There is no greater economic issue facing Canada in 2018 than the renegotiation of the North American Free Trade Agreement, the pact that for 24 years defined this country’s economy, along with those of Mexico and the United States.
So, with the sixth round of talks under way—and a near palpable sense of pessimism in the air—Maclean’s set out to answer an essential question: Can three qualified, knowledgeable and reasonable negotiators reach an agreement to save NAFTA? Given their governments’ opening positions—but absent the racket of politics—can a trio of delegates representing their respective countries achieve what the official negotiators have so far failed to?
What would such a deal look like?
Okay, that’s three questions. But they’re vital ones. And to answer them, we’ve enlisted expert volunteers to participate in a shadow NAFTA negotiation that will unfold over the coming weeks, more or less in synch with the real ones. To state the obvious, this is an exercise in broad strokes: our delegates are tasked with tweaking the framework of NAFTA, addressing only the devilish details that stand in the way of that challenge, on five major subjects: auto and rules of origin, supply management and agriculture, conflict resolution (chapters 11 and 19), the sunset clause, and intellectual property and data. At the end of the complex three-round negotiation, they will have one choice: Deal or no deal.
To that end, we asked our representatives to focus on five high-friction areas: the auto sector, agriculture, dairy and supply management, dispute-resolution mechanisms and a proposed “sunset clause” at which point the parties must renew the deal or end it. But they face no restriction. They are free to introduce other issues if they believe it could lead to an agreement. Read all the negotiations on the topics specifically, or the transcript in full, here.
Now, meet our negotiators:
Christopher Sands (United States) is a Senior Research Professor and Director of the Center for Canadian Studies at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, D.C. where he has previously worked for several think tanks, most notably the Center for Strategic and International Studies and the Hudson Institute. He is American, originally from Detroit, Michigan.
Dan Ciuriak (Canada) is a former Deputy Chief Economist at Global Affairs Canada, runs a consulting practice focussed on quantifying trade agreements, and holds fellowships with the C.D. Howe Institute, the Centre for International Governance Innovation, and the Asia Pacific Foundation of Canada.
Hugo Perezcano Diaz (Mexico) is the Deputy Director of International Economic Law with the International Law Research Program (ILRP), at the Centre for International Governance Innovation. Prior to joining CIGI, he was an attorney and international trade consultant in private practice. He worked for the Mexican government’s Secretariat of Economy for nearly 20 years, serving as head of the trade remedy authority, and formerly as general counsel for international trade negotiations. He was actively involved in the NAFTA and the Uruguay Round negotiations.
The full transcript follows. You can also read specific, curated play-by-plays of each of the five topics to be debated:
- Opening statements
- Auto industry and rules of origin
- Supply management and agriculture
- Conflict resolution (Chapter 11 and Chapter 19)
- Sunset clause
- Intellectual property and data
Dan Ciuriak: OK. Yes, Dave, it’s Dan here. If I may invite Chris to give an opening statement. As this negotiation is at the instigation of the United States, I think it’s fair to put the onus on the United States to make the opening statement.
Christopher Sands: I should probably start by saying something like: “You’re probably wondering why I’ve called you all here today.” (laughter)
The United States, a long time ago, back in the days of Henry Clay, shortly after the War of 1812, adopted what we call in American history the American System, which was a high-tariff wall, a central bank and revenue from the tariff being put into infrastructure to help open up the West. Because economic growth comes from one or two things—either you use your inputs more efficiently or you add inputs—this addition to the productive input to the American economy helped the U.S. go from pretty poor on most socioeconomic indicators in the 1820s to being truly competitive by the end of the 19th century.
At that point, we saw our biggest challenge being colonialism and the mercantilist system that locked us out of markets, where Britain, France, and other countries including Spain, had got first. And so we became proponents of the open door and open trade. Admittedly, this was because we got to the game late. But we wanted to be treated as all other foreign countries are treated. This gave us an ability, because we were successful in pursuing that course, to expand the United States’ productive capacity as an exporter. And that helped further the American dream and keeping the American economy strong.
We ended the Second World War with a commitment to trying to help other countries rebuild. And we did that through a mix of financial assistance and programs designed to bring products to market and encourage the development of export markets. By the end of the Uruguay round [of trade negotiations within the framework of the General Agreement on Tariffs and Trade], we began to see that there was a new promise that we could offer developing countries, and that was export-led growth. So we led an opening of major developed economies to developing economies. NAFTA was very much in that context. Mexico was going to be offered the chance to grow as an emerging market through access to the consumer base in the United States and in Canada, which had the wealth to be able to buy more sophisticated products higher up on the value chain. The implicit assumption was that, as Mexico grew, Mexicans would buy more American products, become a richer market, and the U.S. in general would move up the value chain in terms of what it produced—that all boats would float.
This is the theory, the gamble, that President Trump explicitly has rejected. He believes that, while we generously opened ourselves to emerging markets, many of our trade partners—China in particular—manipulated the rules in such a way that they retained protections in their domestic market while taking advantage of the openness of our market. And it was the American worker who paid the price. Now, yes, automation and other technologies were part of that story. But many people in the United States felt left behind.
This was not a Republican policy or a Democratic policy: both parties’ establishments promoted the openness of the U.S. And our establishment profited quite nicely from all of this, as did yours. There was a period when the U.S. seemed to have the upper hand, when we saw economic nationalism in Canada under the Pierre Trudeau government. We saw economic nationalism in Mexico prior to the opening that NAFTA provided for more democratic governance. So the rekindling of some economic nationalism in the U.S. should come as no surprise.
Our goal is fundamentally is not to destroy NAFTA but to create a more fair balance. The idea that our workers were eventually going to be benefiting from exports to Canada and Mexico has not materialized. The elites have done well, but we’ve left people behind. So what we want to do is put America first. We want to make sure we’ve done a good deal for our workers, that employment is at the centre of our trade policy. And we hope that in doing so, changing some of these rules, we can reform NAFTA so that it works for all three of our countries.
Mexico should know that, while Mexico certainly as an emerging market has taken advantage of the U.S. growth, that isn’t the problem. It’s the cheating that’s the problem. And Mexico by far is a smaller problem than China is. So this NAFTA negotiation, for us, is a signal of where we intend to go globally. This conversation will be had at the World Trade Organization (WTO), and will be had with China, and will be had throughout the international system. We feel that we can treat Mexico fairly but also demand fair treatment in return. From this, and from doing the same with Canada, we think we can make not just America, but North America, great again. But only if we’re all committed to fairness on all sides.
Dan Ciuriak: OK (off microphone) if I may, Hugo, are you OK with me going ahead of you?
Hugo: Go ahead.
Dan Ciuriak: First of all, we recognize that politics will make this negotiation very difficult, as the outcome must also be presentable in Ottawa and in Mexico City as positive for the three parties. So politically, visible concessions will be required. We see Washington will also have to move on this. And that means that we see rhetorical statements such as Mr. Lighthizer’s, “Give us some candy with nothing in return,” as very much negotiable and an opening position, not the nature of the landing zone that we wish to define for NAFTA 2.0.
Second point would be that win-win trade outcomes not only put America first, but Canada first and Mexico first. There is no inconsistency with a trade-liberalizing deal and each party being able to go back to their electorates and say this was a win for us. It’s only when you get protectionism that you get into the lose-lose category—or possibly win-lose if you have large economies imposing tariffs and making terms of trade gains, in which case it’s possible to get nominal income gains despite real income losses, but that is hardly a significant win. So liberalization going forward is the answer to the rhetorical posture of America First.
Secondly, I very much understand what you say, Chris, about the issues regarding Mexico. From the Canadian perspective, we face many of the same issues that the United States does in terms of the shift of manufacturing jobs down to Mexico. It’s a matter of some concern here—and the commentary in Canada has also been about the possibility that maybe NAFTA was not such a good deal for Canada because of this very outcome which you described.
But we don’t see figuratively throwing Mexico under the bus as an option. Because it’s not clear to us that it is a case of Mexico cheating, if you will, on the trade rules, so much as the U.S. corporations which have invested in Mexico cheating. All the data indicate that Mexican wages have not kept up with productivity. Now, it’s a question of who’s paying those wages. Well, largely it’s multinational corporations. So a strong, progressive trade agenda which emphasizes corporate social responsibility, essentially a Fordist kind of agenda, which ensures that Mexican wages and living standards rise as part of the NAFTA big-picture outcome—that would drive the Mexican demand for products from North America across the board, because we have preferential access to the Mexican market. Having Mexican incomes rise is part of the agenda here.
So we see a progressive trade agenda not only as important in terms of taking back to the Canadian electorate an outcome which says we are addressing the inequities in globalization that have emerged over the past decade, but also to making NAFTA a fairer deal—a deal for all parties. We need to think about the progressive trade agenda as an integral part of the solution to making NAFTA work better.
Now turning to the big overview picture of how we want this to come out: I would emphasize that we are looking in this negotiation at identifying as rapidly as possible a landing zone for these negotiations. To date, that has not been put on the table. And it’s not obvious what such a landing zone looks like. I think this is the main challenge of our shadow negotiations.
I would put it out then to move forward on this as follows. Essential modernization elements of NAFTA 2.0: we have already negotiated that in the Trans-Pacific Partnership, and we do not want to return to those in NAFTA 2.0 talks. I think this puts 80 per cent of the text, if not more, already into the decided column. We only need to consider the issues of rebalancing, which have been put squarely on the table by Washington. So these have to be addressed, and we also have to recognize that sometimes what constitutes modernizing may blur with rebalancing.
Canada has made clear—and Washington has also at least rhetorically signalled—that NAFTA 2.0 is to be about freer trade, not protectionism. However, the answer to this may be that the NAFTA 2.0 might be somewhat less comprehensive than the NAFTA 1.0. The way forward to get freer trade may be to pull some things off the table. We have to be prepared to look for areas where “less might be more”. It’s not obvious, I think, that the outcome of the past wave of globalization has been entirely positive. It has led to many inequities in terms of its impacts—not only on blue collar workers, but in general on the middle class and on income distribution. So we have to be prepared for the fact worldwide the model of globalization is changing, and NAFTA 2.0 will be part of that—of the changing of the rules of the game for this new version of globalization. And that might involve somewhat greater freedom to manoeuvre for domestic policy. I think we have to keep that on the table.
In terms of the overall liberalization quotient that NAFTA 2.0 has to deliver, I would point out that 76.5 percent of Canada’s tariffs are already MFN-zero [meaning they have no impact on Canada’s most-favoured trading partners]. The areas where we have tariffs of any significance are in a handful of sectors. They are well known. Autos is one of them, which we’ll be discussing in detail; and obviously the supply managed sectors. I’ll talk about those very briefly. But by and large, we’re already operating at close to free-trade terms. Any imbalances which have emerged therefore have to be considered not faults of cheating but rather the fact that the way that globalization works has not been generating the desired balances.
So I think I will leave that as my opening statement, and then we can get into the specifics of what we want to talk about. But I’ll let Hugo have a go now.
Hugo Perezcano Diaz: Thank you, Dan.
I want to say at the outset that NAFTA has worked very well over the years for all three countries. We have created one of the largest and most dynamic free-trade zones in the world. Trade between the three countries has increased exponentially, especially if we consider what it might have been absent the NAFTA.
Now, the U.S. has raised concerns about the agreement being 20 years old, outdated in some ways, or in many ways, and in need of modernizing and upgrading. Mexico agrees that the NAFTA can indeed be upgraded and modernized. I agree with Dan’s comments, and I must say that it was unfortunate that the U.S. pulled out of TPP, which was in fact intended to bring modernization to trade between the three NAFTA parties while extending it to other countries and maintaining NAFTA.
I will say this quite candidly here among colleagues and partners: while Mexico has been content to remain in the comfort zone to maintain the NAFTA in its current form, I believe this is a great opportunity to revise our 20-plus-year-old agreement. We must do so with a view to improving it—and here I wholeheartedly agree with you both—in a balanced way. Mexico is all for it.
We also recognize that the U.S. has raised some important concerns. But we must use the appropriate tools to deal with them and to try to resolve them. Indeed, the NAFTA is just that: a tool, an economic-policy tool. It is neither the source nor the solution for all economics problems, real or perceived. And if we fail to acknowledge this, we run the risk of dismantling, to a greater or lesser extent, an agreement that has worked well, and of not resolving those other problems. I am looking forward to an honest and frank discussion. While we will be reporting and responding to our constituencies and the media, our discussions here at the table are confidential, and that will allow us to speak our minds and hash out these issues.
I agree with many of the things that you both have said. I agree that we should have more stringent rules to preclude cheating and circumventing the agreement; to have better rules that prevent anyone from taking undue advantage of others by circumventing the NAFTA. I also agree that we need more stringent provisions and standards that will raise wages and standards of living, especially in Mexico, but as well in the U.S. and Canada. There, I think that Mexico and the NAFTA – I would not say that it has failed, but it has come short. Now, it is not a problem that is exclusive to NAFTA. It is a problem of trade agreements in general. Therefore, I think that this serves as an opportunity to all three parties to actually come up with creative and progressive solutions, not only in terms of the trade in North America, but how we approach trade globally.
Dan Ciuriak: I think it’s a fair statement and also very welcome. A question, Hugo. It behooves us to also, I think, in addition to the broad sort of overview of things, to state what is our basic position, starting position, on the key areas which are to be negotiated in this – what I would consider to be the rebalancing portion of the NAFTA 2.0. Would you agree with that?
Hugo Perezcano Diaz: Yes, I think so.
Dan Ciuriak: (Crosstalk). I’m going to, I think, go first, if you guys want to see what I’ve got, to see my cards basically.
Hugo Perezcano Diaz: OK.
Christopher Sands: Sounds good to me.
Dan Ciuriak: So let’s start. I’m going to run down the list of five things, and this is what I jotted down.
On autos, the U.S. demands of 85/50 for rules of origin, they’re over the top. They’ve not been validated by industry. I don’t think that’s a viable starting point. I think NAFTA rules—the 62.5 per cent regional value content with the existing structure of the content rules, including tracing and so forth, is the starting point, now that the U.S. has pulled out of TPP. I think we throw the TPP stuff under the bus because that was essentially the U.S. and Japan’s position. So we have to go back to NAFTA rules of origin as the starting point, and we have to recognize that we’re very much in the hands of what are basically US multinational corporations in terms of what is viable for North America, and, in particular, in view of the fact that we need to keep the industry viable in competition with global firms.
The second thing on autos is that we have to recognize that the sector is undergoing fundamental transformation. The solution of a Fortress North America based upon 20th-century rules of origin—which put a primacy on things like steel and plastic—is inappropriate for the future. Cars are becoming technological instruments, with artificial intelligence and other kinds of technologies being the dominant form of value added, that is where we want to go.
Now, this actually provides a potential solution to the political optics of rebalancing and addressing specific concerns about how the auto industry has worked in North America, because Canada is in the same position as the United States in terms of having seen its share of the auto sector value-added flowing down to Mexico because of low wages. As I mentioned in my opening statement, that’s part of NAFTA’s problem: it did not support the wage and income gains in Mexico that we hoped for.
What I would suggest is potentially possible are to set up the rules of origin for Canada-U.S. and for U.S.-Mexico. We keep NAFTA as one deal, but we devise separate rules of origin which address the differences in the issues facing U.S.-Mexico and facing Canada and Mexico. But Canada’s particular position will be to ensure that our contribution on the technological front is safeguarded, and meanwhile the U.S. can put forth at least with a straight face – and without a red face – that it’s ensuring a very high U.S. content in the traditional portions of Mexican automotive assembly that then flow basically to the U.S. market.
That would be the position I take: that we address the autos issue as a rules of origin issue, and that we consider bifurcating the rules of origin.
On supply management, it’s just not on the table. The fiscal and political costs related to quota buy-out are prohibitive. And that has kept Canada from moving on this for decades, and it would be impossible for us fiscally and politically to move forward to remove supply management and fully open up the poultry and dairy markets. Canada negotiated a reasonable outcome under TPP with the United States, which I think satisfies the immediate market access desires of the U.S. in Canada.
And I would add that technical end-runs around supply management, such as the diafiltered milk, we would not be prepared to grandfather that any more than would the U.S. be prepared to grandfather or tolerate end-runs around its trade remedy laws. And I’m thinking here, for example, when softwood lumber was under anti-dumping duties, countervailing duties, suppliers in the U.S. sought to buy Canadian rougher-headed lumber, which is basically one side of the two-by-four scratched because it is used for facing. And that was seen as self-evidently an end-run, and the U.S. moved to counter that. So we would do the same thing with diafiltered milk. End-run around our supply management, we won’t tolerate that. It’s not part of NAFTA 2.0. So I think the TPP negotiated outcome on dairy satisfied U.S. interests then; it should satisfy U.S. interests now.
Chapter 19 goes hand-in-hand with the heightened recourse by the United States to trade remedies. We’ve seen specifics put on the table which suggest that right now the highest proportion of Canadian exports to the US ever are subject to countervailing, anti-dumping duties — with solar panels, aluminum, steel, softwood lumber and aerospace combined. So the essential reason why Canada insisted on Chapter 19 going into the Canada-US FTA back in the 1980s was the rising trend of use by the United States of trade remedies. Now, one thing which NAFTA does, and which the original Canada-US FTA does – or did, is to exempt under the safeguards clause the NAFTA parties where we are not major suppliers.
I think a solution to the Chapter 19 conundrum is to take that automatic exemption —anti-dumping, countervailing, as well as safeguards— and put that into the trade remedies provision under NAFTA such that, where we are not major suppliers we are automatically safeguarded. That would give the confidence and remove the major threat of widespread application of anti-dumping, countervailing duties, which would enable us to move away from Chapter 19.
I think along with that there would have to be a peace clause on aerospace and autos. And that would mean basically backing off on the Bombardier case. This is especially the case now that Boeing is talking a deal with Embraer. And as part of Chapter 19 going, I think Canada would be willing to see Chapter 11 go as well.
The sunset clause is a blatant imposition of trade costs in terms of uncertainty: it is overtly protectionist, and it cannot be part of the final landing zone. We understand the imperative of being able to say politically that we are making sure that trade agreements are in the national interest. I think this can be dealt with with five-year analytical deep dives by a trilateral body. And the European Commission does something like this automatically; it has a five-year assessment of its trade agreements, which then goes to the European Parliament. This is something which is a feasible and worthwhile endeavour on the part of the countries, and that should become part of the NAFTA process going forward. The five-year deep dive at the analytical level would be supplemented by a ten-year political review of what’s working and what’s not working—but there would be no automatic sunsets.
And finally, this is not part of the main issues, but on IP and data, in particular the e-commerce chapters, this is a very fluid area. We dealt with this in the TPP. Canada can’t go beyond the TPP, and would not want to see this opened up. If it were opened up, we would want to see less on the table, not more.
So that’s kind of how I see the major issues that we need to negotiate going forward. I think there is a solution in here that is a viable landing zone for the three of us. Over.
Christopher Sands: Well, Hugo, do you want to weigh in, or shall I offer some sort of U.S. responses in kind, I guess? What makes sense?
Hugo Perezcano Diaz: Well, like Dan said at the outset, it is the U.S. that’s brought us here. So I would very much like to hear the U.S. position and flesh it out.
Christopher Sands: Sure. Alright. Well, I’m going to follow Dan’s good lead and go issue topic by issue topic, and I’ll respond exactly as you have bring them to in that order. Hopefully, by being parallel like that, it’ll make it easier to follow all the threads and then make some discussion.
With regard to automotive, we feel strongly that we need to bring as much activity and value in North America as possible, but particularly in the United States. We would like to see a higher number than 62.5 per cent. We’re comfortable with having the same rule of origin for autos and other products, but remember that for products, not autos, we’re only at 50 per cent. The President believes that rule of origin represents a headline for the NAFTA agreement. And if it’s possible for us to come to an agreement on a higher rule of origin, and the next day The Washington Post announces that under new NAFTA, the rule of origin has gone from 50 per cent to 75 per cent, 72 per cent, then this is the clearest way to communicate to our supporters, our voters, that this is a better deal. In the same way Buy American has a tendency to communicate to people, we think that it cuts through a lot of the political nonsense that’s been spouted here over trade.
So let me unpack a little bit. Our proposal initially was for 85 per cent rule of origin, with a 50 per cent American reserve. So 50 per cent of the content had to be U.S. And we also proposed that tariff shifting, or the substantial transformation rule, be disallowed, and that tracing had to go all the way back to raw material. We feel that a lot of companies are suggesting that they meet the rule of origin, but if we scratch beneath the surface we find that they are actually not compliant, but that they’ve bundled things, either using one of the other rules and calling them local products or North American products when they don’t truly qualify. I agree with what Dan has said: that in some cases, at least in your opening statement, that in some cases, that the cheaters are not Mexico and Canada; the cheaters are our own firms who have tried to stretch the rules as far as they can. And those companies should be on notice, even if they are American headquartered, that their cheating is not acceptable either.
In order to get a higher number—70, 72, 75 per cent, we’ll see what we can get from you—we’re willing to give ground on substantial transformation and tracing. We’re interested in the headline number. The other pieces are counted in that. But I think that you can change how you calculate things in a way that lets you fairly and transparently meet that higher number.
And let me make a proposal with regard to autos, because it is such a unique sector. What we’ve seen in the United States, and I think Canada and Mexico share this, is that if you look at not just origin but value, an increasing amount of the value of what our car companies produce is in the R&D, in the engineering, in the marketing, in the technology. And our NAFTA rule of origin really counts the bits and bobs that go into making the car, with indirect cost receiving only sort of a cursory allowance. We’d like to see that allowance increased so that it reflects the value that we’re contributing. And yeah, that means white collar jobs in engineering—technology centres that are helping to push this new tech forward. Right now we don’t feel that’s adequately calculated in, and we want to reflect where we are really adding value.
We remember, and I’m sure you do too, the debate over semiconductors and things like VCRs. And the U.S. would take a similar position now: making the gear is nice, but if you own the intellectual content, the movie that the VCR plays or the software that the semiconductor runs, you have opened up on a lot of value, and it’s better to be on that idea side, which is more renewing and more profitable. We want to recognize the intangibles—indirect costs—more in our rule of origin. And we think that that will go a long way to achieving a higher number that we hope we can come to terms with you on.
Supply management: We’ve often taken the position—altruistically, of course, because we’re good, kind, loving people in America—that what we demand is politically difficult from our partners but it’s in their own best interest. And we are prepared to provide the political pressure that helps Canada to make reforms that frankly are in your own market interests. We know supply management in dairy, the concentration of that activity in Quebec, we know that that’s politically very difficult for Canada to do. But as your economists will also tell you, the way in which supply management distorts prices and production is not necessarily the most efficient model. And we want to give you cover to say we need to make these changes because the Americans are insisting on them.
Now, if that requires phase-ins or phase-outs of supply management, if there are other ways that we could trade off, we want to help you to help yourselves. We took a similar position in TPP. You’ll know that our Malaysian, Peruvian, other partners were often pushed to go farther than they wanted to; the Vietnamese as well. But this was something we all felt was ultimately constructive, even though in public we talked about how difficult it was. So that’s our offer to Canada. You’ve done a lot of good for your economy, like getting rid of the Canadian Wheat Board. There’s more room to go here. And to the extent that we can help you get there, we want to do so.
That said, this is an issue that is of importance to us in one very specific way. And that is that, in order to get this NAFTA agreement ratified, we need the support of the New York and Wisconsin congressional delegations, which are very dairy sensitive, as you know. We need some movement. And I understand that the Canadian position is that diafiltered milk is an end-run, but if you were to allow it, it would be a gesture that we might need to get this through Congress so that you could maintain supply management in its present form. Barring that, we need some movement. We don’t have to have all of it. We think we’re doing you a favour by offering this help. But if you don’t take that on board, we need something. And perhaps as we go on, we can come up with something that we can at least dress up and tell Congress that we fought for them.
Chapter 19. You know, the President is a litigious man. He’s been involved in an awful lot of lawsuits over his career. And the United States, I must say, is a litigious country. It is a messy way of resolving disputes, but it is one that is tried and true for us. And while we appreciate that Chapter 19 (the setting up of arbitral panels) was intended as a way — just as arbitration between firms is a way — of avoiding lengthy, messy, costly trials and litigation, we feel that the arbitral panels under NAFTA Chapter 19, and its predecessor, Canada-US Free Trade Chapter 18, have not really led to the kind of results that we are satisfied with.
For this reason, we would like to propose that we revert to what in the United States we call Article 3 courts, that is to say courts that are fully under the judicial branch, Article 3 of the US Constitution. We would propose that there be a court to which you could appeal international investment. There is such a court now that’s part of the US Department of Treasury. We would also propose that, where a Canadian firm or a Mexico firm, or even an American firm, felt that the United States had not provided treatment due under the NAFTA agreement as we renegotiate it, that they be granted standing without the requirement of espousal by the Foreign Ministry to go to the US Court of International Trade and to bring suit looking for fundamentally one kind of redress, which is a change in the behaviour of the US regulating authority.
So if, for example, Customs refused to consider a rule of origin calculation, and the firm felt that that rule of origin calculation should be allowed, they could demand that the court review the math of the firm and get satisfaction. This is not to create massive damages. I think that was one of the mistakes of Chapter 11, that it opened the possibility of monetary damages, which is a negative for governments, for sure. But the idea that a bad decision, a corrupt decision, can be reversed, changed, made right is what we’re really seeking. And we would want Canada through the Canadian International Trade Tribunal, and Mexico through a similar body, to offer the same rights to firms challenging Canadian and Mexican government decisions. And we think that it should be the right also to review the decisions made by the provincial governments and state governments because these governments are often, now that we’re moving into more service trade, they’re the governments that have caused the problem.
So we want judicial review. We want it to be under the sovereignty of our three countries so that it is a domestic court that decides whether domestic governments have cheated or have done what they are supposed to do, the rights of our partners as written into the new NAFTA agreement, will be respected. Now, we like the idea of the safeguard clause, trying to protect Canada and Mexico from safeguards, but I would argue that this is a better deal; that many Mexican firms would feel that they were more empowered than with simply a safeguard provision that might at the end of the day allow more bad behaviour and not lead to a settlement.
On sunset, your sort of last major issue: We’re very open to what Canada has proposed. As you know, we’ve had a NAFTA trade commission where our trade ministers have periodically looked at what’s going on, and we would suggest that, in addition to the deep dives on data, and perhaps a political review on some schedules—with no comment on dates, but we’re open—that there also be a possibility for the public, for interest groups, to weigh in with suggestions for further liberalization. We feel that this would be a way to make the agreement more transparent. You’ll remember we did something like this with the North American Competitiveness Council that was part of our old Security and Prosperity Partnership.
We feel that our citizens need to be able to cry foul or to ask for new changes or to challenge us to think more forward as the economy moves faster than electoral cycles, and certainly faster than most of our government officials. And we’d like to make this a more democratic process where petitions for change could come from the public, from the private sector, and through the data-driven reviews. We know that introduces some politics into the conversation, but we feel that’s important to make this agreement seem like it’s more responsive to the needs of citizens.
On the last comment, just on intellectual property and e-commerce and on data, this is a very, very important subject to the United States. This is one in which you all know that we pushed hard on the TPP front. I think that the TPP is [set on] a sound basis. Were we to have time in our subsequent sessions to put this on the table, we would probably start with TPP demands, and the fact that Canada wouldn’t go further but at least would countenance continuing with the TPP commitment. It is encouraging to us. But I’m just going to put that out of scope for now because I know we won’t have a lot of time.
With that, let me turn it over to you, Hugo, to respond. And Dan, you may want to chime in as well.
Hugo Perezcano Diaz: Alright. Well, thank you both again. And I think Dan did provide a helpful outline of the issues, and I too will take that opportunity to say more.
To begin with, the U.S. position on the origin content is quite helpful, in the sense that it’s easier to recognize that 85 per cent domestic content may actually do more harm to the three parties’ auto industries than good. And I think it’s a creative proposal to consider other elements that have, I would agree with Chris, that other elements have been left out that do provide value but have not been considered simply because this has been the traditional way of looking at things in the rules of origin context.
Mexico would like to understand the U.S. position better, and I’m sure we’ll come to that. We’ll have time to discuss it in more detail. But I think that that provides a good starting point for our discussion. We do want to see more production in North America. We do want to see more business here in the auto sector, and other sectors as well. But again, we need to be careful not to put ourselves in a position that will make us less competitive. Where there were probably originally the big three U.S. companies, I think that we can safely now say that they are the three big NAFTA North American companies as they all do substantial business in North America, seeking other places from where to produce and not achieving any of the goals that each of us is seeking. That is a good starting position.
We’re also happy to hear that the U.S. may rethink its position in terms of substantial transformation, and especially tracing. Tracing is complicated. Autos are very complex goods, and it was not easy to come up to negotiate and to agree on the rules for tracing in the original NAFTA negotiations. And Mexico was quite concerned that, by making them even more complex and going all the way back to raw materials, it will probably defeat many of the purposes that Chris has already placed on the table. We do not want to see more complexity in terms of the rules of origin that will encourage firms to circumvent the rules, that will encourage more cheating as opposed to finding ways to prevent that cheating. But by adding more complexity, I think we will be encouraging just that.
So I think that the tracing provisions as they are, they are already complex, they are far different from how origin verification works in pretty much every other sector. And again, if Mexico would like to see anything, it would be simplification of that, rather than adding complication. I’ll leave it at that for the moment, but I do look forward to a more detailed explanation by Chris and his team on how they envisage reaching a higher content by bringing other elements into the equation.
On supply management, I’ll be quite frank here. Of course trade between Canada and Mexico, mainly because of supply management, has not been great in these products. This is really the only sector that was not liberalized during the NAFTA negotiations. And Mexico would like to see some movement there, not just because we have an important dairy and poultry industry, and we would want to have better access to the Canadian market, but because it is in line—it sends a very important message in terms of the main goal that we all are trying to achieve, which is improving how the NAFTA works.
As Chris [U.S.A.] said, Mexico as well appreciates the political complications that Canada faces in this sector. But I’ll be quite frank: Canada cannot tell Mexico about political complications. Mexico made a huge transformation in vast, very sensitive sectors when we first negotiated the NAFTA. We faced huge political complications and we had fierce debate when that happened. And Mexico has come a long way as well. The few remaining sectors that we did not entirely liberalize, we’ve opened them up legally, and we’re well on the way of opening them up in practice, namely the telecommunications sector and, of course, our energy sector.
So we know we’ve pretty much been there and done that, and Mexico here as well would like to see movement by Canada. We believe that it is important in principle, but it is also important in terms of market access, and it is very important in terms of a better and improved NAFTA. So we are quite prepared to discuss a phase-out period. We’re quite prepared to discuss longer or shorter transition, as they may be needed. But I believe that it is very important for Canada to move on supply management.
Let me turn to Chapter 19 now. I disagree with the U.S. position that Chris expressed, that Chapter 19 has not worked, I believe he said, “as it was intended” or “as the US had initially anticipated.” I think that, of all the dispute settlement mechanisms that we have in the NAFTA, it is the one that has worked better, that our exporters, producers, importers have all NAFTA members have availed of most. I think the results are quite balanced. I do recognize what you said, Chris; that not Trump specifically, but the US in general, is quite litigious. And trade is certainly an area that involves or brings, rather, a lot of litigation.
But having said that, I think that, if anything, we need to improve Chapter 19. I think that one of the reasons why Chapter 19 has, although in general it has worked well, I don’t believe it is perfect, and there are certainly areas to improve in. One of the things that we have failed to do, for instance, is we have been unable to bring to Chapter 19 panels the more qualified staff.
Chapter 19 does replace judicial [authority] – so panellists act in that capacity [but] … we haven’t been willing to pay them well enough. So Chapter 19, we should recognize that first of all, we want top-notch people working in Chapter 19 panels. We want to recognize that they do an important job in reviewing the decisions of our investigating authorities, and we want to recognize the value of the work that they do. If we are going to attract more efficiency, more high quality, and an even more diverse group of people to be involved in Chapter 19 panels, we should be able to pay them for what they do and, in fact, for the work that we want them to do.
So I want to propose actually better wage for panellists in Chapter 19 cases. That will allow us to attract not just academics, but actual practitioners, and perhaps even retired judges. Mexico’s proposal is to actually maintain Chapter 19, and actually to pay panellists better. And I would suggest that the IXIT rate is a good starting point. It is neither a very high rate, such that people will see it as a business niche. Mexico views Chapter 19 as well as Chapter 11 more as a public service than a business niche. But we do recognize that the work that people do has value. And I think the IXIT rate is an appropriate rate that does recognize the work that people do.
I’ll just say it could be an alternative, and we’ll have the opportunity to discuss this further, we may actually want to go back and review the rules for trade remedy. We’ve had discussions in the WTO for many years. This has been a complex issue, or a complex area of negotiation. We also recognize that the US is not entirely satisfied, for instance, in how the WTO rulings have gone. It believes that the WTO panels and the appellate body have gone further and actually modified the rules that the US believes it negotiated originally.
So we’re open to discussing the rules themselves. And I would say it would be a complement to Chapter 19, but we’re willing to talk about that as well as an alternative. And again, I think that trade remedies in general is an area where we could greatly improve and modernize the NAFTA.
On tech, Chapter 11, since Dan brought it up, Mexico has a different view for very different reasons. We recognize, while certainly Chapter 11, the way that it is designed is—and not just Chapter 11 but investor-state arbitration in general—it’s mostly an avenue for governments to be sued. And while we certainly appreciate Canada’s concerns— not that Dan stated them here, but they’re no secret, with concerns about the right to regulate and unduly curtailing government activity. I think—and this I say from the Mexican perspective especially—Chapter 11 is a good set of provisions that help to keep checks and balances on government activity.
The rules are quite clear. I don’t believe that there has been a lot of debate about the decisions and damages that have been awarded. But I don’t believe that the dispute settlement mechanisms is really the culprit. If anything, we should be concentrating in clarifying the rules, as we did, for instance, back in 2000 or 2001, when we negotiated the NAFTA Note of Interpretation and the three countries have in other bilateral investment treaties that we each have entered into with other countries, or as we did, for instance, in the TPP.
Now, having said this, Mexico would be open as well to discussing new areas of improvement of Chapter 11 if we have time for that. And since that, to quote both Dan, and Chris in your opening remarks, the need to rebalance issues to come up with a more balanced agreement. I would think that rebalancing the state-to-investor relationship is also an important area that we can and Mexico is quite open to discuss.
And the way to do it is, for instance, by bringing rules on corporate social responsibility. Because if the three NAFTA states are going to be offering substantive protection to foreign investment, we can and should demand appropriate conduct from those foreign investors in return, and that there should be consequences arising out of misconduct in that respect. But we can go into more detail about that. That would be an area of improvement. And we could make provisions to bring them not just as we did in the TPP, with a vague reference to voluntary standards that are out there, but actually impose actual discipline and bring them into the dispute settlement chapter, if you will. So Mexico is, again, open to discussing Chapter 11 in terms of how best to modernize it.
With respect to sunset, I’ll say that Mexico thanks Canada for its creative proposal. It appreciates the U.S.’s willingness to take that proposal seriously and discuss it. I do think that it will not do anybody any good to have a sunset provision, but to be having these discussions on ending in five-year cycles. And of course, five years is not that long a time. We all thought that our NAFTA negotiations would be done in a few months, and here we are continuing our discussions. And I don’t think that is helpful—that will not solve problems, that will politicize issues further. But Mexico is open to discussing the Canadian proposal and the other elements that the U.S. has placed on the table vis-à-vis public participation and participation of interest groups. While that may politicize issues, Mexico does recognize that it is part of a broader democratic process, and all views should be taken into account.
And finally, with respect to intellectual property and data, these are important issues. We acknowledge that we went a long way in our TPP discussions. The U.S. has backed away from those discussions as well. There were important concessions in that respect. And we are certainly willing to discuss the topic. We believe that e-commerce is important and should be part of our discussions. But we would like to hear what the proposals are, and we can add to them. With the U.S. having backed away from TPP, I think that it’s now fair game to have a more broad and in-depth discussion about many of the issues that we had agreed to there.
So I’ll leave it at that for the time being, and over to you.
Dan Ciuriak: If I may then, I think it’s been very, very helpful to have this first go-around, both in general and on the topics. So I guess – so we should launch into the negotiation of the autos.
Moderator: Yeah, I agree. I think it was a really good job of, as – as you guys said, showing your hands and – and trying to, you know, have that transparency up front about what the – the main thinking is on the key areas. And I was thinking the same thing quietly to myself here, as maybe it’s time to start the talk. We’ve got five major areas. And now that you know what each other’s thinking, or what you say you’re thinking, time to deal.
Dan Ciuriak: Very well, then let’s do it.
Christopher Sands: Well, since we sort of started it here on the U.S. side, I recognize the 85 is a bit high, as you’ve all acknowledged. Can find a way to get to 75?
Dan Ciuriak: Let me jump in here, Chris: The main problem with the high regional value content, in a world where we’re progressively moving towards a made-in-the-world sort of supply-chain sourcing, is that it risks undermining the competitiveness of North America. If you take a look at the supply chain of Boeing, for example, it’s from all over the map. And that’s because the best suppliers are all over the map. So moving in the direction of higher RVC [regional value content] while attractive from a communication sense is just wrongheaded economically.
Here’s another sort of problem that this puts us in. In terms of firms that gear their supply chain towards North America: if they’re limited to sourcing all their components from North America, then they become uncompetitive in the key U.S. market. And it’s not just Canadian firms, but even American firms, which have got important clienteles in Canada and in Mexico. Because the Chinese don’t have to observe North American rules of origin. Europeans don’t have to observe these rules of origin. They just pay the MFN [most favoured nation] tariff. The MFN tariff is very low. So putting in place a requirement for higher sourcing, where eventually you’re going to force every firm that has optimized its supply chain at the 62.5 per cent level now to find another way to meet its input requirements without compromising its costs, that’s going to be extraordinarily difficult.
Countries don’t trade; it’s firms that trade. And the firms will be in a position where they will have to actually move their production offshore entirely to be able to compete with the firms that supply the U.S. market from abroad. And here, I would put on the table the Ford Focus issue. Ford had a dispute with the U.S. Department of Commerce over a treatment of its supply chain, and it basically resolved the issue by moving the production of the Ford Focus to China.
So I think going for higher RVC, while interesting on a communications perspective, would have to be dealt with in a way which ultimately actually doesn’t undermine the competitiveness of firms. And I’m talking about U.S. firms, but certainly about Canadian firms exporting to the U.S. We don’t want to see our market share dribbled away to third countries as a result of costs going up. It’s one thing to rebalance in favour of the U.S., but it’s simply not on the table for anyone—I think this goes for the U.S. as well—to have this dribble away to third countries. So that’s my starting perspective on the higher RVC in terms of the percentage.
Hugo Perezcano Diaz: I have to agree here with Dan. But I think that before talking about 75 or 85 or 72 or 70, my fear is that these may all be happy numbers. And we probably should be discussing other things. Like one of the concerns that you raised was, you know, there is the perception, perhaps a reality, that companies, including U.S. companies, are cheating and are circumventing the origin requirements. Do we need better mechanisms to avoid that? And again, I don’t believe that adding complexity to tracing will do that.
But what is it that we want to get? Is it just any number for the sake of the number, for the sake of coming out and saying, you know, “we went from 62 to 75 or 80 or whatever?” What does that really mean? And you know, Mexico is committed to open markets. We’re still trailing behind the U.S. and Canada, but willing to continue to move forward in more open markets. But even with Mexico, our MSN duties are not that high.
And that means that if we place very stringent requirements on firms based in North America, they will do one of two things. They will begin to import freely from anywhere in the world the component parts and just pay whatever duties they are required to pay. As Dan said, cars manufactured in China or Europe do not have to observe the NAFTA rules of origin, and they’re subject to whatever tariffs we each impose on those goods. But that’s just, I wouldn’t say even simple economics—it’s just a business decision for companies to not have to observe NAFTA rules of origin because they are way too stringent, the content requirements are way too high. It just adds to the cost, and they’re free to import from anywhere in the world.
And secondly, I fully agree with what Dan said. They may be relocating offshore. Nowadays, it is not that difficult to move a production plant from one place to another. And rather than seeing, as the U.S. would want, companies going back and re-establishing in the U.S., or rather than seeing more companies establishing in the North American region, we may see them elsewhere. Certainly China has many cost advantages. But not far from Mexico, south of our border, Central America has many of the same geographical advantages that Mexico has. Central America has CAFTA [the Dominican Republic-Central America free-trade agreement], and we may see a relocation. We don’t want to lose that competitiveness.
So as far as saying whether we can agree to a 75 per cent, Mexico is not in principle opposed to raising the regional value content to something that makes sense if it does, and to something that works for companies here and that will encourage them to remain in North America as opposed to relocating, and that will encourage them to acquire – or to meet those higher content requirements. But I think it’s not as easy to trace the line and say OK, 75 or 72 per cent is the magic number. The industry in all three countries, even in the U.S., oppose it because of the way they are integrated into value chains, and it has to make sense for them in a cost analyses or in a cost-benefit analyses.
But we certainly do want to encourage more production in North America than less production. And there I think that you raised, Chris, an interesting idea of, should we be telling for other elements that go into auto production that also bring value to North American cars. I would much rather begin the discussion there than commit to any number right off the bat.
Christopher Sands: I take onboard your comments, both on the economic challenge and on the fact that we don’t necessarily want to put our firms in an uncompetitive position. Our experience, however, with these firms is that they’re all trying to make money, as we all are, and we know that they’re tempted to put production offshore, we know they’re tempted to find lower-wage options than our workers, including automation. And we feel that it’s part of the government’s job to create the incentive structure that has them do the right thing, whether they do it for the right reasons or not.
Let me make a proposal. Hugo, one of the things that you said that struck me as absolutely true is that the MFN tariff rates being low provide a open door for companies to offshore various bits of production. And we would be prepared to increase our MFN tariff rates, including on autos, perhaps as high as 25 per cent using the truck tariff model that we have now, to create an added disincentive for offshoring.
I would also propose—and I know this is out of the box, but I’m trying to be creative—that we’ve always treated autos differently, whether it was during the Mexican Auto Decree System or the Canada-U.S. Auto Pact era, and that maybe we should take autos out and, for the purpose of the auto sector, agree to a North American customs union for autos in which we all increase our MFN tariff rate for autos to 25, maybe even 30 per cent. And this, I think, would provide the kind of backstop to a higher rule of origin that would force our companies to be creative—and I am open to counting things into the formula to make it easier for them—but we want that powerful symbol that these companies are North American and are willing to stay.
It wasn’t that long ago that we had to bail these American-headquartered companies out. And through the policy NAFTA put in place with 62.5 per cent rule of origin, we got companies like Toyota, Honda, and Nissan to make much bigger commitments into North America. So this has been a strategy that’s worked. I have limited sympathy for the Detroit guys. If they’re not willing to make a good effort, I’m happy to talk to them and ask them to bring it around. But I also think we need to set the parameters that bring them to the table and close off some of these avenues for offshoring that they’ve used in the past.
Any takers on my automotive customs union?
Hugo Perezcano Diaz: Well, you know, we also have to think about the consumer here. Does the U.S. really want to raise prices for already pricy goods in North America and set tariffs that high? It brings me back to when Dan and you both referred to supply management: we do have a couple of customs unions in the NAFTA, one of which is completely outdated, and this was for televisions, the old—I even forget the English words for the televisions, you know, with the big tubes—but we did have a customs unions for that, and we do have a customs union that in my view creates very many problems in trade in sugar between the U.S. and Mexico. And Mexico agreed to that, and what that has created is, and has maintained a very high price on sugar in the North American region that has benefited very few groups and group of companies. And Mexico is not prepared to go down that route again.
The conditions, I think, are very different from when we discussed the customs union for trade in sugar. This places a very important burden on the consumer. And again, I don’t want to equate sugar to cars, but they are almost, I would say, very basic goods that everybody needs and uses in the whole region. So to set so high a duty, do it on a trilateral basis, in order to benefit companies who have had their problems—and I acknowledge that they have had to be bailed out in the past, and not just once—but for the benefit of a few companies, and actually encouraging more inefficiencies by maintaining a closed market, I really don’t think that that is the way to go.
Mexico would be more willing to discuss a customs union more generally with lower duties on other products. Does the U.S. want to go that way? Are you proposing that we have, rather than a free trade area, a customs union, and include all goods there? But to do it on a product-by-product basis, and in a way that increases prices that much—of course, we haven’t run the numbers, and I’m not saying that we will, but I can’t imagine the impact in prices, such as cars, with 25 to 30 per cent duties across the board.
And mind you, that is not going to make cars produced in North America cheaper, and it is not going to make North American companies more competitive either, if they have a protected market. Look at your sugar industry. Now, I’ve referred to sugar, and we’ll come back to this when we discuss the agricultural issues. But we think that this is really a supply management case for sugar as well, and the customs union that we currently have in sugar trade. But I’ll leave that for later.
Christopher Sands: I appreciate your willingness to speak up for the consumer because the consumer and the voter are the same people, and we do recognize that. At the same time, though, we want to provide the incentive structure that has companies do the right thing. This isn’t, in our view, very different from the Trudeau government’s approach to carbon taxes. Maybe the answer is going to turn out to be something outside the context of NAFTA. Maybe we have to tax robots and make companies pay a penalty for substituting automation for workers.
Our goal is to drive American employment up. We want to do that in a way that signals to the market that’s our priority right now, that we want investment and job creation here in the United States, obviously. Just as we put forward America First, we expect Mexico to advocate for its citizens, and Canada should put Canada first. All of that makes perfect sense. But that’s really where we’re coming from—which is not a rejection of what you’re saying, Hugo, just a recognition that for us it’s about calibrating the right balance. We don’t want to have the consumer bear all the burden here. That’s fair, I think a good observation on your part. But at the same time, we don’t take the position that firms should be allowed to do whatever they consider to be the most economically efficient because we feel that what that’s led to is a hollowing out of some of our manufacturing, and we want to reverse that process.
And so it’s a question of degree, I agree. And where we set the numbers and how we move the levers matters. But we’re open to achieving these goals through trade, through adding tariffs, not just removing them, and providing other incentives. And I would, I guess, invite both of you to think on ways in which we might achieve those kinds of goals without some of the negative effects. I think broadly we’re very open to ideas there, but we’re fairly fixated on what we’re hoping to achieve.
Dan Ciuriak: In terms of the possibility of less being in NAFTA, this is very much, I think, a realistic direction to go, in terms of trying to square what seems to be a circle at the moment. But in terms of the customs union idea for autos—there are a number of features to this.
First of all, our third-party FTAs create big holes in that customs union, which implies a common external tariff. So in a world where all of our countries are engaged in FTA negotiations, tariffs constitute less and less of an effective tool for industrial policy – and that’s truly what we’re talking about, industrial policy, when we’re talking about trying to get fairness, wages up, and so forth, and the investment in our own jurisdictions.
Second, our MFN tariffs for autos are different and these would have to be harmonized in order to establish a customs union for the automotive sector. So in terms of the ability to raise the tariff, and we run of course into our WTO bindings, a Trump tariff would obviously violate the U.S. WTO commitments, and this raises a much greater sort of issue of blowing up the WTO. Canada and Mexico would also have to raise their external tariffs on automobiles in order to participate in a customs union with the United States on autos, so that would cause us to also blow up the WTO. I think I can safely say that that would be a non-starter for Canada.
So: while we acknowledge that moving up the rules of origin content for North American production at the margins may induce greater investment in North America, I think we have to deal within the margins that we have to play with, which are created by the common external tariffs that we have right now, or the WTO external tariffs that we have now.
So that limits our room to manoeuvre. I think the far more promising avenue to pursue is that of reflecting intellectual property—R&D, and those headquarters services basically – in the rules of origin. Now, here I would need to do some homework because this sounds an awful lot like what we do with the trade remedies, where we take into account overhead costs and we assign fair market value to them, and deduct them from duties. This could become part of our rules of origin valuation. But I think we do have the intellectual framework for that already in the trade remedy area, So it’s something to think about.
Has anyone done any homework on this that would allow us to think about how we might actually realistically include the headquarters services which includes R&D and the IP into the North American regional value content? That would also include, by the way, U.S. corporations that park all their IP abroad in Ireland or elsewhere, bringing that stuff back home, where it’s taxed such that the income is taxed in the U.S. So that would be salutary from an American perspective directly, without actually affecting Canada or Mexico very much. So you would achieve your higher regional value content without actually undermining Canada or Mexico.
So I think this is a promising area to pursue. I’d like to see the United States actually put something on the table in terms of even a working paper setting out how this might work. Because I’m not aware of anything that’s been done so far on this score. I did think that the idea of an automotive customs union with much higher external tariffs is a non-starter.
Let me just say: the main points I had really were about capturing the brain work for North America so this is interesting in terms of recognizing the intangibles. Really valuable proposal, Chris, and I think that that’s something that we should really focus on, getting that into the NAFTA as part of the headline figure of raising value content. I think this would be both important in terms of capturing important economic activity for North America and in dealing with the public relations issues of the headline numbers on value.
There’s also the idea that not everything belongs in NAFTA – or a multi-speed NAFTA, if you will – with deeper commitments in some areas than others, which is implied by your customs union idea. I think even though I disagree with the customs union per se, I think that idea also is a valuable contribution. So I think I’d have to do a bit more thinking in order to take this thing further.
I would also say, on tracing: I agree with Hugo that every time that we add costs to complying with NAFTA, we use up the margin that is provided by our existing external tariffs to keep things in North America. So we have to really veer away from those kinds of proposals while seeking to capture the activity in other ways.
And finally, I’ll just kind of put on the table again the whole thing about the corporate social responsibility issue. Insofar as the problem has been that the income has been transferred from labour to capital because of footloose capital being able to use trade agreements to squeeze down wages and wage bills and increase profits to the point where these profits are above normal – and that seems to be certainly the case right now in many sectors of the economy, then pushing a stronger corporate social responsibility as part of NAFTA, which would tie in very, very nicely with Canada’s progressive trade agenda, would help. We would very much welcome an American nod in that direction as part of the solution to resolving these imbalances.
And again, I hearken back to my opening comments that part of why NAFTA has not worked as well as the United States, and indeed, I think it’s fair to say, as Mexico had hoped, Mexico wages and living standards did not rise as far as had been hoped for. So that would be a really positive solution on all grounds.
Hugo Perezcano Diaz: Before we move on—and I don’t know whether you and your team are prepared to do this right now—but like I said, I would want to understand better the proposal of bringing those other components into the origin calculation on the IT and other like elements. I would like to understand it better: how they would work, and how they would work with already existing rules of origin. Would we maintain a 62.5 value-added content as it is right now, and then add whatever other value beyond that, but it’s a separate origin calculation? I mean, in order to get to a higher, 70, 75 per cent value, or would it go into the whole origin calculation?
Dan raised the other important question as well: How are these other components going to be valued? What’s the appropriate valuation method? Again, going back to your concern of companies trying to cheat, we would not want companies to overvalue or overestimate the value of their research and development or IP in order to satisfy a particular percentage of RVC and actually lower the goods’ regional content value in the equation. So while I think it’s creative, and something that we’re quite willing to look at, it will raise, you know, complications in how we define the rules if we were to reach agreement in that respect. But again, if this is something that we can tackle later on, I’m happy to move on.
Christopher Sands: I think that extra round has been helpful. But let me just say from the U.S. point of view a couple of things. When we were all talking about the Trans-Pacific Partnership, one of the things that we discussed then was shifting rule of origin compliance to the full accumulation method, that maybe it’s a bit easier and more transparent to generate a calculation, and this was done in order to lower the overall rule of origin threshold. And in an almost net-neutral way, we lowered compliance costs and we lowered the threshold, but felt we were getting a pretty good result at the same time.
This administration wants to go in very much the other way, not necessarily to make compliance more difficult, but (off microphone) the rule that passes the smell test, that people say ‘yeah, that really is a genuine and hard-to-manipulate way of assessing content.’ I’m curious about CSR in the context of rule of origin, or how we incorporate that, particularly how we mandate it so that it’s not just charitable contribution determined by the company, sort of a thin offering or something. I want something a bit more concrete than that.
And I wonder whether we, as we start thinking about including value, rather than just pure origin, in our calculation, whether there’s room for us to include on some sort of formula the cost of labour input into production. I don’t want the indirect labour cost, the executives who are getting paid six-figure salaries. I’m much more interested in the workers. Because if we in fact recognize the value of the workers’ contribution in a monetary way as a contribution towards origin, you provide an incentive or, in some ways, a fairer response to those companies that continue to employ highly skilled labour in the production of vehicles. And if it was the case that there was a Mexican supplier or firm that was underpaying its employees, this would provide an incentive for them, in order to meet origin calculations more fully, to pay their workers better.
I feel a little bit more comfortable with those sorts of incentives rather than “social responsibility,” at least as far as I interpret that as being somewhat voluntary. I’d like something that was a bit more reliable and serious and provided a stronger incentive for the behaviour.
But I appreciate the flexibility that you’ve both shown in terms of being open to new ideas. And in particular, Dan, I have to say I agree. This is so complicated, we’re going to have to run the numbers in order to come up with a precise amount and understand the implications of what we’re proposing. And I think that’s worth doing. Whether we can do it in the next two phone calls I don’t know, but at least I respect the data-driven approach and the integrity that you’ve put behind that.
Dan Ciuriak: Well, thanks so much, Chris. And by the way, if I can add like a two-hander intervention on the topic of sort of the implications of CSR and/or productivity wages being reflected in sort of the value content of production, just as out there for future thinking, OK, and we’ll come back to this in our next phone call, we know that in Mexico in particular wages have lagged significantly behind the rise of productivity in the auto sector. We’ve got statistics on that. Part of the reason why companies have been shifting production, possibly to an excessive degree, down to Mexico, while Mexico itself has not been benefiting because in fact, while it’s getting the production, it’s not getting the wages, and therefore not getting the domestic demand, and we’re not getting the knock-on macroeconomic impact on our own economies of rising Mexican demand. It’s being pocketed by American corporations and multinational corporations. As they are, as Hugo said, now North American corporations.
So if you worked out a formula that said value content is … you subtract the gap between productivity and wages from your value calculation as to what qualifies, and in point of fact a company producing in Mexico that is underpaying relative to the productivity of its workers would then be facing a rules of origin penalty for that. And so that would work to drive up the wages; that would work to reduce the tensions, wage-driven tensions within North America in the auto sector, and would simultaneously have a Fordist type impact on domestic demand in Mexico, which would create demand in the first instance for American goods. So I think that’s a possible win-win way of disciplining corporations. It’s similar to CSR, in that CSR would see that the company should pay its workers in line with their productivity, marginal costs should equal prices in wages, in a perfect economy. So I think let’s think about that as a possible way forward to try and square this particular circle.
Christopher Sands: I like that idea very much. I think this is very promising.
Hugo Perezcano Diaz: Obviously I’m not opposed to finding ways to increase wages and increase living standards in Mexico. I have to do some thinking on this as well. I’m not sure that rules of origin is a good way to achieve it. I will say, for instance, that while I fully recognize that wages in general are much lower in Mexico, in the auto industry especially, we have literally the highest wages, and the most qualified workers pretty much in all the countries. So that is the auto industry, and mostly export-related companies are there, but probably the auto industry in terms of wages is probably the highest-paying. But I’m not sure that there’s a (inaudible). And we would like to look at the numbers, the implications, and certainly other ways where we can productively improve standards of living and improve wages generally.
Dan Ciuriak: OK, sounds good to me, Chris and Hugo. I mean I think we’ve had our go-round on that. I think we have to do a bit more thinking, and I think we’ve had some very interesting ideas put on the table to take us forward to the next round. And perhaps we should move on to then supply management in our final hour here and see if we can make similar dents in that one.
Dan Ciuriak: Oh, well, I guess this is the Canadians on the hot seat here. Chris, you put the issue in an extremely positive way, and it speaks very much to a major part of or a significant part of Canada’s policy community, which would very much line up behind you in terms of saying that the external agreements provide, in a sense, the cover for economically sound but difficult reforms. And Hugo, I’m very cognizant of the extreme political measures that Mexico took on in its agricultural sector, which to this day even continue to reverberate in places like Chiapas.
So I think Canada has of course been resistant to reforming its supply-managed sector for the reason we all know. On dairy specifically, if we were to go back to 1990 or thereabouts, I believe, and we were to look at the number of dairy farms in Canada compared to what we have now, they have fallen roughly by half, if not more. And through that period, we’ve seen a lot of consolidation. We also have, again, a demographic factor, which is that of the aging of the farm population, and not a lot of people necessarily stepping up ready to stay on those farms. So the political demographic is changing in Canada, and will continue to change over the next decade as well, making it easier politically to deal with supply management reform.
The other sort of specific issue that I would put on the table as an economic consideration is that, if you look at the supply curve of dairy in Canada, most dairy firms in Canada are actually globally competitive. We have a small share of firms that are inefficient, small, often distressed firms—or farms. And these are the ones that are mainly protected by supply management. The rest of the dairy sector basically captures rent, and of course that rent capture is a hugely important factor in the intensity with which the dairy lobby lobbies Canada not to change the supply management system.
So there’s a powerful rent-seeking element in Canada. Secondly, there’s a demographic which is making that increasingly less relevant. And thirdly, the possibility of very long-term phase-out would be obviously then the way to reconcile those things and be able to move forward. And you do have a policy constituency in Canada which is in favour of that. So the possibility of supply management reform is not completely impossible, I think, in Canada. To have it being driven in a short-term fashion by a trade agreement would be very difficult, obviously. So how it’s presented would be important. Dealing with the Wisconsin and New York issue, and the diafiltered milk-specific issue, I think that we would have to find a way which does not give a win in diafiltered but does give some market access.
The real question I have here is the concessions which Canada made in the TPP on dairy to the whole TPP—it was never clear as to exactly how it was to be divided amongst the main third-party dairy suppliers, which were the United States, New Zealand, and Australia in that case. But Canada’s put out the basic position that about 5.25 per cent of the dairy supply would be covered by its CETA commitments to Europe and by TPP. And that put the TPP commitments on the order of two or three per cent, a very significant amount for the United States.
Now, here I’ll put on the table another piece of economic news, if you will, which is out there in print. It’s the U.S. ITC estimate of what the U.S. thought it got in dairy market access in Canada. The U.S. ITC TPP study said that the U.S. would gain $1.2 billion worth of export room in Canada. That was not confirmed by the Canadian government. I think the Canadian government just put up the entire figure combining CETA and TPP as somewhat on the order of half of that figure. But nonetheless, we are talking numbers, and dickering now in a range where we’ve got room to potentially move and to make a concession on market access in the near term, on a staged basis over time, without compromising the ability to actually discipline supply management so that we don’t have sudden surges of milk coming in which undermine the entire system.
So I think that’s a possible way of moving forward. That way of moving forward would, I think, involve keeping the discipline; would involve upping the size of the concession that was negotiated in the TPP for the three parties, which is, you know, New Zealand, Australia, and the U.S., and allocating therefore to the United States. Now, of course Hugo would immediately want to see something on the table for Mexico. I think, in all realism, Mexico’s potential as a dairy exporter is relatively limited. And Mexico already has got free market access to the U.S. dairy market. So it’s the distance and the intermediation of the U.S. market between Canada and Mexico that makes that relatively unimportant. But that would be formally on the table too, then.
So an expanded quota, a commitment perhaps in the context of this proposed long-term review, the five-year deep dive, and maybe a year of political review, of saying this will be one of the areas where we would examine progress, and there would be some sort of commitment to accelerating the transformation of the Canadian market towards a more market-oriented structure.
And the other thing I would put on the table here in connection with this would be that we in Canada would have to deal with the issue that, having lost our WTO cases against the United States and New Zealand on whether or not our supply-managed sector subsidized dairy, that all of our exports are subject to the WTO export—subsidized export reduction commitment. So we would have to actually revisit that case. Now, I would put on the table then that part of the review would be whether or not, for North American trade purposes, this WTO rule actually stands or not. And there’s an interesting question of what we can do in North America separate from the WTO, but let’s come back to that.
The key thing here is that the American and New Zealand argument in that dairy case was that, by maintaining this high supply price, or the high market price, in Canada, we were effectively using a cross-subsidy from consumers to the dairy system, and that meant that all of Canada’s exports were subsidized. But if that high tariff actually protects the marginal producer, we are actually pricing in line with market principles in Canada behind a very high tariff wall. And if that were acknowledged in a North American context, that would pave the way for Canada’s efficient producers to start exporting to the United States as well.
This would go towards helping to actually improve efficiency and consumer welfare within North America as a whole, while helping accelerate the transition of the Canadian system towards a more market-oriented production system, which I think is in Canada’s long-term policy interest—Canada’s policy community I think would line up behind this—and, if phased in gradually, would address the cost implied in applying the quota.
So the issue would be then to characterize the agreement in terms of: we are expanding market access, we are reviewing the issue of Canadian exports, to recognize that there are competitive Canadian suppliers. We are maintaining this discipline so that the system itself is preserved so the Canadian political system can actually say yes, we are preserving supply management, and that we are committing toward longer-term reviews as part of this NAFTA mechanism, which do not have to necessarily be spelled out, but basically signal that the system is moving in the long run to a more market-oriented system. I think that might be a possible way forward on dealing with supply management.
Christopher Sands: Well, Dan, I think that is a far cry better than I would have expected. I mean, that’s a very thoughtful response. There’s a lot there. I probably would like to see more for after, if I had a general choice, but at least it points in the right direction. Almost putting aside my mandate—I’ll probably get in trouble from Donald Trump for doing this. Worst dealmaker ever. But I should acknowledge that the United States also subsidizes dairy. Particularly on the agriculture file writ large, we’re involved in a number of programs that are trying to keep our farms in business. And Hugo, you’ll appreciate one of the biggest is our ethanol requirement, which has raised corn prices and caused issues even in the price—and availability—of American exports of corn to Mexico.
I wonder if there would be a way, and maybe NAFTA is not the place, for us to do what we used to do with quotas. You remember we used to try to come up with a tariff rate equivalent of a quota? Then much like you were saying with the WTO, the sort of implicit subsidy effect in trying to reduce subsidies of exports. I wonder if there’s a way that we could agree on a formula that converted into a tariff equivalent the various supports we have for agriculture, with a view to reducing them mutually over time. It’s a big list. Our farmers are already unhappy that we’re talking about NAFTA. They like the system as it is. With the exception of a few particular interests that are complaining, our farm states are all very much worried that we’re going to lose NAFTA.
But to point us in a good direction, I wonder if there wouldn’t be a way for us to convert the discussion about supply management and subsidies and so on into a common language so that it might be easier for us to ratchet in the right direction, which is down over time. That’s opening a huge can of worms, but I just throw that out there as something that might be worth considering, given how open you are to at least making changes to supply management.
Dan Ciuriak: Hugo, I’ll let you go first. I’m very intrigued by this proposal. I’m just going to think about what to put on the table. So I’ll let you go first.
Hugo Perezcano Diaz: In response to your comments, Dan, I think they’re falling quite short from what we expected. I’m not certain that they are all that market-oriented. And you know, we’ve been there before, and the critics will probably recall this. But you know, the U.S.—I’ll come back to Chris’s proposal, but—the U.S. actually saw the original NAFTA negotiations as a way to do without—or to eliminate—the support, especially for the sugar industry. And well, I’ll have to say that the U.S., —but Mexico as well, were unsuccessful in that respect. So I’m not sure that talking about demographics and, you know, reconversion in time, and who knows how long a time we’re talking about, of the farming industry in Canada is really getting us anywhere.
And also, your point about Mexico’s trade being really minor, almost irrelevant in terms of the supply management products, and having the U.S. in between as a better and more lucrative market with no tariffs, so why bother, that in principle is wrong. We did not do that nitpicking in the NAFTA. If that were the case, we would have ended with a very different agreement. I think we have to go into these negotiations with a view to really modernizing and liberalizing beyond the point where we are. And it’s not like this is a minor issue in terms of trade for Mexico, so why bother with Mexico?
I’d say my response is no, we have to deal with all these issues comprehensively. And again, I come back to my point. I think that there has to be movement here. It is as much a question of sending the right message as getting the real liberalization going than just adding more rhetoric in terms of, well, Canada’s farming population is aging, and we’ll get there sometime in the future. In the meantime, we’ll grant you a little bit of access. And forgive me for being so blunt, but you know, since Mexico’s trade in dairy products is irrelevant, we’ll give them an irrelevant quota as well. So I think, while I appreciate your efforts, I think that Canada really needs to do better.
And going now to Chris’s proposal, I agree with Dan in the sense that it is intriguing. We certainly did that in the Uruguay round, and it helped to make things transparent. I still wonder how we all ended up with huge tariffs, but it was probably the price to pay in going back to supply management in Canada with tariffs of over 300 percent. I think they’re higher than even the highest tariffs that Mexico has ever had after its tariffication process.
I’m saying it is an interesting idea. It’s one well worth thinking about and exploring further. We’ll have to be creative in coming up with the right formula, but it will bring transparency—I’m not making any commitments yet, so it would bring some transparency. And as Chris said, at least we would be talking the same language. So that is indeed intriguing. I need to go back to the capital and explore that further. But we’re quite willing to look seriously into it.
I would expand from just supply management-related products in Canada. So beyond dairy and poultry and eggs for Canada, let’s put, as Chris was saying, the other products in the agricultural basket there, sugar included. And I’ll say this, and I’m very cognizant that this would create problems politically for Mexico internally because I’ll have to say our sugar industry, notwithstanding all the problems that they’re facing in terms of their trade with the U.S., they’re quite happy with supply management in sugar, and the very high prices and very high rents that that brings to them. But more importantly, our cane growers, who are at the base, are also quite happy with the higher prices of sugar.
But they do bring distortions. They place an important burden on the consumer. As you may both well know, sugar is part of what we call our basic food basket. It’s part of what we consider one of the basic foods that everybody should have. So sugar is there, along with beans and tortillas and other products. So we are cognizant that it would create political problems with a socially and politically important sector, the cane growers, and the sugar industry. I think it’s the right way to go to confront these issues.
And having said that, once we come up with an appropriate formula, then we can discuss transition periods and phase-outs. I’m not prepared to say yet that I’m happy with the idea, but I am happily intrigued with the idea, and I’ll take it back to capital and we’ll do our internal consultations, and we’ll be happy to talk about it further in our next round.
Christopher Sands: Thank you very much, Hugo. And one of the things I think I appreciate about your remarks that I think bodes well for the negotiation are two factors. One, we believe that the post-war consensus on trade liberalization in the United States has been eroded because the trade system is very complex. And the simplicity of market access as a principle made sense to a lot of Americans. But now of course they’ve become frustrated by the complexity, the lack of transparency in not only how other countries, but even how the U.S., favours particular interests.
And I think even if we can’t solve all the problems in NAFTA, and we have a time constraint here which has to do with election cycles and so on, we have to make sure that we have reasonable expectations for what’s accomplishable. And I won’t underestimate how difficult our trying to deal with agricultural subsidies in the United States will be. It is going to be very tough. But if we can strike a blow for transparency and make the system more intelligible for the average voter, we can have a kind of debate about the drag that these subjects put on the economy. And I think reasonable people will say, well, let’s have less drag, but we don’t want to ruin the agriculture sector. We’ll end up with a muddy compromise. But that, by itself, is not a bad outcome, and I appreciate the willingness to consider that.
Also, I think you’ve added something really valuable, which is a recognition of the need to think about phasing and what’s accomplishable now. I would say that this renegotiation of the NAFTA framework redresses something that we never should have had in the original agreement, which is an impossibility of review and reset. And as we talked about sunset clauses, I think we’ve framed it in terms of, if it doesn’t work for us, we want to have it just die. If we can structure something so that the agreement is allowed to live and grow and continue to make improvements, then I think we’ve also accomplished a lot. And from both of you I hear that willingness.
I am a little worried, Hugo, that if you keep picking on Canadian dairy, that Dan will change his mind and throw you under the bus. But so far, I think we’re all civil.
Dan Ciuriak: I take Hugo’s point, and I think I was remiss in dismissing Mexico’s market interest in Canada. And I think the same issue arises with poultry. And the negotiations have been remarkably silent on that. I think if Hugo raises that as an issue, then I think we would have to respond as well.
Now, but let me go back to dairy, and to the suggestion by Chris on a formula which broadens the discussion from financial per se towards subsidized agricultural production. And NAFTA would then have a role in creating progressive disciplines over time through some form of formula for TRQs related to reduction of subsidies on agricultural production.
Now, that, I think, is a very constructive way forward. I hearken back to what Huge mentioned about the sugar deal between the United States and Mexico. Mexico and the United States had basically reached free trade in sugar in 2008, I believe it was, when the final tariffs fell for imports into the U.S., and then promptly there was an antidumping and countervailing duty case launched. And that led to this recent new compromise, which is to basically maintain higher prices. Hugo has pointed out that, yes, so the Mexican exporters are not unhappy with that system because it does actually raise prices. And that of course is the situation where all agricultural producers are in. They—they have the higher prices for their product, and that of course it’s got consumer downsides, but also there is an economic drag overall.
Now, without being totally a free market sort of ideologist here, possibly we need to have some stronger adjustment support for agricultural production than for manufacturing because agriculture faces much stronger or much more difficult adjustment processes which are not located in urban melting pots, where labour is fungible across all kinds of industries. So we have to be careful about pushing too hard on agriculture per se for adjustment. But possibly there is a case to be made that less subsidy over time for particular products which are not necessarily optimal for society would be one of them. There are “sin” taxes going up on sugar in places around the world. So possibly this formula would be a way forward, and would give Canada political cover on moving on supply management.
Because if the United States is actually moving on subsidies, and this would include, for example, the dairy subsidies, this might include—Chris, here’s the one to think about which we might be interested in seeing the U.S. move on—the water subsidies especially in California. California is a desert where the water tables are being run down and water’s being pumped in from the Colorado River at a high expense, allocated basically at subsidized prices to the farm community. This is where the U.S. produces rice for export in one of the less sort of economically rational schemes that have ever been put in play on the planet.
So if the U.S. were to actually put on the table some of its farm support schemes, that would give a lot of cover for Canada to also then to be more proactive on supply management, including possibly on poultry, which has been largely off the table so far. So Chris’s argument that the U.S. pressure was providing cover for economically sound forums that would go down a lot better in Canada if the U.S. is putting some money, if they had some skin in this game of reducing subsidies.
So basically, the question would be how we would then devise a way to link to a subsidy reduction. If that was the essential model, then, as under a notification scheme whereby we were demonstrating that the net subsidies being paid to a sector had declined, then we were obtaining market access in our NAFTA partners, then as U.S. subsidies declined, the U.S. market access to Canada’s dairy sector would increase. That would be the essential formula, but that would also work in a quid pro quo basis with Canada gaining access, for example, to the U.S. sugar market and I think this would also work in Canada’s favour in areas where we see heavily subsidized U.S. sectors, like corn for example, we were considering taking trade remedy against US farm supports for corn, so we’re aware of corn subsidies. High-fructose corn syrup is one such product.
So as the U.S. ramps down its subsidies, it gains access to Canada’s markets. And conversely, as we ramp down our subsidies, we gain improved access to the U.S. and its protected sectors. I think that’s a brilliant formula, Chris. I think that’s something that would make NAFTA 2.0 progressive, I think, from all sides.
Christopher Sands: Dan, thank you very much. And I just come back to an acknowledgment that you’re right, we may have to be cognizant of the need for agriculture to adjust. They aren’t as easy as manufacturing. Phase-out. I want to go for as much as we think we can on this agreement. And even if all we can agree on is a tariff rate formula so that we have a starting point, great.
But you know, the President’s been very clear. One of the pieces of his tax reform that he’s quite pleased with is the elimination of the state and local tax deduction, or at least the reduction of the deduction whereby in the past you could write off your payments for state and local taxes, which meant that for states like California and New York, where the state taxes are quite high, they were able to write those taxes off. And so the loss to the U.S. Treasury was made up from states that voted for Donald Trump in the middle of the country, where property values weren’t as high and where, in some cases, state income taxes were quite low.
He—he said clearly in that debate that part of what he wanted to promote was—was fairness and transparency, and to avoid the subsidization of—of interventionist regulatory systems at the expense of people who tried to have lower taxes in their own jurisdiction. And I think the principle of fairness would apply with regard to subsidization of water in southern California. One of the things that to me makes no sense at all is that, after NAFTA, we’re still producing avocadoes, and almonds that are quite water intensive, when we could be importing them from Mexico, certainly in terms of efficiency and prices, at a much better rate.
But I also don’t want to underestimate the politics here. And because I have to get every agreement that we all negotiate through the Congress, I don’t want your expectations to be too high. They’ll defend all those firms’ state interests. But I think if we have an across-the-board solution rather than just going after dairy, what you’re saying, Dan, about Canada also applies to us. It will be easier to defend an agreement that goes at all agricultural subsidies and tries on a fair basis to see them reduced over time than singling out one industry for making adjustments. Because that will always get them to demand that Congress stop the presses.
So I think there’s something here, and I appreciate, Hugo, your willingness to take that back as well. There’s something we can do on agriculture, I feel fairly confident, if we just stick to it.
Oh, and by the way, you have to keep buying our GMO crops.
Dan Ciuriak: Yeah. Well, on the latter issue, I mean, one of the overarching issues that we all face is that we also are partners with other countries in trade agreements, and certainly for both Mexico and put Canada, our trade agreements with the European Union are very important, and they’ve got very different rules. And while we know that that TTIP is in deep freeze at the moment, that may eventually unfreeze. And then we would sort of be moving towards hopefully a trans-Atlantic framework that would have a lot of convergence on rules. But for the moment, they’re very divergent, especially in agriculture, especially with regard to GMOs, not to mention of course in the data field.
So yeah, working within the realm of the politically feasible, I think the critical thing that I talked about here is to broaden and treat supply management as part of agriculture; to try and come up with a formula which links market access with subsidy reduction. And that is a critical factor in sellability of both retaining the current degree of NAFTA market access without putting up barriers moving forward, and moving forward in a way where the political pain is shared across, but where, in point of fact, where the con itself is not meeting with pains but meeting with gain.
Christopher Sands: Yeah. And Dan, I will also underscore something that you alluded to just there. And that is the United States today certainly views NAFTA as we did in the first NAFTA 1.0 discussions, as a way to signal broadly the kind of ideas that we’d like to replicate in future trade agreements. This has been our approach for some time. We’re likely to ask for currency manipulation provisions in the context of NAFTA 2.0. We do so not because we think that Canada and Mexico are manipulating currency, but to establish as a baseline something that we’d like to see included in future agreements as well. And to the extent that we send a signal that less protection of agriculture might be relevant for some negotiations than for others, that we’re willing to move down this road —this issue of agricultural subsidies has bedeviled several WTO rounds. We’ve had this discussion globally. And if we could make a start in climbing down here in North America, I think it would be a net positive for the global trading system in pointing a direction in which others might, we hope, be encouraged to follow.
Hugo Perezcano Diaz: Yup, I fully agree with what you just said, Chris. And—and certainly to the extent that Mexico is on board on these commitments, and especially on the type of architecture that will permeate to other agreements, I think Mexico would be a supporter. To a large extent, you know, the NAFTA 1.0 negotiations and the Uruguay round negotiations have served as a complement to each other. The NAFTA negotiations just, to make a push in the Uruguay round for certain topics, for the definition of certain topic that were complicated at the time, and the other way around a bit later on.
So in principle, Mexico would view any solutions that we come up with that are workable and that present, rather than a way to solve very particular localized problems, a good architecture to resolving broader international trade problems, certainly we would be in support of that.
Dan Ciuriak: I guess on the currency manipulation issue, one of the beefy problems which has emerged in North America, and this emerged very, very quickly after the NAFTA, was the peso devalued very, very significantly, and it’s never really recovered. And that has widened the gap between a range of labour costs across the NAFTA. And the really interesting question is why that happened. And first of all, I think, you know, the economics of it was well predicted by markets. Mexico was going to have a devaluation, and the market valuation at the time of NAFTA was not supported by market opinion.
So the question is: what is market or currency manipulation? Well I’ll tell you, you’ve got currencies which are overvalued by markets, but where in fact market participants are anticipating significant changes, and they short sell, for example, even without governments intervening particularly. Other times you’ve got currencies substantially devalued for all sorts of reasons that, even with governments intervening, I remember in the mid-1990s, after the Canada-U.S. FTA, the Canadian government was actively going to New York to talk up the dollar because we thought it was substantially being undervalued by markets and it didn’t accord with what governments thought that the currency valuation should be.
The real question would be: how does one formulate a view on currency manipulation? Because if a government is moving against a wrong valuation, not necessarily a sort of bad manipulative sort of element, as, for example, Canada was doing in the mid-1990s, trying to talk up the dollar, meanwhile the dollar is overvalued, the currency is overvalued, trying to talk it down or pull it down for whatever reason. For example, if the market is treating a country’s currency as purely a petro-dollar, and oil prices are temporarily spiking for some reason, that’s then distorting the entire economy, the valuation of every single asset in the economy, because of the price of one good.
But then a government that leans against that wind is not necessarily manipulating either. So we saw in the TPP various kinds of proposals come forward in terms of persistent buying of currency resulting in expansion of foreign currency reserves and so forth, and rising current account imbalances and so forth. So I think there’s possibly ways to deal with this, but it’s inherently an analytical issue which is not well defined. We’ve got various measures of what is an equilibrium interest rate. There is the behavioural equilibrium exchange rate (BEER).There’s the fundamental equilibrium exchange (FEER) and various others. And they’re not consistent.
So the idea of including something on currency manipulation is interesting; the mechanics of it are problematic. And then I would go back to sort of if you think about the functioning of the exchange rate system under the Bretton Woods fixed exchange-rate arrangement, this was one that had a lot of stability in exchange rates. It provided for periodic adjustments. When the Europeans exited the Bretton Woods system, they maintained their own mini version of it through the snake, and then the snake in the lake, which is the floating version of the snake. But they realized that if you’re going to have deep integration within a region, and the value chain kind of concept happens across borders, then you couldn’t have the floating exchange rate.
And I think the big issue for North America is, if NAFTA 2.0 is a confirmation that we are moving towards something like your customs union idea, where we are committing to producing things together, that there is much less room for currency wiggles within that system and framework if it’s going to be viable or not. And I think one of the reasons why the imbalances within North America did emerge was because of that original devaluation of the peso, which at the time of the negotiations seemed not to be on the table.
That’s a rather longwinded, complex, and not very cogent statement that if North America is going to integrate, there’s a real question as to whether or not this commitment to completely market-determined exchange rates is viable, whether you need something more like the European exchange rate mechanism, which I think would be anathema to American currency policy thinkers. But that is an issue for us to think about, whether we want to venture into that space, or whether we conceive NAFTA as a free trade arrangement between countries with different systems. This is the less historic kind of a proposition, whereby we don’t go as far in terms of the deep integration model, allow for more modularity of production systems, but yet work on interoperability and reduction of frictions and so forth, and reduction of the unhelpful elements of economic policy like subsidies that we’ve just been discussing in connection with agriculture.
So going forward, we should think about whether disciplines on currencies takes us down the direction of the European exchange rate mechanism, versus seeing where the more modular approach where a NAFTA less-is-more system takes you. Anyways, just a few thoughts on that.
Christopher Sands: So I appreciate it because you’re speaking my language in a lot of ways. I think what we have in mind in this particular context is something closer to the IMF criterion for currency manipulation, which we all, I think, reviewed at one time or another, and really trying to parametize what’s outside the normal fluctuation you would expect. I mean, it’s almost a Sherlock Holmes deductive method that goes through and tries to rule out any normal causes of fluctuation to isolate what could only be an intervention.
And the reason that the U.S. has favoured that kind of formula, it’s not so much for countries like Canada and Mexico that allow some movement, even if you might try to slow transition or hasten it, though mostly slow it in the interests of adjustment and managing adjustment costs, but more to send a signal for countries like China, with a sympathetic view for the poor SOB who’s the Governor of the Bank of China when Xi Jinping calls him up and says, “I want you to move the currency this way.” If he can point to internationally verified criterion that have what we don’t have yet, which is a snap-back provision that has a penalty that accrues if you do manipulate your currency, then that guy can say “look, I can do this for you, Supreme Leader, but if I do, they’re going to find out and you’re going to pay a penalty. So you’ll get a short-term gain out of it. It’s not worth it.”
And I think in that sort of a global game that we’re after, Canada and Mexico probably are not high on the radar. And we want to adopt a formula that allows for legitimate adjustments, interventions, and so on, but just puts outside the bounds those interventions that we think may be really designed to engineer long-term, competitive advantage. And there’s got to be room for that. I think in North America you’re quite right, though: We’re not really at the point where we’re ready for any sort of common currency. We do have some movement up and down. Canada’s currency still is very much moved by some of the commodities in ways that the U.S. isn’t. And the U.S. currency is weird because it’s still a reserve currency, and so we get away with things we shouldn’t. But putting it all together, I think we’re probably just looking for something that defines certain fluctuations as clearly out of bounds to make it easier for us to respond.
Hugo Perezcano Diaz: Let me just quickly jump in. I know we’re coming to the end of our round right now. And I do have to report to my minister at 4 o’clock. But, you know, Mexico does not manipulate its currency or, if I can say it candidly, it doesn’t manipulate its currency anymore than most countries do—the U.S., Canada, European countries included, through federal reserve and interest rates and so on and so forth. So we’re not too concerned about this. We understand the broader implications vis-à-vis other countries that have different mechanisms and manipulate it in other ways. So certainly this is something that we are open to talking about. It’s not an issue of great concern.
From the part of Mexico, I would certainly agree, we’re not anywhere near to forming a monetary union, a common currency; there are many more problems that we would need to solve before we get there. But this is certainly something that we’re open to discuss within those boundaries. We would just have to make sure that we retain the discretion and the autonomy our central banks and financial authorities have to conduct their monetary policy.
Dan Ciuriak: I can second that. I mean, expecting this kind of the status quo. I think something along the lines of some of the proposals that were floated in the course of the TPP, general guidelines for what is considered, “extreme or distorting interventions” could be contemplated for the NAFTA. I don’t think it would actually, as Hugo says, impinge upon Canada’s current practice.
But I would simply make the point that the issue of currency measures in a trade agreement, point you in the direction of deep integration—as opposed to a looser structure which I would characterize as the modular approach. And my sense is, in general, that a successful NAFTA 2.0, which is aligned with where the world is going anyway, in terms of some possible degree of pullback from Globalization 2.0 as we have known it due to the structures which that system has given rise, points to a more modular approach. I think we have to have that in mind. And I hope our discussions and deliberations in this over the course of the next couple of sessions think about how NAFTA 2.0 might be aligned with a somewhat more modular approach towards how we formulate our trade agreements amongst ourselves.
Christopher Sands: Excellent. And even I think we’ve done a good job having a good discussion with no swearing.
Moderator: I was looking forward to it.
Christopher Sands: Hey, this is a trade negotiation, not a hockey game.
Our next negotiation will take place in mid-to-late February. Keep your eyes out for our negotiators to take a second crack at this and other high-friction issues to see if they can find common ground.
Read the transcript in full, here. Or click below to go to the section topic they negotiated:
- Opening statements
- Auto industry and rules of origin
- Supply management and agriculture
- Conflict resolution (Chapter 11 and Chapter 19)
- Sunset clause
- Intellectual property and data
Edited by Charlie Gillis, Adrian Lee, Nick Taylor-Vaisey and David Thomas