North American trade pact back to ‘good old days’ of trade disputes

June 30, 2021

By: The Working Forest Staff

HILLTIMES.COM — After a year with the new NAFTA in place, Canada has returned to stability in its North American trading relationship, but historic disputes continue, say analysts. Gone are the threats for the North American trade deal to be withdrawn, but in its place remain long-standing disputes over Buy American provisions, softwood lumber, and access to Canada’s dairy sector.

CAPTION: While the threat of having NAFTA ripped up is no longer a present danger, the North American trading relationship remains fraught with the typical irritants. Prime Minister Justin Trudeau, middle, still has to handle the delicate relationship alongside U.S. President Joe Biden, left, and Mexican President Andrés Manuel López Obrador. The Hill Times photograph by Sam Garcia and photographs courtesy of Wikimedia Commons

“It’s a return to the good old days of NAFTA—where we were fighting over softwood lumber, fighting over supply management, fighting over grain grading—as opposed to the Trump era which was just total insanity,” said Carlo Dade, director of the trade and investment centre at the Canada West Foundation.

“The small problems that we have with the agreement are a sign of return to the old normal,” he said.

Mr. Dade said the “old normal” was about “constant vigilance” on issues in which Canada was in conflict with the U.S.

“We can’t let the fact that things are going well in the old normal disabuse us from the fact that we’ve got to get back to the old line of plugging away every day with the Americans on these issues,” he said.

The United States–Mexico–Canada Agreement (USMCA)—called the Canada-United-States-Mexico Agreement (CUSMA) by the Canadian government—came into force last July 1 after nearly three years of tense renegotiations of NAFTA.

The trade agreement, which marks its one-year anniversary July 1, largely kept many provisions of the original 1994 North American trade pact with changes on Mexican labour standards, and greater access to Canada’s supply management sectors. There was no chapter on government procurement between Canada and the U.S., nor was softwood lumber addressed.

“None of the [current trade issues] are really covered by CUSMA,” said trade consultant Eric Miller, president of Rideau Potomac Strategy Group. “Countries generally do trade agreements to provide certainty around bilateral relationships, but what’s notably absent are things that are problems with the agreement.”

“The headline [issues] are ones that are not covered in the agreement,” he said, adding that with a year into the agreement, “by-and-large, for the most part, things have gone pretty well.”

Mr. Miller said those issues that are currently concerning the Canada-U.S. trade relationship are things that couldn’t have been addressed during the renegotiations of NAFTA.

“The hard truth is trade negotiations are the art of the possible,” he said. “There was no way that Donald Trump was going to do a deal that reaffirmed the openness of the U.S. procurement market to Canada in the new NAFTA.”

U.S. President Joe Biden has continued Donald Trump’s path on protectionist Buy American provisions. While Canada has lobbied Washington on the damages of such policies to the integrated North American market, Mr. Biden has said that exemptions will be “strenuously limited.”

With soaring housing prices, softwood lumber has been put at the front, once again, of the Canada-U.S. trade agenda. An ongoing issue since the 1980s, Canada has said it is committed to negotiating an agreement, but the Biden administration has said Ottawa has yet to engage to address domestic policies that injure the American lumber industry.

Under the CUSMA, American and Mexican farmers gained around 3.5 percent of access to the Canadian dairy market, but Washington has said Canada isn’t allocating its tariff-rate quotas (TRQ) fairly, accusing Canada of allocating quotas to processors and not producers. In response, the U.S. initiated a dispute settlement panel to resolve the issue. International Trade Minister Mary Ng (Markham-Thornhill, Ont.) has said that Canada is in “compliance with our CUSMA TRQ obligations.”

“If you’re a full paying member of the Dairy Farmers of Canada or any of the provincial dairy associations, every day that you continue with the current regime is good for you,” said Mr. Miller, noting that what underlines the U.S. complaint is a view that Canada is respecting the letter of the agreement, but not the spirit. “Which means that, with a reasonable analysis, Canada is poised to win.”

Mark Agnew, senior director of international policy at the Canadian Chamber of Commerce, said the implementation of the new NAFTA has progressed “relatively smoothly.”

“We haven’t seen any major hiccups related to the agreement,” he said. “In many ways, that’s reflective of the fact that it’s largely status quo on the original NAFTA on the really big areas. … That reflects that we haven’t seen major disruptions.”

Mr. Miller said U.S. enforcement of CUSMA is attached to a political process, noting that U.S. Agriculture Secretary Tom Vilsack is concerned with the dairy issue, since he was previously the president of the U.S. Export Dairy Export Council, while U.S. Trade Representative Katherine Tai is more focused on labour standards.

“The screaming for enforcement actions that they hear from the Hill is far louder on Mexican labour than it is on Canadian dairy or anything else,” he said. “Canada, [and] particularly Canadian dairy, is not at the top of the enforcement agenda for anyone other than the agriculture secretary.”

Ohio-based trade lawyer Daniel Ujczo, a Canada-U.S. trade expert at Thompson Hine, said U.S. enforcement action is mostly focused on Mexican labour standards.

“[It’s] a policy imperative, it’s a practical imperative, and it’s a political imperative,” he said. “The only way you are going to build a competitive North America is to have strong labour rights on this continent.”

He added the strong labour enforcement mechanism is the only way CUSMA was approved by Congress.

“The goal of those provisions was to stop the southward shift of manufacturing in North America,” he said, adding that they could help to maintain manufacturing jobs in Canada and potentially lead to new investment opportunities.

Given the pandemic, Mr. Ujczo said, it is difficult to say how the implementation has gone so far.

“The three governments mercifully allowed for a phase-in period last July to December,” he said. “Most companies were just trying to figure out how to keep the lights on last year.”

He added that there’s going to be a great deal of work to do when strong enforcement begins this summer and into the fall.

Ms. Ng met with Ms. Tai and Mexican Economy Secretary Tatiana Clouthier Carrillo for the first meeting of the CUSMA Free Trade Commission in May. During the meeting, the progress of the implementation of the trade agreement was on the agenda, as well as labour standards and environmental protections.

A May 18 joint statement noted that the three countries had “forward-looking discussions on the CUSMA’s landmark labour and environment obligations.”

Former Canadian Labour Congress president Hassan Yussuff, who was appointed to the Senate on June 22, said with the implementation of CUSMA beginning to happen, there is a “real possibility” that there will be “some teeth to the enforcement mechanism,” especially on labour.

“There is a positive sense that these new provisions are going to help Canada,” said Mr. Yussuff, who was a member of the NAFTA advisory board.

He said the “real test” for the agreement will be on enforcement.

“[CUSMA has] much stronger provisions to lift the wages and working conditions in the auto industry. To allow unions to choose their union in a democratic fashion. But more importantly, to not allow any company to abuse the system,” he said.

The U.S., with the support of the union federation AFL-CIO, lodged the first complaint under CUSMA’s “rapid response” provision over labour violations at a Mexican auto parts factory. The complaint alleges that workers were “harassed and fired” for trying to organize with an independent union.

Mr. Agnew said businesses are still waiting to get further guidance from the government on the kinds of obligations firms have in regards to forced labour provisions that are included in the CUSMA labour chapter, which bans the import of goods made with forced labour.

“We’re still waiting to get further guidance on what the obligations are for Canadian companies in so far as audit requirements, documentation requirements [within] the context of increasing levels of scrutiny around things like Xinjiang province and the Uyghurs,” he said.

After pushing back on Mr. Trump’s demand for a sunset clause, a joint review of the trade pact was agreed to after six years, which allows a country to leave the pact after 16 years.

The first review of the deal will come in 2026.

“Donald Trump hasn’t gone away. Neither have the people that supported him or the forces that supported him,” Mr. Dade said.

“We’re looking at Trump in the rearview mirror thinking that was just an aberration that is not going to happen again,” he said. “Trump is still there. If he comes back, or worse someone riding that populist wave comes back, you could find NAFTA under threat again.”

Mr. Ujczo said the existence of the sunset clause “places a premium” on having the deal work from the outset.

“We need to make sure that we are fully implementing this deal before it becomes a potent political lightning rod like NAFTA became,” he said.

Mr. Miller said the sunset clause poses “a medium-term challenge.”

He added that the threat of losing a North American trade deal is one that has not completely disappeared.

“The populist nationalism in parts of the U.S. electorate is going to be out there for the next decade and there is a track record that the Trump people have in terms of denouncing their own deals,” he said.

Mr. Miller said it would be wise for Canada to form a strategy on the sunset clause to see if there is a way to convince the Biden administration to address the sunset clause issue now when there is a “friendlier” and “more reasonable” administration in Washington.

Buy American procurements

With U.S. President Joe Biden continuing some of the protectionist policies of his predecessor, Canada once again faces risks that Buy American provisions could shut out firms from bidding on government procurement projects. While the Canadian government is seeking an exemption to the provisions, Mr. Biden has said such exemptions would be “strenuously limited.” A Global Affairs trade official told the Special Committee on the Economic Relationship between Canada and the United States that there is an “openness and a willingness” by the Biden administration to discuss the kinds of impacts that Buy American procurement policies have on Canada.

Softwood lumber

A frequent point of dispute in the Canada-U.S. trading relationship, softwood lumber remains an ongoing problem. The U.S. Commerce Department recommended last month to more than double its tariffs on Canadian lumber due to its findings that Canada is subsidizing the market. Natural Resources Minister Seamus O’Regan has said Canada wants to negotiate a new softwood lumber agreement but noted the U.S. is “not willing to reach an agreement.” The U.S. has said that Canada is not engaged to address domestic policies that “create an uneven playing field for the U.S. industry.”

Supply management

The fiercely guarded Canadian dairy market was sharply attacked by past U.S. President Donald Trump and continues to remain an issue in the Canada-U.S. trading relationship. In late May, the U.S. requested a dispute settlement panel to look at concerns from the U.S. industry that they are not getting access to the Canadian dairy market that was negotiated in CUSMA. Washington has taken issue with how Canada has allocated tariff-rate quotas (TRQ), which they say isn’t consistent with what was negotiated under in the new NAFTA. International Trade Minister Mary Ng has said that Canada is in “compliance with our CUSMA TRQ obligations.”

Energy access

Early trade issues with the Biden administration have been spotlighted over Canadian energy access to the U.S., seen through the cancellation of the Keystone XL pipeline and the tensions over Line 5 with the Michigan government.

Labour enforcement

To pass CUSMA through the U.S. Congress, Democrats demanded that labour provisions in the already agreed-upon deal be strengthened. NAFTA was criticized in the U.S. for leading to the loss of American manufacturing jobs. Since CUSMA came into force, the U.S. has launched its first trade action last month using the “rapid response” provision of the trade agreement in response to workers allegedly being “harassed and fired” for trying to organize with an independent union. U.S. Trade Representative Katherine Tai has said she wants to use CUSMA to address historic labour issues in Mexico.

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