Canada left facing a fait accompli in NAFTA negotiations

This commentary is being penned in the midst of a “story in process,” as journalists might put it.

On Monday, the U.S. and Mexico announced an “understanding” for an updated North American Free Trade Agreement (NAFTA), and we now await the outcome of talks with Canada over that nation’s acceptance of the US-Mexico deal — or its likely unsuccessful attempts to incorporate its own priorities and trade sensitivities.

Indeed, the major political story out of the past weeks is how Canada allowed itself to be dealt out of the final negotiations (more on this later).

Details have emerged over the past three days regarding what the U.S. and Mexico actually agreed to, so here is a rundown of the good, the bad and the uncertain.

To its credit, the Trump administration did not demand major changes in much of the original substance and structure of NAFTA — such as lowered tariffs rates and the dismantling of many barriers to services trade.

Clearly, U.S. Trade Representative Robert Lighthizer was looking over his shoulder at the Trans-Pacific Partnership (TPP) pact that President Trump rejected in early 2017.

That partially explains advances made in the addition of some digital trade obligations, such as the ban on data localization provision, which went beyond the TPP and included financial services data.

Also moving beyond the TPP, the new NAFTA understanding mandates 10-year data protection for so-called biologics patents, something the U.S. pharmaceutical industry had urgently sought but failed to achieve in the TPP (where a fuzzy 8-year protection is the rule).

It extends copyright protection to 75 years. Finally, at least some in the U.S. business community hailed the addition of provisions dealing with currency manipulation, though this is largely confined to a transparency commitment.

The “America First” philosophy of the Trump administration is front and center in the negotiations over the automobile sector, which since the passage of NAFTA has become a North American regional powerhouse rather than three national markets.

The proposed U.S.-Mexico agreement raises the minimum share of components that must come from North America from 62.5 percent to 75 percent. That would largely impact the production of small cars in Mexico, as international car companies have found it uneconomical to produce such cars in the U.S. and Canada.

Under normal circumstances, cars that don’t meet that requirement would revert to the existing 2.5 percent tariff invoked by the U.S.

But while the details are still unclear, the U.S. is also reserving the right to levy 25-percent tariffs if it goes forward with its (bogus) claim that the automobile industry comes under the national security provisions of the law granting wide authority to introduce trade and investment restrictions when U.S. national security is threatened.

Such moves could devastate existing auto supply lines, as well as ultimately be deemed in violation of U.S. non-discrimination obligations in the World Trade Organization.

Further, in its most interventionist segment, the agreement mandates that 40-45 percent of cars assembled in Mexico must be done by laborers making at least $16 per hour. This is four times the average hourly wage of Mexican workers.

Because of fuzzy, complicated language, it is not clear how onerous these rules will be. But it does represent an unprecedented invasion of a nation’s domestic policymaking through the means of a trade agreement.

This attempt to forge some kind of international minimum wage was an attempt by USTR Lighthizer to secure congressional Democratic support. As such, it seems to be failing, as Rep. Sander Levin (D-Mich.), a leading labor supporter, has announced his opposition to the proposed agreement.

In sum, from a free-market trade perspective, the proposed new NAFTA is a very mixed bag, with some advanced features, some distinctly retrograde — but the most fascinating story of the NAFTA endgame is Canada’s absence from involvement in key decisions.

For the past month, Canadian officials stood back, stating repeatedly that they would return to Washington only after the U.S. and Mexico had wrapped up purely bilateral issues. But it turned out that the U.S. and Mexico actually negotiated a completely updated NAFTA and presented this tentative pact to Canada as a virtual fait accompli.

Astonishingly, Canadian Foreign Minister Chrystia Freeland had to cancel a trip to Europe to hurriedly scuttle down to Washington after the announcement.

Canadian and Mexican priorities did not entirely coincide: Canada had strongly pushed for continuing a special arrangement for an anti-dumping system (now scrapped) and for a strong investor dispute system (now much diluted). Further, the U.S. will demand some liberalization of Canada’s tightly controlled dairy management system.

President Trump (with Mexico going along) has set a Friday deadline for concluding the agreement. As this is written, much drama and uncertainty remain over the NAFTA endgame. But stepping back, here are two questions for future analysis:

How did the Canada fail to understand what was taking place over the past month and fail to take action to enter the negotiating process? And, why did Mexico decide to throw its lot in with President Trump, who is widely despised by the Mexican populace — and in so doing also throw Canada under the bus?

Claude Barfield is a resident scholar at the American Enterprise Institute. He’s a former consultant to the office of the U.S. Trade Representative and the World Trade Organization (WTO).