Background

On July 17, the Office of the U.S. Trade Representative (USTR) issued the summary of negotiating objectives for the renegotiation of NAFTA, as required under the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (Trade Promotion Authority). The release of the objectives paves the way for formal negotiations to begin on August 16 in Washington, D.C.

In Congress, leading Republicans praised the administration overall for the release of the objectives while reserving space to provide additional input on specific issue areas, whereas many Democrats criticized the objectives for being vague relative to the objectives mandated by Trade Promotion Authority.

The document provides an overview of the outcomes that the USTR will seek during negotiations with Canada and Mexico. The objectives cover the full range of chapters incorporated in recent U.S. trade agreements, including trade in goods, sanitary and phytosanitary (control of plant disease and pests in agricultural crops) measures, technical barriers to trade, and intellectual property. Based on the objectives, the negotiations are likely to be broad in scope, at least initially. However, with the NAFTA parties ambitiously aiming to conclude negotiations by December 2017, it remains to be seen if a comprehensive agreement will prove sustainable as negotiations proceed.

Ironically, a number of the objectives outlined are broadly consistent with measures negotiated in the Trans Pacific Partnership (TPP)—from which the U.S. withdrew in January 2017—including objectives in areas such as digital trade, state-owned enterprises, and updated provisions on labor and the environment. It is also true that some objectives are based on principles consistent with the Trump administration’s focus on enhancing U.S. manufacturing exports and overall economic sovereignty—such as an emphasis on reducing the trade deficit, tightening certain rules of origin, and maintaining strong trade remedies.

Notable Objectives

  • Trade in Goods: The U.S. will seek to maintain existing tariff benefits under the current NAFTA for both agricultural and industrial goods while expanding market access opportunities for agricultural goods. This stated goal would appear to provide additional reassurance that the U.S. will not seek to disrupt North American supply chains by unilaterally withdrawing from the current NAFTA.
    • However, the U.S. will also seek to“improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.” Though the Trump administration has clearly made addressing trade deficits a priority, it remains unclear what specific measures USTR will seek in the NAFTA renegotiation to address its respective trade deficits with Canada and Mexico.
  • Rules of origin: The U.S. will seek to update the rules “to ensure that the benefits of NAFTA go to products genuinely made” in the U.S. and North America and “incentivize the sourcing” of goods from the U.S. and within North America. This could mean that the administration will seek to tighten the rules of origin for goods to require more U.S. or North American content in order for goods to qualify for NAFTA tariff benefits, which would have major consequences for existing supply chains. However, such an approach requires a fine balance. If companies find that using the NAFTA becomes too onerous and burdensome, they may be incentivized to pay the duties rather than incur additional costs to adjust their supply chains and set up compliance mechanisms.
  • Digital trade: The U.S. will seek commitments “not to impose customs duties on digital products” and “establish rules to ensure that NAFTA countries do not impose measures that restrict cross-border data flows,” nor “require the use or installation of local computing facilities.”
  • Financial Services: In a slight variation from language in the digital trade objectives, for financial services the U.S. will seek commitments for NAFTA countries to “refrain from imposing measures” (emphasis added) that “restrict cross-border data flows or that require the use or installation of local computing facilities.” The distinction may be to allow some flexibility for federal and state financial regulators to maintain authority to require certain records to be held in the United States. On the other hand, as occurred during TPP discussions, the financial services sector has consistently raised high-level concerns about such differential treatment, relative to other sectors. USTR may have to find a narrow fix that satisfies the financial services industry over the course of negotiations.
  • Customs and Trade Facilitation: The U.S. will seek a commitment from Canada and Mexico to increase their de minimis (minimum) shipment value to one “comparable” to the U.S. de minimis shipment value of $800. The de minimis values allow shipments below the specified value to enter duty free through relaxed customs procedures. Securing these commitments will benefit small and medium-sized U.S. companies, who would face fewer barriers when exporting to Canada and Mexico.
  • Sanitary and Phytosanitary (SPS) Measures: The U.S. will seek to “establish a mechanism to resolve expeditiously unwanted barriers that block the export of U.S. food and agricultural products.” The U.S. will also seek to “provide for a mechanism for improved dialogue and cooperation to address SPS issues and facilitate trade where appropriate and possible.”
  • Investment: The U.S. will seek to establish rules that will eliminate barriers to U.S. investment “in all sectors” in the NAFTA countries, while ensuring that “NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors.” This largely tracks language included in the Trade Promotion Authority legislation, which allows the administration flexibility in determining its approach on investment.
  • Intellectual Property: The objectives track the Trade Promotion Authority statute calling for provisions that “reflect a standard of protection similar to that found in U.S. law.” This leaves open the politically sensitive issue of the term of data protection for biologic medicines, which was a major issue for key Members of Congress during the TPP negotiations. Currently, U.S. law provides 12 years of data protection for biologics, Canadian law provides 8 years, and Mexican law provides no protection. Mexico will likely seek to extract concessions from the United States in order to raise its data protection terms.
    • In the area of copyright, the objectives do not refer to seeking an appropriate “balance” or other fair use exceptions and limitations to copyright protections, as were included in TPP. This omission may ease concerns for content-creating industries, while increasing concerns for technology companies, which were the main advocates for “balance.”
  • Trade Remedies: The U.S. will seek to eliminate the NAFTA “global safeguard exclusion” and “eliminate the Chapter 19 dispute settlement mechanism” for trade remedies contained in the existing NAFTA text. The safeguard exclusion prevents the U.S. from imposing safeguard remedies such as tariffs or quotas on Canadian and Mexican imports for “seriously injured” industries, as it can for other trading partners, unless Canada and/or Mexico are found to be contributing importantly to the global injury determination.
    • The Chapter 19 dispute settlement mechanism provides for settlement of U.S. trade remedy disputes via a special NAFTA panel rather than through U.S. courts.  The Trump Administration has signaled that it would like to apply U.S. trade remedy laws more aggressively, including on Canadian and Mexican imports, but is limited by these provisions. The elimination of the Chapter 19 dispute settlement procedures would be a major point of contention for Canada, which has won key victories against the United States (most importantly on softwood lumber exports) using this mechanism.
  • Government Procurement: The U.S. will seek to maintain certain domestic preferential purchasing provisions (such as “Buy America” requirements), and exclude sub-federal procurement commitments from coverage under the agreement’s government procurement provisions, while increasing opportunities for U.S. firms to sell products to the Canadian and Mexican governments.
  • Currency:The U.S. will seek an “appropriate mechanism” to “ensure that NAFTA countries avoid manipulating exchange rates” in order to “prevent effective balance of payments adjustment or gain unfair advantage.” As with the TPP negotiations, a tension exists between the flexibility on monetary policy the U.S. Federal Reserve would like to maintain, and the enforceability that some industries are seeking for imposing discipline on unfair currency interventions. Since little noise has been made by industry regarding currency interventions by Mexico or Canada, such provisions would serve primarily as models for future trade agreements.
  • Environment and labor: The U.S. will seek to bring labor and environment provisions into the text of the trade agreement, rather than as side agreements, as in the current NAFTA. Specific objectives outlined for environment and labor are similar to those negotiated in TPP.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu