De minimis could be another sticking point in negotiations.
After the United States and Mexico reportedly agreed to language to update their NAFTA trade relationship at the end of August, the most major issues still to be resolved between the U.S. and Canada include Chapter 19 dispute settlement and dairy market access in Canada, trade attorneys recently said.
De minimis could be another inflection point in the remaining negotiations, as Canadian customs brokers have “dug in fairly strongly” in urging the Canadian government to oppose raising its de minimis above the current $20 level, Venable International Trade Group Co-chair Ashley Craig said in an interview with American Shipper.
“They don’t want it to be touched, they don’t want it to go to $100,” Craig said.
The U.S. de minimis level is $800, and Mexico agreed during talks to raise its threshold from $50 to $100.
The United States and Mexico carried on NAFTA negotiations bilaterally in July and August, with Canadian negotiators essentially sidelined during that period. But Canadian Foreign Affairs Minister Chrystia Freeland rejoined negotiations in Washington, D.C., in late August.
In addition to de minimis, Canada is likely to strongly resist compromise in dairy talks as it has, so far, staunchly refused President Donald Trump’s demands to remove market-access barriers for U.S. dairy exports.
Canada in 2016 created a lower-priced class of industrial milk to spur domestic production. U.S. exports declined as a result.
Canada allots a small quota for U.S. dairy exports, after which it charges tariffs ranging from 241 percent to 298.5 percent for dairy products.
In Canada, “the dairy industry is one of the most active, in terms of political influence and lobbying,” Craig said. “They are not going to just let this go by the wayside.”
National Economic Council Director Larry Kudlow on “Fox Business” in early September pointed to milk as a major sticking point in U.S.-Canada negotiations.
Prime Minister Justin Trudeau during a radio interview at the start of September said there could be room for flexibility on dairy issues, depending on the course of NAFTA talks.
On the other hand, Trudeau seems unwilling to budge from Canada’s position that NAFTA Chapter 19 must be maintained, saying in that radio interview that keeping that chapter would help ensure that “rules are actually followed,” even as Trump “doesn’t always follow the rules as they’re laid out.”
Trudeau’s remarks came after the release of off-the-record comments made by Trump to Bloomberg in late August in which Trump said he wouldn’t compromise at all with Canada in NAFTA negotiations, but added that he couldn’t say so publicly because it would be so insulting to Canada that they wouldn’t be able to make a deal.
“I think we have to go with what Mr. Trudeau has said as being absolute,” Craig said. “Of course, there are no real absolutes in politics, so I wouldn’t be completely surprised if we find ourselves with Canada walking back a little bit. But what that looks like is, frankly, a big question mark because the U.S. position is clear: Blow up [Chapter] 19, blow up ISDS [investor-state dispute settlement], let the courts of each particular member to the agreement govern a dispute.”
Dan Ujczo, chair of the Canada-U.S. Practice Group for the Dickinson Wright law firm, agreed with Craig that dairy and Chapter 19 were major areas left to be worked out during talks, but Ujczo said ISDS probably isn’t a hurdle in negotiations at this point, though “there may be an attempt by Canada to tweak that.”
Labor Provisions. Another negotiating area involving trade enforcement is the U.S.-Mexico agreement on labor provisions, which will be enforceable through NAFTA Chapter 20 state-to-state dispute settlement provisions, according to Ujczo.
“I do think [the updated NAFTA labor provisions] will require all companies that are operating in Mexico to look at their labor management relations policies,” Ujczo said. “I’m concerned about the compliance burdens for our companies that are down there.”
Chapter 20 could see more use as World Trade Organization dispute settlement becomes more difficult to rely on, he said.
Members of the Trump administration, including the president himself, have spoken out against the WTO over concerns that the organization threatens U.S. sovereignty.
Since the Trump administration has taken office, it has blocked the appointment of new judges to fill three vacancies on the seven-member WTO Appellate Body, significantly hampering the body’s ability to issue rulings.
Chapter 20 applies to all disputes regarding the interpretation or application of NAFTA. The process begins with government-to-government consultations, after which parties may request a meeting of the NAFTA Free Trade Commission, comprised of the parties’ trade ministers, if consultations don’t resolve the dispute.
If the commission can’t resolve the dispute, a consulting party can then call for formation of a five-member arbitral panel composed of members who are “independent” of any party, according to NAFTA Chapter 20.
But until the text of the actual agreement is released, it’s tough to know for sure whether new labor and environmental rules negotiated into the agreement will be enforceable — as claimed by the Office of the U.S. Trade Representative in an August NAFTA fact sheet, Craig said.
That fact sheet says the United States and Mexico had agreed to bring labor obligations into the core of the agreement and make them fully enforceable as part of a labor chapter that “represents the strongest provisions of any trade agreement.”
Mexico also has committed to specific legislative actions to provide for effective recognition of the right to collective bargaining, the fact sheet states.
Language agreed to by the United States and Mexico also requires parties to adopt and maintain in law and practice labor rights as recognized by the International Labor Organization to effectively enforce and not to waive or derogate from their labor laws, according to the fact sheet.
Further, the U.S. and Mexico agreed to new provisions to “take measures to prohibit the importation of goods produced by forced labor, to address violence against workers exercising their labor rights and to ensure that migrant workers are protected under labor laws,” the fact sheet says.
The two nations also require that 40 percent to 45 percent of auto content be made by workers earning at least $16 per hour.
USTR said that these provisions should help incentivize new vehicle and parts investments in the United States, as well as support better jobs for U.S. producers and workers.
The announced U.S.-Mexico agreement also requires 75 percent regional value content for automobiles, which will help to preserve and reshore vehicle and parts production in the United States and “transform supply chains to use more United States content,” another USTR fact sheet says.
The Embassy of Mexico in Washington didn’t respond to requests for comment.
Canada will likely have no problem agreeing to the U.S.-Mexico agreement on autos as the deal encompasses a lot of Canada’s autos proposal from January, Ujczo said.
The first U.S. NAFTA proposal for automotive rules of origin was an 85 percent regional value content requirement and a 50 percent U.S. content requirement.
Canada then countered with a proposal that set forth higher wages for auto workers, a component that was ultimately adopted by the United States and Mexico, Ujczo said.
“Of any of the major proposals, the one that looks the most straightforward for Canada is autos,” he said. “But the devil’s going to be in the details.”
Sewn-up Textile Rules. The United States and Mexico have agreed to adopt a CAFTA-style short-supply textile and apparel framework for NAFTA, according to Ujczo and Ron Sorini, principal at trade consultancy Sorini, Samet & Associates.
“I think there are going to be dramatic changes to the textile industry in the NAFTA in terms of importing materials from overseas, and I think not only the retail and apparel industry needs to pay attention to that, I think anybody that stitches things together — seat covers, anything else — needs to be keeping an eye on that textile provision,” Ujczo said.
While industry is still waiting to see the textile and apparel text agreed to by the U.S. and Mexico, Mexico “largely conceded throughout the winter” on those provisions, Ujczo said.
Parties that apply for additions to the CAFTA short-supply list submit a request to the U.S. Commerce Department, present evidence of due diligence to determine any CAFTA territory production of the fabric, as well as proof that other fabrics aren’t substitutable in commercial quantities in a timely fashion.
The interagency Committee for the Implementation of Textile Agreements generally has 30 U.S. business days to determine whether a CAFTA short-supply petition contains all necessary information and whether production of the petitioned fabric occurs in the region.
Sorini said it’s plausible that the U.S. and Mexico agreed to a process similar to the short-supply provisions of the Korea-U.S. Free Trade Agreement (KORUS), which would mean that the United States and Mexico would make decisions on short supply in their respective markets.
The textile and apparel agreement will “require more U.S. content, like using sewing thread and pocketing and certain narrow elastics,” Sorini said.
The U.S. and Mexico also have agreed to minimally reduce tariff preference levels (TPLs) for textiles and apparel in NAFTA, Sorini said.
NAFTA TPLs provide duty-free access for specified quantities of yarn, fabric, apparel and made-up textile goods that don’t originate in the NAFTA region.
The Trump administration formally notified Congress of its intent to enter into an updated NAFTA on Aug. 31, after which Congress has 90 days to consider and approve the details. According to Trade Promotion Authority rules, the executive branch must forward complete text to Congress 30 days after formal notification, giving Canada a window to reach agreement with the other two parties.
Summing It Up. All in all, judging from the USTR fact sheets on the announced U.S.-Mexico trade agreement, the United States has gotten about 10 percent to 15 percent of what it was looking for in a revamped NAFTA, Craig said.
“I don’t want to say it’s a lot of ado about nothing, but I will say it’s more optics than it is substance,” Craig said of the U.S.-Mexico announcement. “There will be change, industry will have to adapt. Supply chains will be modified to an extent.”
Trump appears to be using NAFTA largely as a tool to tout policy successes, Craig said.
“It’s almost as if … you had an administration that needed a win … taking flak on different issues, different concerns outside of trade,” Craig said. Trump “puts pressure through [U.S. Trade Representative Robert] Lighthizer to get the Mexicans to agree to something, so that he can stand up and say, ‘I’ve done it. I told you I was going to blow up NAFTA, the worst agreement ever negotiated and entered into,’ renames it, has USTR issue a fact sheet, no details, no text, no nothing.”
De minimis could be another sticking point in negotiations.