Another deadline on NAFTA talks has almost come and gone and still no deal has been reached. U.S. lawmakers suggested in July that a deal had to be done by the end of August to be presented to Congress by December, while the current House of Representatives is still in office. But just because talks seem to be dragging on doesn’t mean progress hasn’t been made.
The U.S. and Mexico appear to be inching closer to an agreement on the auto sector – a major sticking point for all three parties. Canada’s absence from auto talks over the past month has led some to speculate that Washington may actually be seeking separate bilateral deals with Mexico and Canada. U.S. President Donald Trump even suggested in June he might favor separate agreements over a trilateral deal. But it’s not uncommon in multilateral trade negotiations for parties with specific sticking points to break off and iron out their issues separately. The level of trade between Mexico and Canada is fairly low compared to their trade with the United States, so it makes sense that the two countries would negotiate directly with the U.S. This doesn’t have to mean that a trilateral agreement can’t be reached – it may simply be the most efficient way to come to an agreement. Mexico has regularly stated that it expects Canada to rejoin talks soon.
When it comes to the auto industry, the United States’ main issues are with Mexico, though the two appear close to a deal on rules of origin. Reports suggest the deal involves raising the required amount of North American content for cars to 70 percent from the current 62.5 percent, requiring about 40 percent of content to come from factories paying at least $16 per hour and giving Mexico a five-year grace period to incorporate the changes. Canada will benefit from the wage requirement, pushed by the U.S., and from the increased regional content requirement, pushed by Mexico. Therefore, even though it has been left out of the talks, the terms will work in its favor.
Mexico has been flexible in the auto talks, and in exchange, the U.S. appears willing to make concessions on agriculture. Washington has reportedly agreed not to introduce measures that would have made it easier for U.S. farmers to launch anti-dumping cases against Mexican growers of seasonal produce, a move farmers in southeastern states such as Florida had lobbied for. They accused Mexico of subsidizing farm infrastructure and depressing prices. The problem for the U.S., however, was that farmers in states on the West Coast see Mexico as a major market for their produce. Opening up Mexican farmers to anti-dumping suits would make major U.S. fruit producing states on the West Coast and major U.S. companies that have operations on both sides of the border vulnerable to retaliation. The U.S., therefore, decided to scrap the seasonal dumping measures.
With these issues nearing resolution, talks are likely to turn to two other contentious subjects: subsidies and dispute settlement. Here, Canada has been at the center of the disagreements. Washington has accused the Canadian government of protecting a host of goods, through the use of subsidies and trade barriers, that are then dumped on the American market. As recently as Monday, the U.S. Commerce Department placed duties on large-diameter welded pipes from Canada (and other countries), claiming they were being sold in the U.S. at unfair prices.
Canada has faced criticism both at home and abroad for its subsidies in the industrial and agricultural sectors. A report released by the University of Calgary early this year concluded that the federal government along with the country’s four largest provinces spent roughly $29 billion a year on subsidies through various mechanisms. The Globe and Mail newspaper and funding services provider The Funding Portal reported last year that the top 50 Canadian subsidized organizations received nearly 840 million Canadian dollars ($645 million) in subsidies. Of those that made the top 50, 12 were in the manufacturing sector, five were in agriculture, and five were in mining and natural resources. Moreover, the University of Calgary report said about half of the $29 billion in subsidies is misused and doesn’t further economic development.
Dairy and softwood lumber have been among Washington’s top concerns. Trump has accused Canada of placing 270 percent duties on dairy products, for example. Indeed, Canada does impose duties around this level on dairy products imported from the U.S. after a certain quota is reached. In the 1970s, the Canadian government propped up the dairy industry with high tariffs, production quotas and fixed prices paid to producers. Since then, the industry has changed drastically; it’s only one-tenth the size it was 50 years ago and is highly concentrated in Quebec and Ontario. Still, it provides 70 percent of Canada’s milk.
Quebec and Ontario have a lot of political clout in Canada, making it difficult to introduce changes to things like subsidies and tariffs. As part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Canada agreed to open 3.25 percent of its dairy market to imports. Canadian farmers considered this a bad deal and said they wouldn’t accept any more concessions in NAFTA talks. But U.S. farmers have found loopholes in the quota system. They have started producing ultra-pasteurized milk and other high-protein dairy components that aren’t included in the highly taxed list of products. According to Statistics Canada, the country’s national statistics office, the U.S. actually had a trade surplus with Canada in dairy, as U.S. producers exported about CA$296 million in dairy products to Canada last year and Canadian producers sold CA$148.1 million in milk products to the United States.
The dispute over softwood lumber is long-standing. U.S. lumber companies accuse Canada of unfairly subsidizing domestic producers. In 2006, both countries agreed to a truce in the conflict for nine years. But that agreement expired, and in 2017, the U.S. Commerce Department imposed tariffs on softwood lumber imports from Canada. According to the department, Canadian subsidies on softwood lumber range between 20 and 24 percent, and the new tariffs are aimed at offsetting those subsidies. In January, the Commerce Department responded to an industry complaint that Canadian manufacturers were selling newsprint at artificially low prices by placing a 16.88 percent tariff on paper from B.C.-based Catalyst Paper and up to 9.81 percent duties on several other Canadian producers. The International Trade Commission will assess the department’s decision next month. The U.S. government has faced backlash from U.S. homebuilders and local newspapers, both of which have seen costs rise as a result of the duties.
These long-running disputes reveal why a dispute settlement mechanism is such a contentious issue. Mexico supports keeping a dispute settlement option in the agreement; Canada would like to see it improved; and the U.S. wants to do away with it altogether. But if the U.S. were to demand that issues like dairy and softwood lumber be resolved through NAFTA, a procedure to settle disagreements would be necessary. Canada will need to take the lead on this matter, just as Mexico has done on the auto industry.
Editor’s note: An earlier version of this analysis contained an error in the conversion between Canadian dollars and U.S. dollars. CA$840 million is about $645 million.