NAFTA Renegotiation Monitor

NAFTA RENEGOTIATION MONITOR A STATUS REPORT ON THE NORTH AMERICAN FREE TRADE AGREEMENT RENEGOTIATION Haynes and Boone, LLP | October 2017 Contributions to this report provided by McCarthy Tétrault LLP haynesboone.com © 2017 Haynes and Boone, LLP AUSTIN CHICAGO DALLAS DENVER FORT WORTH HOUSTON LONDON MEXICO CITY NEW YORK ORANGE COUNTY PALO ALTO RICHARDSON SAN ANTONIO SHANGHAI WASHINGTON, D.C. NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP 2 For more than two decades, the United States, Mexico and Canada have adhered to the North American Free Trade Agreement (NAFTA). As these countries’ governments engage in a contentious renegotiation, it is imperative for businesses in all three countries to stay abreast of the process and of the impact of any changes to NAFTA. As of mid-October 2017, four rounds of negotiations have taken place and more than 30 issues are on the table for discussion. Busy companies have limited resources to track and monitor the NAFTA renegotiations, and it is difficult for companies involved in international trade to follow specific issues of interest. As a service to stakeholders across all of the key industries impacted by NAFTA, Haynes and Boone, LLP, with offices in Mexico City and throughout the United States, as well as in Shanghai and London, and McCarthy Tétrault, LLP, with offices across Canada, as well as in New York and London, have teamed up to create the NAFTA Renegotiation Monitor. This new report provides an up-to-date overview of the disposition of the most important NAFTA issues, as well as a comprehensive and straightforward reference to the topics in the current NAFTA renegotiation process. This reference comprises a table comparing the positions of the three countries on each of the topics, as well as a comment on the current status of the negotiations and prospects for resolution of each issue. We will update our NAFTA Renegotiation Monitor report periodically to reflect the latest developments and topics of interest. INTRODUCTION AND OBJECTIVES 3 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP TABLE OF CONTENTS INTRODUCTION AND OBJECTIVES / PAGE 2 HIGHLIGHTS / PAGE 4 Trade Deficit .............................. 4 Rules of Origin and Mandatory U.S. Content ........... 5 Mandatory Five-year Sunset ..... 6 Labor Issues ............................. 7 Agricultural Goods .................... 8 Trade Remedies ...................... 10 NAFTA PROVISIONS / PAGE 11 Agricultural Goods .................... 12 Anti-Corruption ......................... 20 Competition Policy .................... 19 Cross-Border Data Flows ......... 17 Currency Manipulation.............. 23 Customs and Trade Facilitation. 14 Digital Trade.............................. 16 Dispute Settlement ................... 22 Dollar Value Below Which No Customs Duty Required .................................. 14 Energy ...................................... 22 Environment.............................. 20 Financial Services .................... 16 Five-Year Sunset....................... 23 General Exclusion..................... 23 Government Procurement......... 21 Harmonization and Transparency of Regulations .... 13 Industrial Goods ....................... 13 Intellectual Property.................. 18 Investment ................................ 17 Labor ........................................ 19 Mobility ..................................... 16 Reduce Bilateral Merchandise Trade Deficit ........ 11 Revised Rules of Origin ............ 11 Sanitary and Phytosanitary Measures (SPS).......... 14 Services.................................... 15 Small-and Medium-sized Enterprises (SMEs)................... 21 State-owned Enterprises (SOEs) ...................................... 18 Technical Barriers to Trade (TBT) .............................. 15 Telecommunications ................. 15 Textiles...................................... 13 Trade Remedies ....................... 21 KEY TAKEAWAYS / PAGE 24 NAFTA TASK FORCE CONTACTS / PAGE 25 ABOUT THE HAYNES AND BOONE NAFTA TASK FORCE / PAGE 26 4 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP TRADE DEFICIT COMMENT / RESOLUTION We are not aware of any other free trade agreements (“FTAs”) that attempt to track trade deficits between modern economies. Consumers benefit from the increased competition, notwithstanding deficits. Most FTAs are more focused on increasing the overall level of trade than apportioning it among countries. Mexico has warned as to the potential damage to cross-border trade and investment if NAFTA were terminated. For instance, only 35 percent of Mexican exports to the U.S. and 36 percent of Mexican exports to Canada would be tariff-free, and U.S. and Canadian investments would no longer be able take advantage of the preferential access Mexico has to 46 markets with which it has free trade agreements. TRADE AMONG NAFTA MEMBERS IN GOODS AND SERVICES IN 2016 US1 Seek meaningful reduction; require ongoing updates and re-evaluations. CANADA Does not feel the trade deficit with the U.S. is material or that it is proper to evaluate important trading relations merely from this perspective. If services are included, there is no deficit in U.S. trade with Canada. MEXICO2 Does not feel the trade deficit is a proper way to evaluate the bilateral relationships between Mexico and the U.S., which encompasses many facets. $317 BILLION $320 BILLION $262 BILLION $307 BILLION $36.1* BILLION $8.7BILLION* MEXICO TO U.S. U.S. TO MEXICO CANADA TO U.S. U.S. TO CANADA CANADA TO MEXICO MEXICO TO CANADA *Includes total for goods in 2016 and total for services in 2015. Sources: Office of the U.S. Trade Representative (USTR), 2017; Parliament of Canada, Trade and Investment Series 2016 5 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP RULES OF ORIGIN AND MANDATORY U.S. CONTENT COMMENT / RESOLUTION This has been one of the most controversial topics during the first round of renegotiation meetings. Even U.S. automakers do not see addition of a U.S. content requirement as helpful. The existing NAFTA regional value content for automobiles is already relatively high at 62.5 percent for automobiles and 60 percent for automobile parts. By way of comparison only, the TPP3 Rules of Origin for automobiles required 45 percent or 55 percent regional value content for finished vehicles, depending on the method of calculation, and 35-45 percent for auto parts. Businesses throughout North America have reorganized their supply chains and increased their international competitiveness in reliance on current NAFTA rules. NAFTA REGIONAL VALUE 62.5% 60% AUTOMOBILES AUTOMOBILE PARTS TPP3 RULES OF ORIGIN 45% /55% 35%-45% FINISHED VEHICLES AUTO PARTS US1 Seek greater North American content; require minimum U.S. content, particularly for auto parts; certification and verification systems should be put in place. Eighty-five percent NAFTA origin, and 50 percent U.S. origin, has been mentioned. Tracking of origin of parts to be expanded, perhaps to include steel and electronics. CANADA Opposes country-specific content requirement; a product which is North American should receive duty-free or at least preferential treatment. MEXICO2 Opposes country-specific content requirement, but acknowledges the mutual need and goal to keep the greatest proportion of supply chains as possible within North America. Wants to ensure the continued growth of the Mexican automotive sector, which in 2016 produced approximately 3.5 million automobiles, with U.S. and Canadian parts. 6 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Mandate a regular, systematic reexamination of the effectiveness of the agreement. CANADA Sunset would destroy investment incentives that are among the chief benefits of an FTA. COMMENT / RESOLUTION Could be a deal killer. U.S., Canadian and Mexican businesses, including energy industry, see a sunset clause as counterproductive. Opposition also attributed to U.S. Departments of Agriculture and State. MANDATORY FIVE-YEAR SUNSET MEXICO2 Re-examination would introduce economic instability. Destroy Investment Incentives Introduce Economic Instability CounterProductive Could Be A Deal Killer FIVE-YEAR 5 SUNSET 7 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Bring labor into core of NAFTA; conform with International Labor Organization (ILO) standards, including freedom of association and elimination of compulsory labor; abolition of child labor; elimination of discrimination; establish minimum wages, occupational health and safety rules and maximum work hours; prohibit waiver or derogation from the above; provide for equitable judicial proceedings; subject the above to NAFTA dispute resolution and establish stakeholder participation and oversight. CANADA Ensure that any NAFTA rules regarding labor avoid a “race to the bottom” and preserve the provincial powers to impose minimum standards. Furthermore, Canadian negotiators urged their U.S. counterparts to commit to passing a federal law negating the “right-to-work” laws in 28 U.S. states, arguing that these laws give an unfair advantage to those states. COMMENT / RESOLUTION Mexico agreed to raise labor standards generally conforming to ILO standards in the Trans-Pacific Partnership (TPP). During the first round of negotiations between August 16th and 20th, Canada was also vocal about the need for Mexican salaries to rise in order to enable Canadian manufacturing industry to compete better with the Mexican manufacturing industry. The Canadian government is requesting that Mexico and the U.S. ratify the eight core conventions of the International Labor Organization (ILO). Canada has proposed to use the labor chapters in the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and the TPP as templates for the relevant chapter in NAFTA, but giving the corresponding provisions more “teeth.” (Currently, there is a NAFTA labor side agreement). These positions appear to be influenced strongly by Canadian organized labor. Mexico and the U.S. have ratified, respectively, seven and two such ILO conventions. LABOR ISSUES MEXICO2 Mexico wants NAFTA to reflect Mexico’s international labor commitments, and has expressly rejected increasing wages by means of other than market forces. Source: U.S. Bureau of Labor Statistics, International Labor Comparisons, 2013 $10 $20 $30 $40 US dollars $6.36 $35.67 $36.33 HOURLY LABOR COST COMPARISONS (2012) 8 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Maintain existing duty-free market access; Expand opportunities and eliminate non-tariff barriers (NTBs); include more stringent labor standards for Mexican agricultural workers. Limit imports when U.S. produce is “in season.” CANADA Opposes changes to dairy and poultry supply management systems; demands elimination of U.S. restrictions on softwood lumber imports. COMMENT / RESOLUTION U.S. agricultural interests are wary of breakdown in NAFTA renegotiation reducing their exports, especially maize and wheat of which Mexico is a net importer. Likewise, Mexican agribusinesses, especially tomato and avocado producers, are wary of potential tariffs on their exports and the potentially adverse effect of heightened labor standards on their costs, especially in light of pressure from Florida and California producers who, in the past, have attempted to thwart Agreements Suspending Antidumping Duty Investigation on Imports of Fresh Tomatoes from Mexico (most recently in 2013). The U.S. has indicated a desire to have Canada dismantle its dairy (and perhaps other) supply management regime, which caps production at domestic needs but uses tariffs to prevent imports, and which prevents almost any export from the United States. Canada has answered that it can talk about that issue, but only if the U.S. agrees to dismantle its heavy subsidization of its overproducing dairy (and other) agricultural goods, an unlikely scenario. Canada cannot expose its farmers to a massive surge in subsidized imports. In previous negotiations, with the U.S. and with the European Union, Canada has negotiated moderate increases in the quota allowed for duty-free exports of such goods to Canada. In Canada this is a highly politicized issue, complicated by the view of Canadian farmers that their milk is safer and more hormone-free than U.S. milk. AGRICULTURAL GOODS MEXICO2 Concern for the impact of stringent labor standards, including the inclusion of a requirement for a higher minimum wage, on Mexican exporters, especially vegetable agribusinesses, and the strength of lobbying efforts by tomato producers in Florida and California. Mexican agribusinesses are forming a united front nationally to devise common positions and voluntarily to adopt better labor practices to ease pressure from the United States on this matter. Similar efforts were made during the negotiation of the Trans-Pacific Partnership (TPP). Mexico’s agricultural sector, enshrined in the Mexican Constitution, was very protected prior to NAFTA and many small farming jobs were lost at the hands of the U.S. agricultural sector. 9 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP AGRICULTURAL GOODS CONT’D U.S., Mexican and Canadian agroindustry representatives (including CEOs of companies such as Driscoll, Mission Produce, Sun Farms, Aneberries, as well as the chair of the United Fresh Produce Association) gathered in Mexico City on the sidelines of the renegotiation talks. These representatives presented a united front defending NAFTA and highlighting the benefits it has brought to producers and consumers in the three countries. They also rejected calls for the imposition of temporary tariffs demanded by certain producers in the U.S. (such as tomato producers in Florida). 2000 160 CANADA OTHER COUNTRIES 0 20 40 60 80 100 120 140 2005 2010 2015 MEXICO $ billion Source: USDA, Economic Research Service, with data from the U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Database. U.S. AGRICULTURAL EXPORTS, 2000-2015 10 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Eliminate Chapter 19 dispute settlement arbitral panels for appeals of trade remedy cases; eliminate global safeguards exclusion; exclude state-owned enterprises from analysis of domestic industry in antidumping cases; address duty evasion; facilitate imposition of measures against third-country dumping. CANADA Opposes elimination of Chapter 19 dispute settlement mechanism. Chapter 19 was essential to Canada’s view of fair judicial review in, e.g., the last softwood lumber dispute. COMMENT / RESOLUTION In 1989, Canada walked out of NAFTA negotiations in which the U.S. offered neither disappearance of anti-dumping /countervailing duties proceedings nor bi-national or tri-national review of administrative decisions for these types of matters. TRADE REMEDIES MEXICO2 Opposes elimination of Chapter 19 dispute settlement mechanism. AGRICULTURE CHEMICAL MINERALS OTHER STEEL 7% 32% 18% 17% 13% 13% LUMBER CONCRETE Source: NAFTA Secretariat, Status Report of Panel Proceedings (active, completed and terminated) - NAFTA Chapter 19, 1995-2017 PRODUCTS APPEALED TO NAFTA CHAPTER 19 149 DECISIONS IN THE LAST 22 YEARS NAFTA PROVISIONS 11 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Seek meaningful reduction; require ongoing updates and re-evaluations. CANADA Does not feel the trade deficit with the U.S. is material or that it is proper to evaluate important trading relations merely from this perspective. If services are included, there is no deficit in U.S. trade with Canada. MEXICO2 Does not feel the trade deficit is a proper way to evaluate the bilateral relationships between Mexico and the U.S., which encompasses many facets. COMMENT/RESOLUTION We are not aware of any other free trade agreements (“FTAs”) that attempt to track trade deficits between modern economies. Consumers benefit from the increased competition, notwithstanding deficits. Most FTAs are more focused on increasing the overall level of trade than apportioning it among countries. Mexico has warned as to the potential damage to cross-border trade and investment if NAFTA were terminated. For instance, only 35 percent of Mexican exports to the U.S. and 36 percent of Mexican exports to Canada would be tariff-free, and U.S. and Canadian investments would no longer be able take advantage of the preferential access Mexico has to 46 markets with which it has free trade agreements. US1 Seek greater North American content; require minimum U.S. content, particularly for auto parts; certification and verification systems should be put in place. Eighty-five percent NAFTA origin, and 50 percent U.S. origin, has been mentioned. Tracking of origin of parts to be expanded, perhaps to include steel and electronics. CANADA Opposes country-specific content requirement; a product which is North American should receive duty-free or at least preferential treatment. MEXICO2 Opposes country-specific content requirement, but acknowledges the mutual need and goal to keep the greatest proportion of supply chains as possible within North America. Wants to ensure the continued growth of the Mexican automotive sector, which in 2016 produced approximately 3.5 million automobiles, with U.S. and Canadian parts. COMMENT/RESOLUTION This has been one of the most controversial topics during the first round of renegotiation meetings. Even U.S. automakers do not see addition of a U.S. content requirement as helpful. The existing NAFTA regional value content for automobiles is already relatively high at 62.5 percent for automobiles and 60 percent for automobile parts. By way of comparison only, the TPP4 Rules of Origin for automobiles required 45 percent or 55 percent regional value content for finished vehicles, depending on the method of calculation, and 35-45 percent for auto parts. Businesses throughout North America have reorganized their supply chains and increased their international competitiveness in reliance on current NAFTA rules. Reduce Bilateral Merchandise Trade Deficit Revised Rules of Origin NAFTA PROVISIONS 12 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Maintain existing duty-free market access; Expand opportunities and eliminate non-tariff barriers (NTBs); include more stringent labor standards for Mexican agricultural workers. Limit imports when U.S. produce is “in season.” CANADA Opposes changes to dairy and poultry supply management systems; demands elimination of U.S. restrictions on softwood lumber imports. MEXICO2 Concern for the impact of stringent labor standards, including the inclusion of a requirement for a higher minimum wage, on Mexican exporters, especially vegetable agribusinesses, and the strength of lobbying efforts by tomato producers in Florida and California. Mexican agribusinesses are forming a united front nationally to devise common positions and voluntarily to adopt better labor practices to ease pressure from the United States on this matter. Similar efforts were made during the negotiation of the Trans-Pacific Partnership (TPP). Mexico’s agricultural sector, enshrined in the Mexican Constitution, was very protected prior to NAFTA and many small farming jobs were lost at the hands of the U.S. agricultural sector. COMMENT/ RESOLUTION U.S. agricultural interests are wary of breakdown in NAFTA renegotiation reducing their exports, especially maize and wheat of which Mexico is a net importer. Likewise, Mexican agribusinesses, especially tomato and avocado producers, are wary of potential tariffs on their exports and the potentially adverse effect of heightened labor standards on their costs, especially in light of pressure from Florida and California producers who, in the past, have attempted to thwart Agreements Suspending Antidumping Duty Investigation on Imports of Fresh Tomatoes from Mexico (most recently in 2013). The U.S. has indicated a desire to have Canada dismantle its dairy (and perhaps other) supply management regime, which caps production at domestic needs but uses tariffs to prevent imports, and which prevents almost any export from the United States. Canada has answered that it can talk about that issue, but only if the U.S. agrees to dismantle its heavy subsidization of its overproducing dairy (and other) agricultural goods, an unlikely scenario. Canada cannot expose its farmers to a massive surge in subsidized imports. In previous negotiations, with the U.S. and with the European Union, Canada has negotiated moderate increases in the quota allowed for duty-free exports of such goods to Canada. In Canada this is a highly politicized issue, complicated by the view of Canadian farmers that their milk is safer and more hormone-free than U.S. milk. U.S., Mexican and Canadian agro-industry representatives (including CEOs of companies such as Driscoll, Mission Produce, Sun Farms, Aneberries, as well as the chair of the United Fresh Produce Association) gathered in Mexico City on the sidelines of the renegotiation talks. These representatives presented a united front defending NAFTA and highlighting the benefits it has brought to producers and consumers in the three countries. They also rejected calls for the imposition of temporary tariffs demanded by certain producers in the U.S. (such as tomato producers in Florida). Agricultural Goods NAFTA PROVISIONS 13 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Maintain existing reciprocal duty-free market access and strengthen disciplines to address non-tariff barriers that constrain U.S. exports. CANADA Maintain existing reciprocal duty-free market access and strengthen disciplines to address non-tariff barriers that constrain exports. MEXICO2 Maintain preferential and duty-free access to U.S. and Canadian markets for Mexicanmanufactured goods. COMMENT/RESOLUTION Mexican and Canadian manufacturing businesses are looking to alternative markets such as Japan, Germany, and other European countries so as to diversify their markets. Industrial Goods US1 Maintain existing duty-free access and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities. Eliminate tariff preference levels that allow significant non-NAFTA origin textiles to enjoy NAFTA preferences. CANADA Maintain NAFTA status quo. MEXICO2 Maintain preferential access to U.S. and Canadian markets for Mexican-manufactured goods. COMMENT/RESOLUTION Competition from Chinese textile and finished apparel products is a concern for Mexican industry and the government. Textiles US1 Promote greater regulatory compatibility with respect to key goods sectors to reduce burdens associated with unnecessary differences in regulation, including through regulatory cooperation where appropriate; ensure transparency in publication, adoption and implementation. CANADA Seek regulatory harmonization without yielding regulatory sovereignty. MEXICO2 Avoid unduly burdensome rules and regulations which, in practice, are veiled trade barriers. Harmonize regulations in key goods sectors to reduce burdens associated with unnecessary differences in regulation. COMMENT/RESOLUTION Fundamental similarity in the three positions ought to produce mechanisms leading to simplification and mutual recognition of standards and transparency of regulatory process. Harmonization and Transparency of Regulations NAFTA PROVISIONS 14 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Provide for enforceable SPS obligations that build on World Trade Organization (WTO) rights and obligations; establish new and enforceable rules to ensure that SPS measures are science-based. CANADA Ensure continuing harmonization with WTO constraints, but also with WTO permissions which allow reliance on health risks even though they might not be certain risks. MEXICO2 Mexico has not publicly stated a position on this issue. In general, at this time, this issue is not perceived to be one of the more contentious issues. COMMENT/RESOLUTION Canada will, for example, be anxious to preserve the power to impose content requirements on milk, even if some U.S. interests see those requirements as based on an exaggerated view of risk. US1 Implement WTO standards; transparency; rapid release of goods; increased automation of processes and electronic payments. CANADA Modernize and quicken as much as possible; reduce the cost and delay of border crossing. MEXICO2 Simplify customs rules, regulations, and procedures, and reducing waiting times for inspection at ports of entry. Harmonizing customs rules, regulations, and procedures. COMMENT/RESOLUTION Fundamental similarity in the three positions ought to bring mechanisms which will ease border crossing for all goods. US1 Increase all three countries’ lower limit for duty-free imports to the equivalent of USD 800. CANADA Opposes high de minimis level as it will lead to decreased sales tax revenues for Canada and all provinces and send online shopping to larger, more numerous U.S. on-line sites. MEXICO2 The Mexican Ministry of Commerce opposes an $800 de minimis level because it would hurt domestic manufacturers and lead to decreased VAT revenues in Mexico. The current Mexico de minimis level is $300, as a general rule, but is $50 for e-commerce transactions. COMMENT/RESOLUTION Canada is concerned that, if the dutyfree limit is raised, Canadian shoppers will increase the quantity of lower priced retail goods purchased in the U.S. and bring goods back across border dutyfree. The contentiousness of this issue reveals that NAFTA is about more than import duties. Sanitary and Phyto-sanitary Measures (SPS) Customs and Trade Facilitation Dollar Value Below Which No Customs Duty Required NAFTA PROVISIONS 15 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Technical Barriers to Trade (TBT) Services Telecommunications US1 Follow rules of WTO TBT; consultation and national treatment regarding adoption of standards, transparency and related areas. CANADA Follow WTO rules; Canada believes it already does. MEXICO2 Mexico has not publicly stated a position on this issue. In general, at this time, this issue is not perceived to be one of the more contentious issues. US1 Eliminate discrimination against NAFTA suppliers; eliminate requirement that data or service provider be local; allow U.S. cross-border delivery of services. CANADA Protect requirements that personal and private data, particularly health data, be stored where it will not be in danger of disclosure to foreign governments. MEXICO2 Mexico has not publicly stated a position on this issue. In general, at this time, this issue is not perceived to be one of the more contentious issues. COMMENT/RESOLUTION The U.S. is competitive in many service sectors and will want to ensure that its companies continue to grow in this area without the impediment of undue trade barriers. US1 Ensure market access, network connectivity access and protection of technology. CANADA Ensure connectivity but also domestic power to protect privacy and to enforce domestic rules. MEXICO2 Promote a greater integration of the three countries’ telecommunications markets. COMMENT/RESOLUTION Mexico has abolished inter-country roaming charges and certain Mexican consumer groups have advocated for this reform to be adopted on cross-border roaming charges as well. NAFTA PROVISIONS 16 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Financial Services Mobility Digital Trade US1 Increase transparency and eliminate restrictions on crossborder flows. CANADA Increase efficiency of flows of financial services without reducing power of oversight. MEXICO2 Facilitate and increase access for Mexican providers of financial services to U.S. and Canadian markets. COMMENT/RESOLUTION Canada is very conscious that its regulatory oversight of the financial sector spared the Canadian economy the ravages which greatly harmed U.S. consumers and the U.S. economy during the Global Financial Crisis and hence is likely to resist changes that would create additional risks in this area. US1 The U.S. Summary of Objectives contained nothing on this topic. The U.S. is likely to resist any liberalization. CANADA Facilitate crossborder mobility of business people to support trade in services. MEXICO2 Facilitate crossborder mobility of business people and professionals to support trade in services. US1 Commit not to impose duties on digital products such as software, video, music; nondiscriminatory treatment; remove safe harbor for internet sites onto which pirated material is uploaded. CANADA See similar comment above as to Canadian government concern for loss of sales tax revenue stemming from U.S. sites. MEXICO2 Foster the development of the digital economy, electronic commerce, and the provision of financial services through electronic platforms. COMMENT/RESOLUTION The Mexican Online Sales Association has expressed concerns of unfair competition by U.S. and Canadian e-commerce companies to expand their customer base in Mexico, because Mexican e-commerce companies are unable to acquire merchandise at the same price as their U.S. and Canadian counterparts. U.S. and Canadian companies have lower costs because they pay lower import duties and taxes on East-Asian goods. The Mexican government is pushing for uniform import duties. NAFTA PROVISIONS 17 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Cross-Border Data Flows Investment US1 No restrictions on cross-border data flow; no requirements that data be stored locally; no mandatory disclosure of software source codes. CANADA Allow cross-border data flows but preserve rules governing data storage, for purposes of protecting privacy. MEXICO2 Mexico has not publicly stated a position on this issue. In general, at this time, this issue is not perceived to be one of the more contentious issues. COMMENT/RESOLUTION Both Canada and Mexico have data protection laws designed to protect personal identifiable information (PII). Canada may seek greater protection as to personal data protection for its citizens. US1 Reduce or eliminate barriers to U.S. investment; investor rights consistent with U.S. legal principles; no greater rights in U.S. for NAFTA investors than for U.S. investors. CANADA Preserve investor protections (perhaps without preserving NAFTA Chapter 11). MEXICO2 Maintain non-discriminatory treatment for Mexican investors in the U.S. and Canada in accordance with international standards. COMMENT/RESOLUTION Foreign investment is still limited and/or capped in a limited number of economic activities in Mexico. NAFTA PROVISIONS 18 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP State-owned Enterprises (SOEs) US1 Activity in accord with commercial considerations and ensure nondiscriminatory purchases and sales by SOEs; exceed WTO SCM guidelines; avoid subsidization of SOEs; limit sovereign immunity; transparency. CANADA Canada has greatly reduced protections for state-owned enterprises (SOEs). It will seek to preserve what is left, particularly as to alcohol. MEXICO2 Mexico liberalized its oil and gas and power sector in 2014 allowing for greater foreign investment, but both Pemex and CFE remain important SOEs. The Mexican government has declared that a more developed and closely-integrated North American energy market should be a common goal in a revised NAFTA. COMMENT/RESOLUTION See comments in item entitled “Energy” on page 27. Intellectual Property US1 Implement WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS); ensure protection equivalent to U.S. level; eliminate discrimination in availability of IP rights; strong and transparent enforcement; allow market access for U.S. entities that rely on IP protection; foster access to medicines; eliminate improper use of geographic indications. CANADA Canada already made concessions towards the U.S. position on IP in the context of the TPP negotiations and will resist further concessions. Canada also has a strong interest in maintaining exceptions required to protect Canadian culture and the French language. MEXICO2 Inclusion of mechanisms to achieve effective protection of intellectual property rights, promoting an equilibrium between the public interest and the interests of holders of IP rights. COMMENT/RESOLUTION Canada fought hard in initial NAFTA negotiations to protect its use of geographic indicators. Canada will be very careful to preserve the protections it has already negotiated, with the U.S. and with others, for Canadian geographical indicators, but also to avoid making commitments which will interfere with commitments made, for example recently to the European Community, for the protection of other jurisdictions’ geographical indicators. The recently negotiated CETA (free trade agreement between Canada and Europe) includes many commitments and compromises covering geographical indications. The 27 EU members (excluding the UK) are pressing for the inclusion of rules protecting geographic indications in the revised free trade agreement between Mexico and the European Union. NAFTA PROVISIONS 19 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP US1 Bring labor into core of NAFTA; conform with International Labor Organization (ILO) standards, including freedom of association and elimination of compulsory labor; abolition of child labor; elimination of discrimination; establish minimum wages, occupational health and safety rules and maximum work hours; prohibit waiver or derogation from the above; provide for equitable judicial proceedings; subject the above to NAFTA dispute resolution and establish stakeholder participation and oversight. CANADA Ensure that any NAFTA rules regarding labor avoid a “race to the bottom” and preserve the provincial powers to impose minimum standards. Furthermore, Canadian negotiators urged their U.S. counterparts to commit to passing a federal law negating the “right-to-work” laws in 28 U.S. states, arguing that these laws give an unfair advantage to those states. MEXICO2 Mexico wants NAFTA to reflect Mexico’s international labor commitments, and has expressly rejected increasing wages by means of other than market forces. COMMENT/ RESOLUTION Mexico agreed to raise labor standards generally conforming to ILO standards in the Trans-Pacific Partnership (TPP). During the first round of negotiations between August 16th and 20th, Canada was also vocal about the need for Mexican salaries to rise in order to enable Canadian manufacturing industry to compete better with the Mexican manufacturing industry. The Canadian government is requesting that Mexico and the U.S. ratify the eight core conventions of the International Labor Organization (ILO). Canada has proposed to use the labor chapters in the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and the TPP as templates for the relevant chapter in NAFTA, but giving the corresponding provisions more “teeth.” (Currently, there is a NAFTA labor side agreement). These positions appear to be influenced strongly by Canadian organized labor. Mexico and the U.S. have ratified, respectively, seven and two such ILO conventions. Competition Policy Labor US1 Maintain rules prohibiting anti-competitive conduct. CANADA Generally in line with U.S. position. MEXICO2 Maintain and modernize rules prohibiting anticompetitive conduct, improving cooperation and exchange of information between the three governments. COMMENT/ RESOLUTION Agreement on this issue tentatively reached at end of third (Ottawa) round of negotiations. NAFTA PROVISIONS 20 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Environment Anti-Corruption US1 Bring environment provisions into core of agreement; establish obligations that are subject to NAFTA dispute settlement; prohibit waiver or derogation from the above; require implementation of obligations under multilateral environmental agreements; allow stakeholder participation; require fair and transparent enforcement and judicial proceedings; provide adequate sanctions for violations; provide for cooperative activities and oversight; combat illegal fishing, prohibit fisheries subsidies and promote fisheries management; protect and conserve flora, fauna and ecosystems; and combat illegal trafficking in wildlife and timber. CANADA Openness to environmental provisions in the core agreements but reticence to allow U.S. control over Canadian standards. MEXICO2 Bring environmental provisions into the core of the agreement and strengthen cooperation between the three countries on environmental matters. COMMENT/RESOLUTION Canada is seeking the inclusion of provisions that would prevent a country from intentionally weakening climate change and environmental policies to attract investment. US1 Criminalize government corruption; adopt adequate enforcement and penalties; require books and records; disallow tax deductions for corrupt payments; and encourage establishment of codes of conduct. CANADA No announced position but several non-NAFTA pronouncements indicating commitment to fight corruption at home and abroad. MEXICO2 Criminalize acts of corruption by government officials and private parties affecting trade and investment. COMMENT/RESOLUTION Although details are yet to be disclosed, representatives of the three countries are reported to be close to reaching an agreement on the relevant chapter, which will likely have two angles: enforcement in commercial transactions between private parties and anti-bribery measures in government procurement processes. NAFTA PROVISIONS 21 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Trade Remedies Government Procurement US1 Eliminate Chapter 19 dispute settlement arbitral panels for appeals of trade remedy cases; eliminate global safeguards exclusion; exclude state-owned enterprises from analysis of domestic industry in antidumping cases; address duty evasion; facilitate imposition of measures against thirdcountry dumping. CANADA Opposes elimination of Chapter 19 dispute settlement mechanism. Chapter 19 was essential to Canada’s view of fair judicial review in, e.g., the last softwood lumber dispute. MEXICO2 Opposes elimination of Chapter 19 dispute settlement mechanism. COMMENT/RESOLUTION In 1989, Canada walked out of NAFTA negotiations in which the U.S. offered neither disappearance of anti-dumping/ countervailing duties proceedings nor bi-national or tri-national review of administrative decisions for these types of matters. US1 Increase opportunities for U.S. firms to sell U.S. products into NAFTA countries; exclude U.S. sub-federal coverage from commitments being negotiated; keep U.S. domestic preferences for various protected groups and for national securityrelated procurement; keep Buy America requirements on federal assistance to state and local projects, transportation services, food assistance, farm support etc. Limit Canada’s or Mexico’s access to U.S. government procurement to sales U.S. suppliers can obtain in that country. CANADA Opposes requirement to open Canadian procurement in the face of U.S. demand that Buy America procurement exceptions be expanded. Canada has repeatedly and steadily opened federal and provincial procurement to U.S. and Mexican suppliers. MEXICO2 Guarantee legal certainty to Mexican suppliers in such processes. COMMENT/RESOLUTION The one-sided U.S. demands will not be accepted by either Canada or Mexico. Small-and Medium-sized Enterprises (SMEs) US1 Secure commitment to provide support for SMEs to meet NAFTA requirements and export to NAFTA markets. CANADA Canada does not see large or small business as needing distinct protections. It sees trade liberalization as good for all. MEXICO2 Secure commitment to establish mechanisms to stimulate and encourage a greater participation by SMEs in regional supply chains and to export to U.S. and Canadian markets. COMMENT/RESOLUTION Representatives of the three countries announced completion of this section at the conclusion of the third (Ottawa) round of negotiations. Agreement includes establishment of a NAFTA SME Trilateral Dialogue and efforts to increase access of SMEs to member states’ markets. NAFTA PROVISIONS 22 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Energy US1 Preserve and strengthen investment, market access, and state-owned enterprise disciplines benefitting energy production and transmission; support North American energy security and independence, while promoting continuing energy market-opening reforms. CANADA Canada remains open to the NAFTA goal of a North American energy market and seeks to avoid new U.S. protectionism. MEXICO2 Overhaul NAFTA’s energy chapter to take advantage of the potential offered by the Mexican energy reform, support North American energy security and independence, and ultimately achieve an integrated and North American energy market and bloc. COMMENT/RESOLUTION Reform of these SOEs was carved out of the initial NAFTA. Mexico has hinted that a more developed regional energy market is a potential upside for the current NAFTA negotiations, but reforms to PEMEX and CFE remain politically sensitive, particularly with upcoming Mexican presidential elections in July 2018. Some private upstream companies have raised concerns about leveling the playing field vis-à-vis Pemex. Mexican government has historically rejected the inclusion of a waiver of sovereign immunity in its E&P contracts, despite ongoing petitions by the upstream industry. Obama Administration decision to block Keystone Pipeline has not been forgotten by Canadian authorities. Dispute Settlement US1 For Chapter 11, establish dispute settlement mechanism that is transparent with open hearings, public determinations and openness to nonparty submissions. Recent indications suggest, however, that the U.S. may want to see even more significant restrictions to arbitral rights under Chapter 11. As noted in Trade Remedies above, the U.S. may demand elimination of Chapter 19. CANADA Canada remains very open to greater transparency of all dispute settlement hearings, but is adamant about the need to preserve both Chapters 11 and 19. MEXICO2 Modernize Chapters 11 and 19 to make disputesettlement mechanisms more transparent, swifter, and more effective. COMMENT/RESOLUTION The leaders of the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers have publicly expressed their support for a strong investorstate dispute settlement (ISDS) mechanism under Chapter 11 to resolve disputes under NAFTA. Canada would prefer to see establishment of a standing independent claims tribunal similar to the forum established in CETA. NAFTA PROVISIONS 23 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP Currency Manipulation General Exclusion Five-Year Sunset US1 Ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. CANADA Canada sees this as a red herring. Its currency trades freely. MEXICO2 Keep the flexibility of the Bank of Mexico to take measures to control inflation and protect the currency from violent fluctuations. US1 Allow for the protection of legitimate U.S. domestic objectives, including the protection of health or safety and essential security, among others. CANADA Canada will be relieved to have new provisions confirming for the Canadian public that Canadian governments preserve their powers and rights to see to health, environment and safety. MEXICO2 Mexico has not publicly stated a position on this issue. In general, at this time, this issue is not perceived to be one of the more contentious issues. Mexico’s position on this issue may not differ much from the U.S. position. US1 Mandate a regular, systematic reexamination of the effectiveness of the agreement. CANADA Sunset would destroy investment incentives that are among the chief benefits of an FTA. MEXICO2 Re-examination would introduce economic instability. COMMENT/RESOLUTION Could be a deal killer. U.S., Canadian and Mexican businesses, including energy industry, see a sunset clause as counter-productive. Opposition also attributed to U.S. Departments of Agriculture and State. NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP 24 The parties agree that modernization of NAFTA is necessary, and they are making good progress on several technical issues. The negotiations have been extended into February 2018, perhaps reflecting that progress is being made but also that more time is required. The current dynamic of the negotiating positions, however, may drive the negotiations toward possible breakdown or failure, with respect to: Eliminating bilateral trade imbalances Increasing requirements for regional and country-specific origin Expanding national preferences in government procurement Weakening investor-state and trade remedy dispute resolution regimes Subjecting the agreement itself to mandatory periodic sunset absent new negotiations U.S. Chamber of Commerce President and CEO Tom Donohue expressed concern over the U.S. negotiating posture noting that “there are several poison pill proposals still on the table that could doom the entire deal.” Nonetheless, the parties have announced their intention to extend the negotiations through February 2018, suggesting that the talks have not broken down and that bargaining will continue. KEY TAKEAWAYS Contributions to this report provided by McCarthy Tétrault LLP For information in Canada, please contact: 25 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP NAFTA TASK FORCE CONTACTS Nicolas Borda Partner | Mexico City nicolas.borda@haynesboone.com T +52.55.5249.1867 Phil Lookadoo Partner | Washington, D.C. phil.lookadoo@haynesboone.com T +1 202.654.4510 Eduardo Corzo Ramos Counsel | Mexico City eduardo.corzo@haynesboone.com T +52.55.5249.1817 Ricardo Garcia-Moreno Partner | Houston ricardo.garcia-moreno@ haynesboone.com T +1 713.547.2208 Larry Pascal Partner | Dallas larry.pascal@haynesboone.com T +1 214.651.5652 Hector Herrera Partner | Mexico City hector.herrera@haynesboone.com T +52.55.5249.1846 Jorge Labastida Partner | Mexico City jorge.labastida@haynesboone.com T +52 55.5249.1825 Alberto de la Peña Partner | Dallas alberto.delapena@haynesboone.com T +1 214.651.5618 Yasser Madriz Partner | Houston yasser.madriz@haynesboone.com T +1 713.547.2504 George Y. Gonzalez Partner | Houston george.gonzalez@haynesboone.com T +1 713.547.2011 Edgar Klee Partner | Mexico City edgar.klee@haynesboone.com T +52.55.5249.1873 Simon V. Potter Counsel McCarthy Tétrault LLP spotter@mccarthy.ca T +1 514.397.4268 Ed Lebow Counsel | Washington, D.C. ed.lebow@haynesboone.com T +1 202.654.4514 Gina Falaschi Associate | Washington, D.C. gina.falaschi@haynesboone.com T +1 202.654.4572 Michael Scanlon Associate | Washington, D.C. michael.scanlon@haynesboone.com T +1 202.654.4570 Valisa Berber-Thayer Associate | Houston valisa.berber-thayer@ haynesboone.com T +1 713.547.2698 Cesar Ramírez del Ángel Foreign Associate | Dallas cesar.ramirez@haynesboone.com T +1 214.651.5157 Diana Liebmann Partner | San Antonio diana.liebmann@haynesboone.com T +1 210.978.7418 Suzie Trigg Partner | Dallas suzie.trigg@haynesboone.com T +1 214.651.5098 Luis Campos Counsel | Dallas luis.campos@haynesboone.com T +1 214.651.5062 Rafael Anchia Of Counsel | Dallas rafael.anchia@haynesboone.com T +1 214.651.5035 Jeff Civins Senior Counsel | Austin jeff.civins@haynesboone.com T +1 512.867.8477 Haynes and Boone lawyers have been helping clients successfully close transactions, clear regulatory hurdles, and manage disputes involving international trade for more than four decades, including those related to the North American Free Trade Agreement (NAFTA). In anticipation that the new U.S. administration will seek to amend NAFTA, our lawyers have been helping clients prepare for the impact of potential changes and any new opportunities that may arise. Based on our experience working with clients and other lawyers in Canada, Mexico, and the United States, we are familiar with the sections of NAFTA that are likely to be impacted, including investor-state arbitration provisions, binational review panels for trade litigation, and local content requirements for products such as automotive parts. Our lawyers have also worked extensively with legal authorities in the U.S. and Mexico who would have a function in any efforts to amend NAFTA, as well as any efforts to develop rights of retaliation in the event negotiations reach an impasse. Clients benefit from our experience and our team of more than 70 International Practice Group lawyers, drawn from lawyers in our 12 U.S. offices and our office in Mexico City, which collectively take an integrated and collaborative approach to advising on cross-border projects. Our lawyers are actively engaged in ongoing discussions about NAFTA, speaking at conferences about the agreement and notifying clients of recent developments. For example, our firm currently is assisting companies in Canada, Mexico, and the U.S. with cross-border supply chain exposure to prepare for possible NAFTA changes so as to minimize commercial disruptions – or even to take advantage of the changing legal environment for trade in North America. Clients of Haynes and Boone seek us out not only because of our experience in international trade transactions and disputes, including those relating to NAFTA, but also because we have been on the ground in Mexico City for more than 20 years, helping clients address and resolve cross-border issues and obtain the benefits of cross-border transactions. As an example of our detailed understanding of Mexico’s legal and business environment, we have helped major energy clients win bids to secure blocks in connection with the oil and gas bid rounds as part of Mexico’s Energy Reform. Our full-service capability in Mexico, together with our long history in six Texas cities and our growing presence in New York, Washington, D.C., and California provide a valuable commercial vantage point to help clients seeking practical and thoughtful advice related to their cross-border expansion challenges and opportunities. 26 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP ABOUT THE HAYNES AND BOONE NAFTA TASK FORCE LOCATIONS AUSTIN 600 Congress Avenue Suite 1300 Austin, TX 78701 United States of America T +1 512.867.8400 F +1 512.867.8470 CHICAGO 180 N. 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China T +86.21.6062.6179 F +86.21.6062.6347 WASHINGTON, D.C. 800 17th Street, NW Suite 500 Washington, D.C. 20006 United States of America T +1 202.654.4500 F +1 202.654.4501 27 NAFTA RENEGOTIATION MONITOR HAYNES AND BOONE, LLP This publication is for informational purposes only and is not intended to be legal advice and does not establish an attorney-client relationship. Legal advice of any nature should be sought from legal counsel. REFERENCE 1 See in general, Office of the United States Trade Representative, Summary of Objectives for the NAFTA Renegotiation (July 17, 2017). 2 See in general, the Mexican Ministry of Commerce report to the Mexican Senate on the “Priorities of Mexico in the Negotiations of the Modernization of the North American Free Trade Agreement,” dated July 31, 2017. 3 The U.S. withdrew from the Trans-Pacific Partnership in January 2017. haynesboone.com © 2017 Haynes and Boone, LLP