In our last international trade brief, we talked about the Trump administration taking aim at Chapter 19 of NAFTA, the U.S. wish list for NAFTA renegotiations and the U.S. border tax proposal. In this brief, we discuss the Canadian Free Trade Agreement, the U.S.-China 100-day plan and how provisions in the now defunct TPP could find their way into NAFTA.
The Canadian Free Trade Agreement
On April 7, 2017, federal, territorial and provincial governments jointly released the text of the Canadian Free Trade Agreement (CFTA), which establishes new free trade rules that will apply within Canada effective July 1, 2017.
The CFTA seeks to improve trade, investment, and worker mobility within Canada, by reducing, and in some cases eliminating, existing interprovincial barriers. Regrettably, comprehensive free trade within Canada continues to be elusive 150 years after Confederation. The CFTA provides for numerous exceptions within its 335 pages, thus achieving only a partial removal of obstacles to trade and investment.
CFTA will replace the Agreement on Internal Trade (AIT), which has been in place since 1995. Unlike AIT, CFTA adopts a “negative list” approach such that any remaining barriers have to be specifically expressed in the agreement by the governments. This approach is an improvement over the AIT’s “positive list” approach, and will significantly increase the transparency of remaining barriers to interprovincial trade.
Furthermore, one of the main goals of the CFTA is to ensure that Canadian businesses receive the same benefits as do foreign businesses that can rely on Canada’s international trade agreements such as CETA.
A 75-page dispute settlement mechanism includes both government-to-government and person-to-government provisions. Monetary penalties for violation of the CFTA will range from $250,000 to $10 million.
The benefit of the CFTA is projected to be significant. Interprovincial trade accounts for roughly 20% of Canada's annual GDP and almost 40% of provincial exports. According to the Bank of Canada, removing internal trade barriers could add up to 0.20% to Canada's annual output, which is comparable to the expected benefit of CETA.
U.S.-China Comprehensive Dialogue, while Canada negotiates a FTA with China
On April 7, 2017, U.S. President Donald Trump and Chinese President Xi Jinping, at the conclusion of a two-day presidential summit in Palm Beach, Fla., agreed to a 100-day plan to launch new bilateral trade consultations. While the scope and the structure of the trade consultations are yet to be determined, this agreement appears to signal the two countries’ willingness to co-operate and avoid trade stand-offs.
During a White House briefing, U.S. Secretary of State Rex Tillerson stated that the two leaders had established what he called a “new high-level framework for negotiations” to be known as the U.S.-China Comprehensive Dialogue, based on the four pillars: a diplomatic and security dialogue; a comprehensive economic dialogue; a law enforcement and cybersecurity dialogue; and a social and cultural issues dialogue.
U.S. Commerce Secretary Wilbur Ross emphasized in the briefing that the 100-day timeframe, “given the range of issues and the magnitude…may be ambitious, but it’s a very big sea change in the pace of discussions.” He went on to note that the dialogue was “a very important symbolization of the growing rapport between the two countries.” The main objective of the U.S. includes increasing American exports to China while reducing the net trade deficit, which totalled US$347 billion in 2016.
Again, as in the case of NAFTA renegotiations discussed in our previous international trade briefs, the rhetoric and aggressive posture during the electioneering campaign of candidate Trump, is not being reflected in President Trump’s post-election actions. The reference to the “growing rapport” between the two countries by Secretary Ross would suggest that we can look forward to potentially seeing a more diplomatic and conciliatory approach to resolving the trade and other differences between the U.S. and China.
In the meantime, Canada and China have already engaged in exploratory discussions for a possible free trade agreement (FTA), holding the first set of face-to-face discussions in February of this year. Last month, the Government of Canada launched public consultations on FTA negotiations, and a second round of discussions is expected to take place later this month.
Canadian businesses are encouraged to participate in the consultation process by making submissions before the deadline of June 2, 2017, and monitor developments in future trade discussions.
What might be included in the renegotiated NAFTA? The TPP might provide some insights
On April 6, Representative Henry Cuellar (D-TX) said in a statement that he believes the NAFTA renegotiations will necessarily draw heavily from the provisions of the now defunct TPP. In arguing his position, Representative Cuellar referenced a recently released Congressional Research Service report (CSR). The CSR examines the parallels between the TPP text and the draft notice on NAFTA renegotiations circulated to Senate committee members in late March by the acting U.S. Trade Representative Stephen Vaughn (as discussed in our last international trade brief).
What is clear is that, had it been implemented, the TPP would have governed trade between NAFTA partners as all three countries were planning to implement the TPP. As such, the U.S. would not in fact have had to renegotiate or provide for many of the same provisions within a revised NAFTA. In light of the U.S.’ withdrawal from the TPP, any revisions that the U.S. would like to implement into its trade terms with Canada and Mexico will now need to be done through a renegotiated NAFTA.
One of the areas where the CSR illustrates the existence of considerable overlap between the draft notice and the TPP is in customs and enforcement. Though the draft notice did not provide details, it did call for increased transparency and efficiency in customs proceedings. The TPP, in pursuit of this goal, required the use of electronic systems and automated risk analysis/targeting, provided a special customs procedure for express shipments, and required the online publication of all customs laws, none of which is currently required by NAFTA. The draft notice also called for NAFTA to include a process for exporters/importers to receive early consultation on significant regulations, following the TPP’s provisions related to early advice and expeditious responses to general information requests.
Another category discussed in the CSR is investment protection. The CSR highlights the draft notice’s proposal to “maintain and […] improve procedures” for resolving disputes between U.S. investors and NAFTA countries rather than eliminating the investor-state dispute settlement mechanism altogether. Similarly, the TPP Investment Chapter (Chapter 9) also sought substantive protections for private investors and investments against discriminatory, unfair, and arbitrary treatment by host governments and recourse to investor-state dispute settlement (ISDS) for binding arbitration.
Several other categories are canvassed in the CSR, including sanitary and phytosanitary standards, the treatment of state-owned enterprises, e-commerce and data flows, intellectual property rights, rules-of-origin for the automotive industry, labour and the environment. In all of these areas, the CSR details similarities between the NAFTA renegotiation goals set forth in the draft notice and the provisions of the TPP. Though the draft notice is subject to change, early indications show that the TPP, having already been the subject of intensive negotiations, may provide insights into what a renegotiated NAFTA may include.