What are the USTR’s primary objectives for NAFTA renegotiation?
That is best answered by looking at the now defunct initiatives: Transpacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Geopolitically, the TPP and TIPP both had the aim of creating a collective of likeminded states that specifically excluded two great power rivals that have emerged in the 21st Century: China and Russia.
These aims are central to the Trump Administration’s efforts to renegotiate trade agreements.
Allies in the 21st century begun to sharply diverge from the US on core issues that underpin the liberal economic order. European allies have steadily declined economically relative to the US and with it, became less and less able and willing to share the defense burden. Under the Trudeau regime, longtime allies like Canada have rejected (or ignored) the US views about the threat coming from Communist China and North Korea; refused to credibly increase defense spending or to address these threats; and, at the same time, actively undermined US initiatives to strengthen NATO.
The Trudeau regime’s foreign policy agenda with regard to the US is particularly evident when contrasted with Liberal policy toward Communist China.
Canada’s Trudeau regime have failed to recognize that the People’s Republic of China of 2017 is not the backward, conservative, ill armed regime of the 1970s that Trudeau Sr. dealt with; or the reformist Dengist regime of the 1980s that appear to be on the path to abandoning communism for democracy.
The People’s Republic of China that emerged in the 21st Century is a Communist, one party state presiding over the 2nd largest economy in the world that is spending massive funds (>2% GDP) building a military and para-military establishment under the control of the Chinese Communist Party (CCP). The PRC’s military posture have shifted from defensive in the 1990s to an offensive posture against the US and allies including Canada from 2012 onwards under President Xi Jinping.
Canada, in direct contrast with the US, have elected to ignore PRC’s imperial expansion in the “near abroad” like South China Sea, the crude use of naked power against neighboring states like South Korea, Japan, the Philippines.
Above all, politicians, business leaders, and the Government of Canada under the Trudeau regime have turned a blind eye to the CCP’s extensive and widespread subversion campaign against Canada.
The Liberal regime have chosen to treat the CCP-PRC as a benign military and political force and sees PRC solely as a business opportunity to expand Canadian trade and investment. Communist China see no such distinction or separation between their commercial and military aims.
Canada’s Trudeau regime have placed a high priority on negotiating a free trade agreement with communist China. However, it is not just any free trade agreement, but an agreement expressly intended to counter US demands for a fairer deal under NAFTA, in effect, by threatening to sharply curtail the alliance with the US.
And if that means giving the PRC what they want, the Trudeau regime have no problems allowing Canada to become a Communist Chinese Trojan horse against the former close ally US.
What do the PRC want from Canada?
The PRC’s geopolitical goals is to decouple Canada from the political and economic alliance with the US, and to secure Canada’s acquiescence to the PRC’s imperial designs like the seizure of the South China Sea in violation of UNCLOS. Canada, the alleged champion of multilateralism and rules based international order under the Trudeau regime, cared less about PRC’s UNCLOS violation than Britain did about the seizure of Sudetenland.
What about trade?
PRC is seeking from Canada recognition of Beijing China as a market economy under WTO rules, access for PRC services and industries including markets for communications and other security related sectors, freeing up the process of securing export licenses from Canada for sensitive technologies, elimination of restrictions on PRC state enterprise ownership of Canadian assets and a ban on national security exceptions by Canada on their activities and freedom to import Chinese nationals into Canada.
What are the ramifications of Canada acceding to the PRC on these items?
The issue of “market economy status” for the PRC is central to US policy on NAFTA. When the PRC joined the WTO in 2001, the accession protocol stipulated that PRC can be treated as a non-market economy for 15 years. This enabled anti dumping (AD) and countervailing duties (CVD) to be calculated not on the basis of costs in China, but by an estimate of the equivalent cost in market economies. This provision expired in 2016 but to date, EU, the US, Japan and most major trading nations have refused to grant the PRC market economy status.
The PRC has taken this issue to the WTO dispute settlement body (DSB) (Case DS516 against EU, Case DS 515 against US). The timeline for adjudicating a dispute varies, but it is probable that the PRC case – a very complex and politically difficult case – will be adjudicated around the end of 2018. In terms of law, or what the WTO members agreed to in the PRC accession protocol, the PRC is more likely than not to win this case.
Robert Lighthizer, the USTR, made it clear in June, 2017 to Congress that the PRC market economy status litigation is the single most important case before the WTO for the US.
“I have made it very clear that a bad decision with respect to the non-market economy status of China . . . would be cataclysmic for the WTO,”
Lighthizer’s position is strongly supported by Commerce Secretary Wilber Ross at the U.S.-China Comprehensive Economic Dialogue in Washington. PRC’s trade performance is not “the natural product of free-market forces”.
While the threat is implied by Lighthizer and Ross rather than explicit, it is clear that the USTR’s backup plan for losing DS515 will be to withdraw from WTO. That is why high priority is placed on renegotiating existing non-WTO multilateral pacts like NAFTA, and failing that, bilateral agreements with all major US trading partners. The US is preparing for the eventuality of withdrawing from the WTO as early as 2018 upon six months’ notice under Article XV.
What are the ramifications if the PRC was granted “market economy status” by Canada as a part of a free trade deal?
Canada under NAFTA enjoy unparalleled access to the US market for most goods and services. To grant the PRC market economy status would in effect, open a “back door” to the US via Canada. Goods can be exported from the PRC to Canada without being subject to punitive tariffs or even the treat of AD/CVD investigations under non-market economy rules, and then be in turn, re-exported to the US from Canada with minimal or no processing. If the US, Canada and Mexico cannot stand collectively on this issue, NAFTA is through.
And it is not just NAFTA, but the Canada-US Free Trade Agreement and the Auto Pact.
Thus, the most urgent goal for NAFTA renegotiation for the US is to close off the possibility of the PRC using any non-WTO trade deal as a back door.
If the USTR’s principal goal for NAFTA renegotiation is to head off the PRC using Canada or Mexico as a Trojan Horse, then the highest priority must be on renegotiation of NAFTA Chapter 4 and Annex 401. This objective, buried on page 6 of the USTR document, drew little attention in Canada and Mexico despite strongly worded language “to ensure that goods that meet the rules of origin receive NAFTA benefits, prevent duty evasion, and combat customs offences” that hints at widespread cheating via Mexico and Canada.
The present required regional value content of 60% (transaction method) or 50% (net cost method) is wholly inadequate and inappropriate. The USTR’s opening offer on this may be to phase in sharp increases in regional value content, (e.g. 80% by transaction and 70% by net cost), with the ultimate goal in the 95%+ range. This, combined with tightened rules, will serve to limit NAFTA benefits to North American products.
An increase in qualifying content will head off the booming business in which (e.g. auto parts from China) are being imported into Mexico and Canada virtually duty free with little threat of AD/CVD (because there are few domestic producers of those parts in Canada or Mexico), assembled into semi-finished or finished vehicles, and then exported to the US.
This will also preclude companies like Bombardier from importing a Chinese manufactured aircraft and have it qualify for NAFTA benefits.
What would be the next line of defense should the firewall of “qualifying content” be breached?
Tucked under Trade Remedies is a series of measures including elimination of the NAFTA dispute settlement mechanism under Chapter 19. It is notable that removal of this item is also consistent with USTR’s proposal to either reform or remove the same provision in WTO.
A major problem that is not addressed is the lack of consistency and mutual recognition of anti-dumping and countervailing duty investigations between Canada, Mexico and the US. Canada applies rules under the Special Import Measures Act that varies considerably in practice from the US or Mexico. A comparison between what cases are currently pending in Canada by CBSA and the US ITC shows little consistency between the two systems in terms of complaints filed.
AD/CVD investigations have so far, been relatively limited exercises that generally do not look much beyond one level of analysis. China, in particular, have been able to effectively evade charges of dumping on many items by disguising their subsidies through multiple levels. E.g. subsidies for solar cells may not be evident at the level of cell manufacturing, but the manufacturers of the silicon ingots that accounts for a large share of raw material costs are heavily subsidized by the state. AD/CVD investigations need to have the ability to look deeper at these hidden subsidies.
Then there is the problem of injury for domestic industries.
If dumping is done into (e.g. Mexico) where there is not a party that can be injured, but the injured parties are in Canada or Mexico, it is not clear if the injured party in a third country have the standing to file a complaint in Mexico.
Beyond these administrative issues, trade rules tend to be narrow and specific, allowing an adept circumventor to rapidly outmaneuver the regulators even if administration and enforcement is consistent across the board.
Chinese firms dumping product in the US or NAFTA countries can rapidly move their product around so that it originates from other countries (e.g. Chinese aluminum exported to NAFTA via Vietnam to circumvent AD/CVD tariffs) or conduct a minimum of processing somewhere to qualify it under a different tariff category once AD/CVD tariffs are imposed on the original classification.
For NAFTA to be viable in the 21st Century, a much more agile and lower cost system of regulation and administration of trade is required to at least match the maneuverability of circumventors.
Presently this is not a stated goal of NAFTA renegotiations.
It needs to be.
These issues are just the tip of the iceberg in crafting a new trading system to replace the existing system — which was never intended to deal with managing large volumes of trade with major geopolitical and military rivals like China and Russia.
How to secure the benefits from freer trade and yet contain the damage done by the CCP-PRC’s predatory economic and military moves is going to be the key to unlocking a win-win-win deal for NAFTA.
Canada, under the Trudeau regime, rather than working to deal with common problems with the US, have largely disregarded or willfully sabotaged the United States efforts in reforming the trading system.
If Canada were to cede any of the major demands from the PRC for a free trade deal, it will be at the expense of all extant trade deals with the US first, and then close US allies.
It will not end well for Canada’s longstanding close ties with the United States.
A problem unless Canadians, rather than the Trudeau regime, choose to become a de facto CCP-PRC ally in North America.