This is a must-win issue for Canada at the NAFTA talks

By Gregory Boyd

It was arguably Canada’s greatest gain from the North American Free Trade Agreement: a way to fairly resolve cross-border disputes, especially those with an outsized southern neighbour. That prize is now back on the table, with the questions of what else Canada might surrender in order to preserve it.

Negotiators from the United States, Canada and Mexico began work on a new version of NAFTA last week and concluded their first round of closed sessions on the weekend. The task of reaching agreement seems daunting, with an official U.S. position entering the talks that included a terse list of more than 100 changes required to “revise” and “renegotiate” the agreement. The messaging from Canadian and Mexican leaders was less specific and couched in language about the need to “modernize” and “reform” the agreement.

The distinctions were apparent at the formal opening event last Wednesday, when the senior U.S. official, Trade Representative Robert Lighthizer, included some tough words for the 23-year-old trade pact. NAFTA has “failed many, many Americans,” he said. President Trump, he said, “is not interested in a mere tweaking of provisions and a couple of updated chapters.”

Expert observers, including Scotiabank Chief Economist Jean-Francois Perrault, caution against reading too much into such rhetoric, however. Whatever the public posture, the success or failure of the talks rests on private give-and-take.

When it comes to giving, though, there is one thing Canada is highly unlikely to offer: NAFTA’s system of settling disputes over trade and investment. These panels and tribunals put such arguments in the hands of acknowledged experts who determine whether actions by a corporation or a government (such as alleged dumping, unfair subsidies or other trade barriers) contravene the overall agreement.

The Canadian perspective on the need for good referees has not budged since the Mulroney government established similar panels as part of the 1987 Canada-U.S. Free Trade Agreement that set the table for NAFTA. That requirement was firm enough that the FTA talks nearly broke down over it.

“The idea that there is a mechanism to resolve trade irritants and disputes is a fundamental building block of a trade agreement,” says Scotiabank’s Perrault, noting that a more evolved dispute settlement system is built into the new Canada-European Union trade agreement.

The U.S. administration seems to disagree. When Trade Representative Lighthizer released the formal Summary of Objectives for the NAFTA Renegotiation on July 17, one point puts it bluntly: Eliminate the Chapter 19 dispute settlement mechanism.

“The fact that the Americans have put this on the table is a serious concern to the Canadian government -- and to the Mexican government,” says Perrault.

“The idea behind these things is that, if you are signing international trade agreements, you need some kind of a supranational legal mechanism to ensure that country lives up to their commitments, so you’re not beholden to the findings of the Canadian trade remedy system or the American trade remedy system or the Mexican trade remedy system. There is a kind of a third party adult in the room that rules on the basis of the agreement that was signed.”

What could Canada give up?

There are reasons to believe that the U.S. administration’s distaste for expert panels may be driven as much by political considerations as commercial reality. For one, the Americans usually win.

“Not only do they mostly win,” says Perrault, “the few times where we have won, the Americans typically have not implemented the decision. Softwood lumber is an example of that.”

Furthermore, Perrault notes, there is little indication that the U.S. business community sees the tribunals as an issue.

“I think the business community in the U.S. values that aspect of the deal because it provides them protection against actions we have taken -- and they have won most of the cases they have brought forward,” he says. “So the Americans have benefited from this more than we have.”

But the NAFTA negotiations are overseen by political leaders with their own agendas. And their own timetables: a summer 2018 general election in Mexico and fall 2018 U.S. Congressional elections have injected an atmosphere of urgency into the talks. If pressure mounts to make the deal on a deadline, what might Canada give up in order to preserve the dispute-settlement system?

Perrault points out two bargaining chips that could have considerable impact on consumers and businesses: cross-border shopping and intellectual property rules. Both have bargaining value, but both would present the Canadian government with problems.

The cross-border shopping issue revolves around the U.S. suggestion that Canada and Mexico harmonize their rules on the value of goods that consumers can carry, or have shipped to them, across the border without paying duty. These are referred to using a legal expression, in Latin: de minimis rules. They might best be described in contemporary language as the Amazon Limit.

For now, Canadians shopping online may buy up to $20 worth of goods from an American retailer before paying duty. For Mexican shoppers the duty free limit is about USD 300. The American limit is USD 800. Significantly cranking up that limit in Canada could have enormous impact on the retail sector, which employs more than 1 in 10 working Canadians, by making online purchases from Amazon and the like much cheaper for Canadians.

That presents a tough choice for the government, Perrault says: “Do you do something that’s of clear benefit to consumers over firms, or the other way around?”

Intellectual property rules cut to the heart of another perennial concern for Canadians: health care costs. Intellectual property includes drug patents, for which Canada’s rules are very different from those in the Unites States.

“We have much less protection for patents for medications and patents in general than the U.S., and therefore have a much more dynamic generic drug industry,” says Perrault. “The Americans want to change that. So there is a potential there that leads to higher drug prices.

Disrupting retail and driving up drug costs could have serious implications. More serious, though, are the likely results of a failed NAFTA negotiation. Failure to resolve the three nations’ differences could have grave consequences, destabilizing a continental economic zone of 470-million people who generate one-quarter of the world’s GDP.

Next week: Assessing the risks of failure and the consensus gap on costs and benefits of NAFTA.