Tag: NAFTA

Towards a New North American Free Trade Agreement (in Principle)

After a brief hiatus during the run up to the recent Mexican elections, negotiations on the North American Free Trade Agreement (NAFTA) are in the news again, with hints of an agreement by the end of August. We have heard talk of an imminent agreement before and the chances of an agreement within the month may not be very high, and even if it does happen it may be more of an “agreement in principle” with many details still to be worked out. Nevertheless, with the renewed interest, we thought it was worth breaking down some of the key remaining issues (there are a lot of them, which helps illustrate the amount of work still left to do!).

Rules of Origin (RoO) for Autos

This is the focus of the current talks taking place between the U.S. and Mexico (Canada does not appear to be actively involved, perhaps because it does not have strong feelings about some of the outcomes here). In essence, the Trump administration wants to tighten the requirements for having trade in autos benefit from zero tariffs. In this regard, the U.S. wants to increase the percentage of content that must be from North American sources (currently the figure is 62.5%; the U.S. proposed raising it to 85%, and press reports suggest that 75% is the figure being discussed now). It also wants a percentage of the autos to be made by workers who make above a certain hourly wage (reports suggest that the current U.S. proposal is that 40% of light-duty vehicles and 45% of pick-up trucks are to be made by workers that make as least $16 an hour).

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To Keep NAFTA Humming, Keep Talk of Steel Out

The 7th round of negotiations on the North American Free Trade Agreement (NAFTA) wrapped up early this week, and ended on a relatively positive note.  There was a noticeable change in tone in the joint press conference with USTR Lighthizer, Minister Freeland and Secretary Guajardo, which NAFTA watchers certainly must have noticed.

The first striking detail was actually something that was omitted. Though Lighthizer did say that the two major goals of the administration were to update and rebalance the deal, he didn’t once utter the phrase trade deficit. Instead, he highlighted discouraging outsourcing, likely referring to the U.S. proposals to eliminate the controversial Chapter 11 on investor-state dispute settlement (ISDS); strengthening rules of origin by increasing the content of North American inputs in automobile manufacturing; and adjusting the rules on government procurement, through a “more balanced” dollar-for-dollar procurement market. It should come as no surprise that he is still pushing in these areas, as there is much left to negotiate, and concessions on these issues will not likely be settled until the final rounds of the agreement take shape.

So far, the three countries have closed a total of 6 out of 30 chapters, most recently finishing the chapters on Good Regulatory Practices, Administration and Publication, and Sanitary and Phytosanitary Measures. Though the three ministers all stressed the importance of timing, considering the upcoming Presidential elections in Mexico, as well as mid-term elections in the U.S., Freeland made clear that Canada would not be satisfied with just any deal. Lighthizer seemed to suggest this as well, but said that while the U.S. preferred a tripartite agreement, he would conclude bilaterals, if necessary. This light jibe is in line with previous reports that Lighthizer thinks the talks are moving a lot more smoothly with Mexico than with Canada.

The overall positive tone was only briefly interrupted when Freeland addressed President Trump’s announcement last week that he would impose a 25% tariff on steel and 10% tariff on aluminum imports. She reiterated the message from her official statement that any tariffs on Canada would be “entirely inappropriate.” A comment on this was to be expected, not least because Canada would be the country most affected by the administration’s actions. In fact, a December 2017 report by the International Trade Administration noted that Canada leads in steel imports to the U.S., making up 16% of total imports. The Canadian and U.S. steel sectors are also highly integrated, with 50% of all American steel exports destined for Canada.

What remained unacknowledged, however, were recent comments by President Trump that the tariffs would be tied to satisfactory progress on the NAFTA negotiations. The three ministers seemed to signal that they prefer to keep the discussion on steel tariffs separate from NAFTA. This would be wise. First, linking the Section 232 actions to NAFTA undermines the overall national security argument put forward by the administration, as it is now being used by the president as a bargaining chip. Second, it would run counter to the spirit of NAFTA, which is of three neighbors working together to increase North American competitiveness. The Department of Defense even expressed its concern “about the negative impact on our key allies” that the steel and aluminum tariffs would bring about. Third, linking this issue to the ongoing negotiations could seriously threaten to derail the talks, which the administration simply cannot afford due to its tight negotiating timeline.

While the NAFTA negotiations have had their ups and downs in seven successive rounds, it is important to keep in mind that things can change very quickly. In Monday’s press conference Freeland, addressing Lighthizer, said “I think we’re becoming friends.” Let’s not upset the progress we’ve made so far on NAFTA, as well as the friends we’ve made along the way, and keep steel out of the discussions.

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NAFTA Round 6: What To Watch For

Trade negotiators from Canada, Mexico and the United States will meet in Montreal next week for a crucial round of talks on renegotiating NAFTA. This is the 6th round of negotiations, and the major demands and proposals are now on the table. Can the parties begin to work out their differences and make progress towards a deal? Here are some key issues to watch.

Poison Pills

The United States (i.e., the Trump administration) was the only NAFTA country that was pushing to renegotiate the existing agreement, so its views are important for determining whether a new NAFTA can be worked out. The Trump administration has made a number of proposals that are probably unacceptable to Canada and Mexico (and also to many members of Congress, as well as other groups). These have been referred to as “poison pills,” with some speculation that the administration offered them in the hopes that the proposals would kill the talks and give the U.S. an excuse to withdraw from NAFTA. Three of the biggest poison pills are:

– A weaker enforcement mechanism for policing violations of the agreement (not weaker than most areas of international law, but a big step backwards from what currently exists in U.S. trade agreements).

– A “sunset clause” that would have the agreement expire after five years unless the parties affirmatively decided to renew it.

– A requirement that in order for automobiles to benefit from the zero tariffs under NAFTA, 50% of their content must be from U.S. sources.

The key question for these proposals is whether the U.S. is going to keep insisting on them, or whether it is willing to accept less (e.g., a review mechanism rather than an automatic expiration clause) or even, ideally, to abandon the proposals completely.

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Strange Bedfellows Event: Investor Protections in the NAFTA Renegotiation

It isn’t very often that free traders at the Cato Institute and the anti-corporate left agree on matters of trade policy. We free traders oppose barriers and subsidies and seek straightforward, nonintrusive rules to ensure an equality of opportunity for businesses, workers, investors, and consumers. The left tends to see those rules as asymmetrically beneficial to business and seeks to leverage trade barriers and subsidies to achieve what it defines as a greater equality of outcome. Those fundamental differences explain why you would see very little overlap in a Venn diagram depicting the policy objectives of Cato’s trade center and, say, Joseph Stiglitz or Public Citizen’s Global Trade Watch.

But a shaded intersection does exist. It exists because free traders are not “pro-business” to the left’s “anti-business.” We are “pro-market.” Accordingly, we are skeptical of rules or policies that tip the scales in favor of one interest group over another. That’s called protectionism. 

Investor-State Dispute Settlement (ISDS) is one such example. ISDS provisions are intended to ensure that foreign investors—usually companies that have acquired or established operations abroad—are protected from actions or policies of the home government that fail to meet certain standards of treatment and that cause the investor economic harm. ISDS confers special legal privileges on foreign-invested companies, including the right to sue host governments in third-party arbitration tribunals and win damages for failing to meet those standards. 

One might immediately understand why the left would take issue with special provisions that enable multinational corporations to challenge governments’ efforts to regulate them, but there are many problems with ISDS from a free-market perspective, as well. 

Join us tomorrow on the Hill for a discussion. Panelists include:

  • Joseph Stiglitz, Nobel Prize-winning economist and professor at Columbia University
  • Dan Ikenson, director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies
  • Bruce Fein, Fein & DelValle, PLLC constitutional law expert and associate deputy attorney general under President Ronald Reagan
  • Lori Wallach, director of Public Citizen’s Global Trade Watch
  • Moderator: Adam Behsudi, trade reporter for Politico

 

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With Back-to-Back Bombshells, Trade Terrorism Hits the Global Aircraft Industry

This afternoon, the U.S. Department of Commerce announced the preliminary results of its antidumping investigation in large civil aircraft from Canada, launched at the request of the Boeing Company in May. Commerce “calculated” dumping margins of 79.82 percent for Bombardier—the only Canadian aircraft producer in this market—which becomes the rate of duty that any U.S. purchaser would have to post with U.S. customs upon importation. This penalty comes on top of last week’s assessment of 219.63 percent subsidy margins in the companion countervailing duty case.

It goes without saying that neither Delta Airlines (the intended customer) nor any other U.S. carrier is going to pay a 300 percent tax to purchase these aircraft. Unless the U.S. International Trade Commission rules in February 2018 that Boeing is not threatened with material injury by these proposed Bombardier sales, the orders will go into effect (requiring approximately 300 percent duties, although those figures will change—but probably only slightly—between the Commerce preliminary and final), putting the U.S. market out of reach to Bombardier, and Bombardier aircraft out of reach to the U.S. carriers, who need these smaller planes (which Boeing doesn’t even produce) to serve less-travelled routes efficiently.

In a previous post, I described some of the methodological shenanigans that Commerce was likely to perform in this case. Confirmation of those and other capricious decisions will be possible after the official analysis memo is released.  But, if the ITC finds “threat of material injury” to Boeing by reason of these “unfair” prospective Bombardier sales, and AD and/or CVD orders are imposed, in all likelihood, there will be some major issues that Bombardier or Delta will want the U.S. Court of International Trade (or a NAFTA Chapter 19 panel) to review and determine whether Commerce acted beyond its authority.

Even if the ITC goes negative in February—finds no threat of injury—the market for the next 5 months will be in a state of suspended animation.  Uncertainty will rule.  Bombardier will not know how to proceed.  Should it build the aircraft in anticipation of exoneration?  Should it seek other markets? Will it be able to service its debt and keep its workforce? Delta and the other airlines will have to put off plans to modernize their fleets, while remaining unable to perform reliable cost-benefit analyses. The specter of a long adjudicative process offers only distant relief, with plenty of distortions and inefficiencies to endure in the interim.

The U.S. trade laws are a form of economic terrorism. They are deployed unexpectedly and with stealth; they cripple their intended targets, while generating enormous amounts of collateral damage to other companies, industries and jobs; and they cast a long shadow of uncertainty over the costs and conditions of operating in the market prospectively. 

Maybe the political and economic fallout from this case will bring scrutiny of these laws to the level they have long deserved.

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Boeing-Bombardier Round II: Blame Trade Remedy Laws, Not Trump

The other shoe is about to drop in the Boeing-Bombardier trade row.  But first, some background…

Last week, smack dab in the middle of the third round of the NAFTA renegotiations taking place in Ottawa, the U.S. Department of Commerce issued a preliminary determination in a countervailing duty case brought by the Boeing Company in May. The Countervailing Duty Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of sales of subsidized imports.  

In early summer, the U.S. International Trade Commission ruled, preliminarily, that there was a reasonable indication that U.S. manufacturers of large civil aircraft (i.e., Boeing) may be threatened with material injury by reason of prospective sales of aircraft from Bombardier to Delta Airlines, which may be offered at artificially low prices made possible by various government subsidies to the Canadian producer.

Subsequently, Commerce’s investigation turned up 16 different subsidy programs—equity infusions, launch aid, “provision of land for less than adequate remuneration,” various tax credits and incentives, and federal and provincial grants—constituting specific benefits to Bombardier by the governments of Canada, the United Kingdom, and the province of Quebec, which amounted to an aggregate subsidy rate of 219.6 percent ad valorem. 

By historical standards, that is a very large number. If finalized at that rate, the duty would put the U.S. market out of reach to Bombardier and—of greater significance to the U.S. economy—put Bombardier airplanes out of reach to U.S. carriers, reinforcing Boeing’s monopoly power, and ensuring higher costs of air travel and air shipping in perpetuity.

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Regulatory Cooperation Makes Its Debut in NAFTA Round 2

Round two of the NAFTA negotiations wrapped up early this week, without any major new developments. Of course, it is still very early in the process, and until the parties propose actual text for particular chapters, it is difficult to assess how bargaining will unfold. However, there are some issues where the positions of Canada, Mexico and the United States are fairly well known. One such issue, which Canada raised in the second round, is the inclusion of provisions on regulatory cooperation. As I’ve written with my colleagues in a recent working paper, a chapter on regulatory cooperation would be beneficial to an upgraded NAFTA.

First, as traditional tariff barriers have decreased over time, many of the remaining trade frictions take the form of so-called non-tariff barriers. Among these are the various regulations and standards that different countries utilize to regulate their product markets. There are a wide range of reasons these rules may differ—protectionism, consumer preferences, or divergence resulting from regulating in silos. The first of these is already addressed at the World Trade Organization (WTO). The second can entail things like consumer attitudes towards genetically modified foods (GMOs). The third is the range of issues that make up the bulk of what would be addressed in any type of regulatory cooperation forum. Examples include differences in the dimming technology for headlights used in vehicles, or the size of soup cans.

In 2011, there were two bilateral initiatives between the U.S. and Canada and between the U.S. and Mexico to address this type of regulatory divergence (outside of the NAFTA framework). The initiative with Mexico, the High-Level Regulatory Cooperation Council, did not achieve much progress, though Mexico has remained a supporter of regulatory cooperation initiatives. However, the U.S.-Canada Regulatory Cooperation Council had some notable successes, though progress has been very slow. For example, Health Canada and the Federal Drug Administration created a common electronic submission process that allows for a single application to both agencies for pharmaceutical and biological products; progress was also made in establishing mutual recognition of foreign animal disease zoning, as well as a joint review process for crop protection products. Given that this initiative has been in place for six years, however, criticism of the limited number of outcomes is not misplaced.

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