Canada making two proposals in a test of whether NAFTA talks have any hope

by Alexander Panetta & Mike Blanchfield (feat. John Weekes)

The Canadian Press
January 24, 2018

MONTREAL -- Canada is about to put forward two sets of proposals at the NAFTA negotiations seen as a litmus test of whether these talks become a real give-and-take negotiation, or a deadlocked process defined by intractable differences.

It could be clearer by weekend.

Canada intends to make its first two significant counter-proposals on controversial topics, responding several months after the U.S. stunned its neighbours with a series of demands Canada and Mexico viewed as non-starters.

Sources say the Canadians will suggest major changes to auto rules, and to the dispute-resolution system under Chapter 11. While the U.S. has requested far tougher auto-parts rules, and a far weaker Chapter 11, the Canadians will suggest creating entirely new systems.

If the U.S. engages, the countries will finally, after five months of talks, be thrust into back-and-forth bargaining on the most troublesome sticking points in NAFTA. If it shoots down the ideas outright, the countries will remain entrenched in distant positions, leaving the talks in jeopardy.

"We're here to negotiate," chief Canadian negotiator Steve Verheul told reporters earlier this week.

"We hope the others are as well."

Chapter 11 is one of three dispute-resolution systems in NAFTA, and governs companies suing states for unfair treatment. The U.S. has proposed watering down this chapter and essentially scrapping the other two. Sources say Canada intends to suggest a new, permanent tribunal system modeled on those in the Canada-European trade agreement.

Autos are arguably the No. 1 U.S. priority. The Trump administration wants half of all car parts to come from the U.S., and 85 per cent from within North America. Auto-makers call that unrealistic, and warn they might simply shift production to Asia and pay new tariffs.

The Canadian auto proposal would overhaul the entire NAFTA formula for calculating content: instead of just counting the country of origin for mechanical parts, it would include intellectual property and emerging technologies -- which would inflate the percentage of U.S. content given American research dominance.

The big unknown is how the U.S. will respond.

"This will be a real litmus test of whether the U.S. wants a successful renegotiation of NAFTA," John Weekes, Canada's chief negotiator of the original 1994 deal, said in an interview Wednesday.

"If the Americans hold firm and show no signs of flexibility, then I think we have to sort of accept the fact these negotiations probably aren't going anywhere."

Insiders view this round as instrumental -- after the Montreal talks wrap up next Monday, there are just two rounds left before the current schedule of talks runs out in March.

At that 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 Mexican election, 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 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.

"They've got to be able to come back to their capitals and say, 'We have made substantive movement."'

Volpe said the idea of including non-material things like IP costs in the content calculation would be less damaging since the U.S. already dominates the field -- and it would help North America compete as a block 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 a car's North American content.

There are some things Canada does not intend to raise this week, according to sources.

Canada has no plans to push the conversation on dairy, where the U.S. is demanding changes to the Canadian supply management system. Nor will it delve into the U.S. desire to eliminate the Chapter 19 dispute process, where industries can fight abusive punitive duties.

That chapter was a fundamental condition of Canada entering into free trade with the U.S. -- and has been used in recent high-profile cases, including softwood lumber and Bombardier.