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 curated play-by-plays of this round of negotiations on the five topics specifically here. Or read 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 negotiations began with general opening statements, which you can read here. They then progressed to discussions about supply management, launching these negotiations with opening statements about their starting positions and asks on this topic in particular.
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 physically 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 be Canadian rougher-headed lumber, which is basically one side of the two-by-four was scratched because it was used for facing. And that was self-evidently seen as 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.
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 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.
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.
Canada opened the conversation by admitting the obvious: Canada has assertively protected supply management over many years, and successive international trade negotiations. Ciuriak, representing Canada, acknowledged two competing forces: the considerable, sustained influence of the dairy lobby and the shrinking number of dairy farms in Canada. He admitted the latter trend would eventually force Canada’s hand to some degree, and the Trans-Pacific Partnership and Canada-EU free trade deals both opened the door to increased market access for international producers. He insisted NAFTA renegotiations were not the proper forum for such a generational policy shift, but was open to revisiting supply management every five years as part of a larger NAFTA review, and in a controlled manner that preserved the system as it was phased out. At the end of the day, Ciuriak allowed that “moving towards a more market-oriented production system … is in Canada’s long-term policy interest.”
Sands, representing the U.S., was pleasantly surprised by Ciuriak’s openness to reform right off the bat. “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,” he said, acknowledging himself that Americans also subsidize dairy and other domestic agricultural sectors. Sands underscored the difficulty of taking on any substantial reduction in agricultural subsidies, but smartly managed expectations: a “muddy compromise” on negotiations of this complexity is not a failure.
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.
Sands tested the appetite for a conversation about introducing, and gradually reducing, tariff-rate quotas on supply-managed goods—a two-tier structure that would protect domestic producers by slapping higher tariffs on imports beyond an agreed-upon quota. Diaz, representing Mexico, hinted at possible support for Sands’s proposal. His initial response offered a window into the cautious language of negotiators forced to react in realtime to complex ideas.
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 … 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.
Diaz took a different tack than Ciuriak, criticizing the general tone and breadth of his remarks and urging more aggressive reform more quickly.
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.
Ciuriak pushed back on that haste.
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.
And then the Canadian negotiator hinted at a quid pro quo. The U.S., Ciuriak claimed, subsidizes agriculture in places where agriculture wouldn’t otherwise be economically feasible.
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.
If Americans drew down those subsidies, that “would give a lot of cover for Canada to also then to be more proactive on supply management. 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.” Sands agreed with the principle of Ciruiak’s argument about the inefficiency of some U.S.-produced agricultural goods. “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.”
Sands also immediately managed expectations. “I also don’t want to underestimate the politics here,” he said. “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.”
Diaz had earlier insisted that supply management be negotiated comprehensively, not in a piecemeal fashion that only deals with, for example, dairy. Sands made the political argument for the same approach. “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.”
The negotiators agreed that whatever deal they produce, their shared goal is to achieve a trade deal that’s replicable across the global trading system—an end that would suit everyone’s best interests. Said Sands: “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.”
Diaz agreed with that direction. “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.”
A cordial first round on supply management, without the utterance of a single curse word, prompted a salient observation from 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
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