NAFTA: Litmus Test on a Deal Will Come Over Next Few Days

January 25, 2018 Last Updated: January 25, 2018

MONTREAL—A pair of Canadian proposals over the next few days will provide a litmus test on one of the biggest questions looming over this country’s politics, economics, and international relations: Can a new NAFTA deal be achieved?

The coming days could clarify that as Canada reaches out with ideas intended as an olive branch on two of the most acrimonious topics of the NAFTA negotiations: the rules for autos, and those for resolving disputes.

Sources say the Canadians intend to suggest changes to the dispute mechanism under Chapter 11 that allows companies to sue governments for unfair treatment, which the United States wants to weaken by making it voluntary.

That’s on top of a Canadian move designed to shift the conversation on autos: Canada will propose an overhaul of the formula for calculating where a car comes from, to include intellectual property and emerging technologies.

The big unknown is how the United States will respond.

If it engages, the countries will suddenly be involved in back-and-forth bargaining on the most troublesome parts of NAFTA. If it shoots down the ideas outright, the countries will remain entrenched in distant positions.

Canada’s chief negotiator said he’s hoping for movement.

“We’ve come to Montreal with a lot of new ideas—a lot of creative strategies to try to bridge some of the gaps,” chief negotiator Steve Verheul told reporters Jan. 23.

“We have high hopes for making progress this week but of course it depends on the other partners as well. We’re here to negotiate. We hope the others are as well.”

Insiders view this round as instrumental. There are just two rounds left before the current schedule of talks runs out in March, at which point U.S. President Donald Trump faces a dilemma on what to do with NAFTA.

Trump has suggested he could start cancelling NAFTA to get a better deal, or pause the talks during the upcoming election calendar. Mexico holds a presidential vote in July, followed by the U.S. midterms later this year.

An auto-parts stakeholder says this round is key.

“Canada, Mexico, and the U.S. will go back to their respective capitals and they’re [hopefully] going to be able to say whether we’ve actually got something or not—or whether it’s a waste of time,” said Flavio Volpe of the Canadian Auto Parts Manufacturers’ Association.

The United States has identified autos as a top priority in the talks.

The proposal from Canada is designed to shift the conversation away from American demands for greater U.S. and North American content for vehicles to qualify for duty-free movement across borders—a demand derided by the industry as destructive to North American competitiveness.

Volpe said the idea of including non-material things like IP costs in the calculation would be less damaging since the United States already dominates the field—and it would help North America compete as a bloc against the growing Chinese auto sector.

The American auto sector is favourable to the approach.

In a letter this week to U.S. trade czar Robert Lighthizer, the U.S. Motor and Equipment Manufacturers Association suggested including research and development, engineering, design, and software development expenditures in calculating whether a car counts as North American.

There are some things Canada does not intend to raise this week, according to sources. These include irritants over dairy, and the United States desire to eliminate the Chapter 19 dispute settlement mechanism, which allows industries to fight abusive punitive duties.

That dispute chapter was a fundamental condition of Canada entering into free trade with the United States and has been used in high-profile cases—including current skirmishes over softwood lumber and Bombardier.

Earlier this week, Volpe was critical of Canada joining the new Trans-Pacific Partnership, saying it was inconceivable that Ottawa would sign a deal that does the opposite of what its No. 1 customer—the United States—wants.

“This could not be a dumber move at a more important time,” he said, accusing the government of chasing a legacy item without regard for how it might affect the far more important NAFTA negotiations: “We’re trophy hunting.”

From The Canadian Press