-border e-commerce, one of the US objectives was to increase the threshold for duty and tax free shipments to $800. This didn’t happen, but Canada did agree to raise the old $20 dollar threshold to $150 before the assessment of customs duties kick in.
- Dispute settlement Recourse to binational panels was preserved (Chapter 19) in matters that relate to the imposition of anti-dumping and countervailing duties, an objective that had to be met and at the center of the Canadian negotiating strategy.
- IP protection The Canadian 8-year cap for the protection of patents and pharmaceuticals increases to 10 years. The Canadian landscape for copyright protection will also see an increase.
- FTA with non-market countries Hidden towards the end of the agreement is Article 32.10 which provides for a consultation process and the right to withdraw from the agreement should one party decides to initiate free trade talks with a “non-market” country (i.e. China). This is new to NAFTA (or any other FTA for that matter) and is meant to be some kind of threat against future trade liberalization with “the enemy”. It remains to be seen what future administrations might think of such provision and whether it will in fact influence foreign policy.
- Termination Some will recall the surprising demand from the US which came out of nowhere, essentially forcing a 5-year sunset clause to the new agreement, a demand which met with great opposition. In the end, there was agreement for a 16-year possible termination and a 6-year built-in review process for renewal.
New chapters were introduced that aim to deal with certain subjects not normally incorporated into FTAs, namely a chapter on digital trade (Chapter 19), another on SMEs (Chapter 25) and a chapter on anticorruption deterrence (Chapter 27). It’s fair to say that, as time goes by, FTAs tend to cover more and more subjects that, although not specific to international trade, have relevance nevertheless.
Letters on the side please
Six side letters were also signed and made part of the deal. They aim to handle specific issues relative to specific sectors like automobile, energy, water and wine.
- Concerning energy, the side letter enshrines principles of greater cooperation between parties and improved regulatory transparency.
- The water side letter reaffirms each country’s sovereignty over their respective water resources.
- As for wine, it deals specifically with one of Canada’s provincial (British Columbia) restriction over grocery sales of imported wine.
- Last but not least, the Section 232 safeguard letter provides that, in the future, these special tariffs will not be imposed by the USA before a 60-day negotiation period first takes place. Canadian automobiles receive a particular treatment: no such tariff will touch them unless 2.6 million units have already been exported to the USA, a threshold that has yet to be met and provides a relatively safe buffer for years to come.
Of course, no agreement could be reached concerning lingering Section 232 safeguard tariffs on steel and aluminum, and the lash of retaliatory tariffs that soon followed. No commitment has yet been made to remove them. Canada and Mexico weren’t able (or willing) to apply their art of the deal to successfully get rid of these tariffs and make that a prerequisite of signing any new agreement: that day has already passed and the tariffs remain.
We’re not yet out of the woods. The new NAFTA still has quite a few more steps to go before it becomes part of our reality. And the upcoming approval process in the USA promises to be as painful, if not more, than the negotiations. In Canada, the text of the new agreement was tabled in the House of Commons in mid-December. An implementation Bill could likely be introduced in March 2019, followed by Parliamentary debate in House and Senate Committees. As for the USA, Congress won’t even consider the agreement until 2019 is well under way.
The bottom line? The close integration of North America’s supply chains has been preserved and will continue to grow for the foreseeable future. Don’t expect to see heated debates and serious opposition in Canada: once introduced the implementing Bill will follow its usual course of polite deliberation and predictable outcome. Too much is at stake in this country to bring into question the obvious endorsement of the new text. The story, however, will be entirely different in the USA.