NAFTA: The times they are a changin’

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‘NAFTA has fundamentally failed’ thundered Robert Lighthizer, the US trade representative. Thundered perhaps overstates the delivery, but Canadians are understandably thunderstruck.

A fundamental failure sounds serious. Similar to a fundamental breach of a badly drawn contract but this time he claims that the entire $1.3 trillion dollar NAFTA region failed. This would be past everyone’s cumulative errors and omissions insurance, even if you totaled up all the insurance limits for all of the Canadian lawyers.

How did the US come to this overwhelming conclusion? When examining any policy matter, one spends most of their time drilling down to find the real essential issue. The worst approach applies a perfectly executed solution to the wrong problem. We can assume that the present US leader spent 140 characters on analyzing the issue as he does most things. We can also assume that this worst approach solution shall soon be upon us.

Their major complaint appears to be the huge current account deficit that the US has run up. The US simply imports more than it exports. Canada exports more goods, but our imports of US services exceeds this. Blame or thank Netflix for Canada’s trade deficit. The Canadian current account deficit increased beyond expectations last quarter. Therefore, we do not appear to be part of the problem, but unfortunately we will be part of the solution. Lighthizer must mean that NAFTA did not live up to its objectives.

NAFTA’s main objectives include national treatment, most-favored-nation treatment and transparency. The most favored nation treatment requires that whatever benefits you provide one treaty country, you should provide to all members of the treaty. National Treatment requires that foreign goods should be treated the same as domestic goods. The present US administration appears to have difficulty in applying that concept to immigrants however.

The other main objectives include eliminating barriers to trade, promoting fair competition, increasing investment opportunities, providing intellectual property rights, creating effective procedures for the resolution of disputes and establishing a framework for cooperation to expand and enhance the benefits of the agreement.

NAFTA scores highly on all these criteria. Duties have been reduced or eliminated. The US sees promoting fair competition as unfair to US business. The concept of free trade and fair competition relies upon comparative advantage. If a country provides some better or cheaper good or service, then it should produce more of that and less of whatever good or service it can’t produce as well as another country. The hollowing out of the US textile industry flowed naturally, but not willing, from this underlying concept of free trade. The US objection to this type of competition appears that not only must the US win all competitions, but all other countries must lose. A simple sum/zero look at the world.  Canadians prefer more of a synergistic grow the maple pie type of relationship.

Under normal, or average circumstances, this idea of competition should allow the best suited country to succeed. However, times are never normal. We rely upon the averages. For example, using quantitative easing the US Federal Reserve increased its financial assets 5 times as before the financial crisis in an attempt to keep interest rates low and to stimulate their economy.  Now that the fed intends to start selling off these assets to normalize, average, things out, the chickens coming home to roost might collapse the hen house.

As part of the NAFTA negotiations, the US demands that US firms have access to Canadian government contracts and that Canadian firms cannot access US government contracts to the same extent. This position comes across as, and please excuse the legal jargon, sucking and blowing at the same time. As the Art of the Deal suggests, you should ask for everything and the more outrageous the better.

Some of the US NAFTA failure arguments do not hold water. As a side note, we are better off to mention not water since the US may look north once again. The North American Power and Water Alliance plan to divert rivers into the US died a justifiable death, but rising from the dead has become very popular in the zombie fixated culture. Back to the main point, the US unemployment has dropped to levels not seen for years. The US manufactures more goods than ever. The GDP for all three countries has risen to three times since the start of the agreement.

The US complaint of job loss occurred but this was mainly the result of increased efficiency and automation. Job loss also occurred as a result of other countries having a comparative advantage. Admittedly, NAFTA diffuses the benefits and focuses the costs elsewhere. Some groups benefit but other groups are paying the costs in job loss.  Buggy whip manufacturing is not coming back anytime soon. Neither is coal.

NAFTA provides a dispute mechanism for the effective resolutions of disputes. The US claims that this infringes upon their sovereignty and want to default to the US court system. Having an independent dispute settlement system remains the best practice as evidenced by the WTO’s own dispute system. . They have a very fine system, but US litigation lawyers would not necessarily call it effective, or efficient.

NAFTA recognizes the importance of several multi-lateral environmental treaties and that these treaties prevail over NAFTA. The treaties cover ozone depletion, transportation of hazardous goods and prohibitions of trade in endangered species. Attempting to expand this list may prove difficult. The treaty between the US and Mexico on Cooperation for the Protection and Improvement of the Environment in the Border Area takes on a degree of tragic irony.  

Although NAFTA negotiation time lines were tight, Trump has recently indicated that there is ‘no rush’ and things seem to be ‘moving along nicely’. The next round of negotiations begin at the end of January. Canada has developed some innovative options to deal with the US requirement for 50% US content for automobiles. Essentially the concept is include several other car components that weren’t previously taken into account in the percentage calculation. If you have a bad ratio, then by strategically adding different stuff to the numerator and the demoninator you can make a percentage look better.

The US poison pill requirement to get rid of the objective tribunals and use the US court system still stands. Canada retorted by filing with the WTO almost 200 instances of the US retaliating to dumping by alleging countries exported subsidized products at artificially low prices. Lighthizer has called this WTO action ‘ill advised’. Although this sounds threatening as in an organized crime sort of way, it actually sounds less so than his damning observations of NAFTA fundamental failure.

Trump does sound a bit more conciliatory in his recent remarks. The recent WTO challenge may move his simple bluster into a simply angry notification to withdraw. Financial advisers suggest purchasing US dollars if this occurs. Although this sounds more like a gamble than an investment when trying to determine how the president might react to someone confronting him.

How does this impact the overall legal profession? Clients require legal assistance during booming and desperate economic times. Their needs become more acute during time of economic flux. Law firms could position themselves for handling the disruption of goods and supply chains should NAFTA be amended, or worst case, be terminated. The times they are a changin’.

 

Photo credit

Julius Silver