NAFTA

In the USMCA Ratification Battle, A Big Tariff Fight Is Brewing

For those of us who support the North American Free Trade Agreement (NAFTA), the renegotiation process had us at the edge of our seats each day.  Would the three parties be able to reach agreement? If not, would the Trump administration try to withdraw from NAFTA? And if so, would Congress act to stop the withdrawal? When the newly minted U.S.-Mexico-Canada Agreement (USMCA) was signed last November, there was a brief reprieve from the stressful, high-stakes negotiations.

U.S. Trade Policy Agenda in 2019? Fixing What’s Been Breaking Since January 20, 2017

Upon taking office in 2017, President Trump accused trade partners of underhandedness, demonized U.S. companies with foreign supply chains, and perpetuated the false narrative that trade is a zero-sum game requiring an “America First” agenda. He withdrew the United States from the Trans-Pacific Partnership, threatened to pull out of North American Free Trade Agreement and the Korea-U.S. Free Trade Agreement, and initiated a war of attrition against the World Trade Organization by refusing to endorse any new Appellate Body judges until his unspecified demands were met.

NAFTA 2.0: The Best Trade Agreement Ever Negotiated (Except for All of the Others)

The text of the new “United States-Mexico-Canada Agreement” was released last Sunday night, a few hours after I had spoken at an event in Birmingham, England about the virtues of “The Ideal U.S.-U.K. Free Trade Agreement.” To borrow from the late Sen. Lloyd Bentsen: I know the ideal free trade agreement; USCMA, you’re no ideal free trade agreement.

The ideal free trade agreement is one which accomplishes maximum market barrier reduction, enables maximum market integration, forecloses governments’ access to discriminatory protectionism, and obligates the parties to refrain from backsliding.

As explained in the paper:

The ideal free trade agreement provides for the elimination of tariffs as quickly as possible on as many goods as possible and to the lowest levels possible. It should limit the use of so-called trade remedy or trade defense measures. It should open all government procurement markets to goods and services providers from the other party. It should open all sectors of the economy to investment from businesses and individuals in the other party. It should open all services markets without exception to competition from providers of the other party. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or more of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations…

…[T]he ideal FTA must also include rules governing e-commerce. Digital trade — data flows that are essential components in the provision of goods and services in the 21st century — must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architectures that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.

When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. Certainly, when businesses have to comply with two sets of regulations to sell in two different markets, it limits their capacity to realize economies of scale and reduces their capacity to pass on cost savings in the form of lower prices or reinvestment.

If those regulations are comparable when it comes to achieving the same social outcomes — consumer safety, product reliability, worker safety, environmental friendliness — there may be scope to require businesses to comply with only one set. A regulatory cooperation mechanism to promote mutual recognition would be a useful innovation, as a means to reducing business costs (provided no deep cultural aversion or science-based reason exists for considering one regulation better than the other and worth the greater cost).

Finally, the rules of the ideal FTA must be enforceable. What’s the point of a trade agreement if its terms are just suggestions? To make sure governments keep their promises, trade agreements should have a binding and enforceable dispute settlement mechanism, to ensure that the agreement is followed.

Here’s how the USMCA stacks up to the ideal free trade agreement, which:

  • Would provide for the elimination of tariffs as quickly as possible on as many goods as possible and to the lowest levels possible.

In USMCA, most goods trade will continue to be tariff-free (the NAFTA status quo) under the new agreement, and barriers to certain agricultural products will be reduced as well. Moreover, the value thresholds for importing goods without having to pay any duties have been raised in Mexico and Canada, which will benefit small businesses, disproportionately, as they tend to conduct a larger share of transactions online.

(Conclusion: Criterion is almost met).

  • Would limit the use of so-called trade remedy or trade defense measures.

Trade remedy laws give domestic industries recourse to trade restrictions when they can demonstrate injury caused by “dumped,” subsidized, or substantially increasing imports. These laws are prone to misuse and abuse and become loopholes through which the benefits of trade barrier reduction achieved in the agreement can be quickly rescinded.  

In USMCA, no restrictions on the use of antidumping, countervailing duty, or safeguard measures are made. Rather, the long arm of the Safeguard law extends further under the revised deal by making it more difficult for Canadian and Mexican exporters to be excused from prospective safeguard tariffs. Moreover, the failure of the United States agreeing to blanket exemptions for Canada and Mexico from prospective tariffs on imported automobiles under Section 232 of the Trade Expansion Act of 1962 and the failure of the United States to remove the existing Section 232 tariffs on Canadian and Mexican aluminum and steel—thereby enshrining the view of Canada and Mexico as threats to U.S. national security—is in extremely poor taste, violates the spirit of a trade agreement, and reflects an absence of understanding of the meaning of being a good trade partner. 

(Conclusion: Criterion worse than unmet.)

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).

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.

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.

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.

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.

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.

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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