September 20, 2017
Sunset clauses, virtue signaling, warp speed and right-to-work. Since Round 2 of NAFTA 2.0 negotiations wrapped up, these words have been bandied about in press briefings, news articles and interviews. Needless to say, there remains an incessant amount of speculation and rhetoric about what’s happening at the bargaining table. Although the outcome is still foggy, the good news is that the rhetoric is slowly easing, while the realities of a negotiation are beginning to set in. In anticipation for Round 3 which begins on September 23rd in Ottawa, let’s break down some of the areas that have received the bulk of the media’s attention.
A lot of rhetoric has been circulated domestically on the idea of including the environment in NAFTA. Some have disparaged it as “virtue signaling” and some have said that “social issues” should remain out of NAFTA – but the environment is a tricky little nugget.
The current NAFTA contains a side agreement on the environment, and is one of the reasons Brian Mulroney is often considered Canada’s greenest Prime Minister. Interestingly, both Canada and the U.S. want to bring the environment into the actual NAFTA text, perhaps as its own stand-alone chapter.
For Canada, the interest lies in preventing a “race to the bottom” – the progressive lowering of standards to attract investment, resulting in increased levels of pollution. While Canada is wary of the U.S., the U.S. is also wary of Mexico jumping onboard the race to the bottom. This indicates some of the U.S. interest in creating a more level playing field in NAFTA.
While the U.S. administration is not viewed as environmentally friendly, the fabric of the country is difficult to navigate on this issue. Many emissions and environmental standards are set at state level and some states such as California are more environmentally conscious than any Canadian jurisdiction. The President essentially has his hands tied to some extent, so it may be better to see something included in NAFTA on the environment, rather than leaving it to all the other unknowns.
For Canada, the environment presents an opportunity for the government to spin rhetoric and show their credentials as greens, but it’s also a somewhat realistic position and something that is being negotiated. For the U.S., on the other hand, you won’t hear the words “climate change” and while they may not make a big fuss publicly about an environment chapter, but they will be negotiating one.
RULES OF ORIGIN (THEY TOOK OUR JOBS!)
A second theme that came out of Round 2 was the U.S. demand for “domestic content requirements” for the automotive sector. To put it plainly, the U.S. wants a certain quantity of a car’s parts to be made in America. The issue with this is it serves as a shift from the existing requirement that a quantity of car parts are to be made in NAFTA countries (i.e. Canada, the U.S. or Mexico). How will a new U.S. requirement affect the industries in Canada and Mexico?
The rhetoric around this one is clear: “They took our jobs!” However, the reality is much more uncertain. There is likely a middle ground that Canada and Mexico could agree to, but they must be vigilant not to undermine their respective domestic automotive sectors which largely rely on the benefits provided by the current NAFTA to stay afloat.
SUNSET CLAUSE (EXPIRY DATE)
A sunset clause is essentially an expiry date for a piece of legislation. It must either be renewed at such date or it is no longer in force. The U.S. frequently uses sunset clauses in domestic legislation. Canada and Mexico on the other hand do not.
This one seems to fit squarely in the U.S. rhetoric side of things. It is highly unlikely that Canada or Mexico would accept it and it sounds more like pandering to sentiment by creating the possibility of getting out of a “bad deal”. The reality is NAFTA already contains a mechanism for any party to withdraw from the agreement. Why add uncertainty for the business community by potentially opening this up to debate every few years?
The rhetoric has been toned down since Round 1 and it looks as if the negotiators are slowly taking over ownership of this file. There is still a lot of noise out there, and that will likely continue as the negotiation deals with some of the more contentious issues down the road. For now, everyone seems content to get the easy stuff out of the way and make platitude statements about how all three sides are negotiating together.
Once Round 3 wraps up, we’ll turn our attention to some of the other difficult issues such as dairy and labour standards. We may even discuss the ramifications of Amazons HQ2 on the negotiations. Until then, enjoy the headlines as they roll out.
You can reach Noah via everydaytrade.ca