NAFTA Negotiations
The exploration of two possible outcomes of the NAFTA negotiations
Scenario:
It’s the eighth and final round of NAFTA negotiations. President Trump has declared this is the last chance to ‘Make a Deal.’ Chief negotiators and senior ministers, including lead Canadian negotiator Steve Verheul and his American counterpart Robert Lighthizer, gather in Washington, prepared to negotiate through the night, tackling problems with softwood lumber, auto, steel and labour that have eluded agreement thus far. Canada, the US and Mexico have reached a fork in the road: find a way to renegotiate NAFTA to the satisfaction of all parties or fail and run the risk of economic isolation and upheaval.
Regardless of whether NAFTA is successfully re-negotiated and improved or fails completely, Canada must respond. Its options are to either mold NAFTA to continue to serve its interests or seek out new trade agreements. Succeed or fail, the United States and Canada remain neighbours and must find a way to work together with respect to their economies.
General Background
NAFTA negotiations have become an intensely debated topic as a result of President Trump’s anti-trade rhetoric. In recent months, NAFTA has sparked accusations that it is the “worst deal ever” and is impeding American economic growth.[1] President Trump has objected to NAFTA with respect to steel imports, and has threatened tariffs to protect American industries and national security. Canada and Mexico currently benefit from an exemption from tariffs on steel and aluminum, but Trump has set a May 1st deadline for metal negotiations. This deadline puts extreme pressure on negotiations, and the likelihood that negotiations will wrap up before the Mexican presidential election on July 1st and US congressional elections in November 2018 is slim. NAFTA has becomes embroiled in domestic politics and is a prominent issue in both elections.
There have been many areas of contention in the negotiations, including Trump’s content demand on automobiles built in North America, which Canadian negotiators have rejected as unacceptable; Trump’s tweet accusing Canada of treating American farmers unfairly, and his demand that NAFTA must be re-negotiated every five years or become null. The automotive and agricultural sectors have historically been contentious, linked to questions of jobs and livelihoods, which are lightning rods for domestic political debate and discord
Option 1
NAFTA is successfully renegotiated
In a last ditch effort, the United States, Canada, and Mexico reach an agreement on a renegotiated NAFTA. The key areas to this agreement relate to steel, the auto industry, lumber and labour mobility.
2. Softwood Lumber
Current Resources and Inputs
Softwood lumber has been one of the longest and most important trade disputes between the United States and Canada.[6] While the two nations have traded lumber since the 1800s, it has always been a source of tension between them, particularly since the election of Donald Trump who ran on a platform of “ensuring fair trade for the United States” even if that meant using protectionist trade policies.[7] Since his inauguration, President Trump has specially targeted the Canadian lumber industry with heavy import tariffs.
A Timeline of Softwood Lumber Disbutes
February 2017
Concern about increasing duties on Canadian lumber exports to the U.S. has made the prices of Canadian S-P-F and Western Red Cedar jump. Some Canadian mills speculate that duties could be 30%.
April 2017
The U.S. Department of Commerce issues its preliminary determination in the countervailing duty case, with duties levied against Canadian lumber exports to the U.S. averaging 19.88%.
May 2017
President Trump files a 90-day notice with Congress on May 18, stating a desire to renegotiate NAFTA with Canada and Mexico. With those talks set to begin in mid-August, time to work toward a Softwood Lumber Agreement is shrinking.
June 2017
The U.S. Department of Commerce announces its preliminary determination in the anti-dumping (AD) duty case June 26. The average AD rate assessed is 6.87%, which combined with a preliminary CVD rate of 19.88% means most Canadian shippers will pay total duties of 26.75% on exports to the U.S.
July 2017
Rumors circulate that Commerce Secretary Wilbur Ross and Canadian Minister of Foreign Affairs Chrystia Freeland reached a handshake agreement in the softwood lumber dispute. Sources say the deal would involve a quota on Canadian shipments to the U.S. that would limit Canada’s market share in the U.S; it would reportedly begin with a 31% market share and decrease to 28%.
August 2017
Hopes that a new U.S.-Canada Softwood Lumber Agreement can be reached before NAFTA talks begin on August 16 appear slim. Canada’s ambassador to the U.S. says the two sides are close to a deal that would give Canada roughly a 30% share in the U.S. lumber market
November 2017
Days ahead of its deadline, US Commerce announces its final determinations in the CVD/AD investigations on November 2. Most Canadian shippers will pay combined duties of 20.83% on lumber shipments to the U.S., which is down from the preliminary rate of 26.75%.
Softwood Lumber Talks
Following the final U.S. duties on Canadian softwood lumber, Canadian Foreign Affairs Minister Chrystia Freeland released the following statement
“U.S. duties on Canadian softwood lumber are unfair, unwarranted and troubling. They are harmful to Canada’s lumber producers, workers and communities, and they add to the cost of home building, renovations and other projects for American middle-class families. Canada has already begun legal challenges of these duties under NAFTA and through the WTO, where Canadian litigation has proven successful in the past… Canada will also continue to engage with the U.S. Administration and with American legislators to come to a new agreement on softwood lumber.”[8]
U.S. trade czar Robert Lighthizer denounced Canada’s WTO complaint as
a “massive attack on the American system of international trade.”[1]
At the heart of the fight over lumber are contrasting approaches to lumber regulations. In Canada, companies can lease forested land in order to harvest timber at a price set by the provincial governments. This means that the “stumpage fees” (the price a private firm pays for the right to harvest timber from a given land base) paid by Canadian producers is kept artificially low by provincial governments. The stumpage fee in B.C. differs according to the type of tree, but across the board does not exceed CAD $10 per meter cubed.[9] In the view of American competitors, this subsidy is unfair.
In contrast, since the land in the United States is owned by the private sector, companies engage in various buyer/seller techniques where the price is dictated by the open market. The United States has often stated that since Canadian lumber firms do not compete for land access, the Canadian system leads to artificially low prices which makes them competitive with the US producers. Washington has also made it clear that they will continue to levy these taxes and tariffs on Canadian softwood until Ottawa agrees to put in place measures to make the process more competitive—such as a bidding process or allowing American firms to have access to raw Canadian timber.
The Breakthrough /Policy Recommendation
Canada and the United States have agreed to a two-pronged approach to softwood lumber.
1.
American Lumber Firms Can Apply for a Permit to have access to Crown lands
-
Under this renegotiated deal, American firms can now apply to the federal/provincial government requesting access to excavate timber from government owned lands. In other words, American competitors will have access to the same subsidy as Canadian producers.. This stump age fee would be paid to the provincial government, and the American firms will then ship the lumber back to the United States under a set tariff price of 13%.
2.
Canada and the United States agree to continue the quota/limited tariff model already in place on Canadian lumber exports.[10]
-
Under the current model, provinces have the autonomy to choose how their lumber exports will be taxed when entering the United States. Since British Columbia and Alberta collectively account for 60 per cent of Canada’s lumber exports, the opt for a tax. However, Manitoba, Saskatchewan, Ontario and Quebec opt for a combined tax and quota model.
4.Open-Border US-Canada Labour Mobility
Background
With the onset of talks on NAFTA’s renegotiation, Canadians working in the United States under treaty auspices will be affected. Specifically, the TN Visas, granted as NAFTA exemptions to the usual H-1B visa, will have to be re-imagined and re-vamped. In some ways, labour mobility in the European Union serves as a good model for the new-and-improved mobility of Canadian workers in the US.
The TN visa is a NAFTA provision that allows highly skilled Canadians and Mexicans to work in the US, and is a much faster alternative to the standard American work visa, the H-1B.[20] In order to obtain a TN visa, Canadians must have proof of a valid job offer from a qualifying employer in the US, and must have proof of Canadian citizenship. The list of occupations which qualify for TN visas range from biomedical researchers to accountants, to geographic land surveyors.[21] All of the jobs listed are high-skill jobs, requiring potential travelers to have a minimum degree or relevant experience.
Importance
Estimates state that an average of 60,000 TN visas have been issued to Canadians every year since 2003.[22][23][24] It is difficult to gauge the accuracy of this statistic, since some Canadians end up settling in their place of employment and acquiring green cards, while others repatriate to Canada after only a short time.[25] Regardless of these nuances, there is a clear demand for Canadian labour in the US.[26] The TN visa is an important section of NAFTA negotiations that needs to be considered in the midst of changes.
Recommendations
1.
Outdated Job List
The current TN visa system, established in the initial drafting of NAFTA in the early 1990s, contains a few major problems that could be overcome if current talks yield a more open border policy. The list of qualifying jobs outlined in the TN visa provisions is outdated; it does not account for the rise of the internet, automated technology, and artificial intelligence.[27] Seeing as these sectors make up a large part of both Canadian and American economies, tapping into that pool of talent could be a beneficial update to the current visa system.[28]
2.
Canadian ‘Brain Drain’
Critics of the TN visa claim that it encourages a “brain drain” from Canada to the United States. Namely, the concern is that highly qualified Canadians end up contributing their skills to the American economy, rather than their own. If NAFTA is re-negotiated to pursue more open borders and allow for more movement into and out of America, then Canadians will have more opportunity to bring their skills back to Canada after valuable experience in the US.[29] A ‘thinner’ border means short-term employment would be more feasible than it currently is; Canadians would not necessarily be tied to a job in the United States indefinitely.
3.
Universal Education Standards
A final problem with the TN visa system is that it does not account for the different education standards employed by the US, Canada, and Mexico.[30] For example, a technical degree acquired in Canada for a specific trade is not the equivalent of a college degree in the same trade in America. Renegotiating NAFTA and the TN visa would address these problems by outlining a universal standard of education, applicable to all three parties to the treaty. By setting these standards, an open border policy could operate efficiently, without the problem of confusion over qualified and unqualified individuals.
These recommendations, while by no means exhaustive, address not only the innovation of an open border policy between the United States and Canada, but are improvements to the TN visa system that should take place regardless. An outdated, decades-old immigration policy can only account for so much in the realm of labour mobility. Updates and improvements, a la European-style open borders, would be be beneficial to Canadians and Americans alike.
Option 2
NAFTA negotiations are unsuccessful and the agreement collapses:
Solution 2:New dispute resolution mechanisms
Were NAFTA to collapse, it would be an opportunity to improve the dispute resolution mechanisms. Currently, chapters 11 and 19 outline the dispute resolution process. Chapter 11 calls for international commercial arbitration, whereas chapter 19 calls for a binational panel. This is particularly relevant to B.C., as the tensions surrounding softwood lumber are high and because Trump has signalled his desire to repatriate dispute resolution.
"The government of Canada will continue to vigorously defend our industry and its workers against protectionist trade practices," Freeland said.[54]
A re-negotiation of NAFTA would rely heavily on the framework provided by the Commercial Arbitration and Mediation Centre for the Americas. CAMCA was founded to provide an “impartial international forum devoted to facilitating the resolution of private commercial disputes” that arose due to NAFTA [55]. Because it is an entirely international body that operates outside of national courts, the fear of possible unfairness is mitigated. Furthermore, CAMCA focuses on arbitration, which is far less polarizing than litigation and promotes rapprochement and future cooperation. A fully international dispute resolution mechanism is key in creating successful bilateral treaties and can weather intense disputes.
Considering the fact that Canada has called for a WTO adjudication panel to address the issue of lumber exports, it is clear that tensions with the United States are high. What is not clear is that the WTO is the best option to resolve the issue of countervailing and anti-dumping. Canada is taking its complaints to the WTO as a response to the United States’ rejection of chapter 19, which the US has argued is unnecessary because the WTO exists.[] Given the less than effective outcomes of the WTO decisions on softwood lumber, moving to embrace CAMCA would increase the likelihood of Canada and the United States coming to agreement, and would reduce antagonism.
Conclusion
Whether it is re-negotiated or scrapped altogether, updates to NAFTA represent a need to keep up with the changing face of US-Canadian relations. While it is undeniable that the relationship between the two neighbours is essential to their prosperity and security, it cannot be pursued effectively without cohesive policy. The key actors in the future of NAFTA, namely the industries and provinces implicated in its policies, must convene to push their priorities in an productive manner. For the automotive, softwood lumber, and steel industries, this means economic policy innovation to encourage more efficient trade. For the provinces, this means collaboration and increased policy cooperation to capitalize on trade with the U.S. In sum, NAFTA needs to keep up with the dynamic nature of trade across the world’s longest undefended border - these recommendations are a part of how this can be achieved.