LexSage

What Will The U.S. Be Fighting For
And What Direction Can Canadian
Businesses Take From The Recently
Published U.S. Objectives For The
NAFTA Renegotiation

July 21, 2017
Authored by Heather D. Innes, Counsel to LexSage

Reports in today's press indicate that the first round of NAFTA renegotiation talks will begin on August 16, 2017 in Washington, D.C.   Each country has conducted or is in the process of conducting consultations with its stakeholders.  The U.S. Congress has now received the U.S. Summary of Objectives for the NAFTA Renegotiation (the “US Objectives”). Global Affairs Canada also extended a request for submissions from all Canadians that were due on July 18, 2017.  As in the U.S. where over 12,000 submissions were received, we understand that there has been a strong response from Canadian stakeholders to the Global Affairs Canada request for input.

The US Objectives provide important information and start to give shape to the many objectives informally voiced by President Trump and his Administration.  Although the US Objectives did not include many of the details needed to better inform organizations and permit them to plan for potential change, they do provide a better sightline into what the U.S. will pursue.

Many of the objectives set forth general principles, often citing or implying  “American first”  and reducing U.S. trade deficits as objectives, without specifying the industry or sector that is targeted (see: Summary of US NAFTA Objectives).

Much has been written over the last couple of days about those of the US Objectives that are likely to be the most contentious, including: i/ elimination of Chapter 19 binational panel reviews of anti-dumping/countervailing duty decisions; ii/ removal of all restrictions on the “Buy American” requirements at the state and municipal level including on all federally funded programs; iii/ elimination of the NAFTA global safeguard exclusion that currently restricts the application to Canadian and Mexican products, of U.S. safeguard duties.  These are duties imposed when a U.S. domestic industry is seriously injured by an unexpected flood of imports; iv/ elimination of all barriers to U.S. investment in NAFTA country industries and identification of both the telecommunications, and financial services sectors as targets for change; and v/ elimination of non-tariff barriers to U.S. agricultural exports, including restrictive administration of tariff rate quotas.

Certain of the U.S. objectives make sense.  General objectives calling for increased transparency, cooperation, consultation and regulatory compatibility seem appropriate in the context of modernizing NAFTA. Objectives calling for science-based sanitary and phytosanitary measures, and updated and streamlined customs procedures (including immediate release of compliant shipments) also seem appropriate.  Of course, the “devil is in the detail” and what appears eminently reasonable may prove contentious if the U.S. seeks requirements and restrictions that apply only to Mexico and Canada and not to the U.S.

Other U.S. Objectives are too generally worded to clearly identify the target industry or sector.  However, when these objectives are read together with previously stated US Administration and industry positions and goals, we can surmise that certain Canadian industries and sectors are likely priorities for the U.S. negotiators:

• dairy, poultry and eggs – supply management programs – elimination of barriers to U.S. agricultural products;
• health services, cultural industries – elimination of investment restrictions & service supplier restrictions & the call for a narrow negative list approach to excluded services;
• government procurement (at least at the Federal level) – seek greater access for U.S. providers/vendors but preserve U.S. Buy America requirements in State and local programs;
• retail sector, e-commerce/digital trade and Tech products – seeking increase of de minimus to $800 for duty free entry and commitments to not impose customs duties on digital products (e.g. software, music videos, e-books). They are also seeking a limitation of restrictions on cross border data flows and elimination of data localization requirements.  These objectives could be both harmful and helpful to Canadian retailers and digital trade organizations, depending on their product offerings, competition and markets ;
• softwood lumber industry – eliminate Chapter 19 binational panel provisions which means that industries like softwood lumber will need to seek recourse in the U.S. courts or the WTO; and
• fisheries industry – prohibit harmful fisheries subsidies.

As important as what is included in the US Objectives, is what is missing.  The missing elements themselves may provide hints that something may not be a priority.  Or, the missing details may simply indicate that the U.S. is not yet ready to tip their hand on the details of what they will seek.  For example, the following items were provided in vague terms or were omitted from the U.S. list, leaving Canadian organizations unable to prepare their businesses or to provide suitable alternatives to the Canadian negotiators:

1. rules of origin – the U.S. Objectives seek to “update and strengthen” “as necessary to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America”. Many U.S. industries and/or their unions have highlighted changes that they would like to see including: (i) changes/increases to the content required for vehicles and changes to address the fact that steel used in vehicles is not subjected to the rule of origin (ROO) tracing requirements; (ii) tougher ROO's for the oil sands sector; (iii) improvements to competitive opportunities for U.S. textile and apparel product exports.  Does this mean that the U.S. is looking for a loosening of ROO's for textiles and apparel?;
2. labour mobility – the U.S. Objectives are silent on labour mobility enhancements. Important enhancements are needed to address the movement of business persons within North America including: (i) intra-company transfers; (ii) enhanced entry for a broader list of specialists; and (iii) recognition of professional credentials.  It is unclear whether these issues will be stuck in the mire of U.S. immigration policy or will be addressed as the important improvements that they represent for all three countries;
3. Chapter 11 – binational panel review provisions relating to investment measures are not specifically identified in the U.S. Objectives and they have not otherwise been called out as a priority for the U.S. While the US Objectives generally call for a general review and revision of the dispute settlement process and specifically call for the elimination of Chapter 19, it is unclear whether this includes a review and revision of Chapter 11;
4. Protection of personal data and anti-spam laws: while reference is made to regulatory compatibility, seeking commitments that the NAFTA countries not impose measures to restrict cross-border data flows and elimination of data localization requirements, the U.S. Objectives are silent on the protection of personal information and compliance with anti-spam laws (CASL).  U.S. laws generally are less restrictive and less demanding that Canadian laws, leaving Canadian industry at a disadvantage when developing products and services for a North American market.  Any effort by the U.S. to dilute the robust protections applied to Canadian generated data or Canadian requirements set out in CASL are likely to prove contentious.  Silence on these issues is difficult to interpret.
5. Measures and assistance for small & medium sized enterprises (SME's): the US Objectives call for the maintenance of U.S. domestic preferential purchasing programs for small businesses. Otherwise, the US Objectives are very general, calling for the sharing of information, cooperation on SME issues and the establishment of an SME committee.  While this is generally positive, it begs the question of whether more ambitious provisions could be contemplated.  For example, specific cooperative measures that could support the growth of SME's within North America, reducing their NAFTA driven costs.

Should you have any questions or would like assistance interpreting the US Objectives or preparing your organization for the upcoming NAFTA renegotiations, please do not hesitate to contact Heather Innes at 416-350-1234 or heather@lexsage.com.