10 things to know about the NAFTA negotiations if you are a Canadian importer or exporter

Whether you are a Canadian importer or exporter, you certainly follow NAFTA’s renegotiations closely. They began in August 2017 and have not yet been completed; they could even last into 2019. As a Canadian company exporting and importing goods, you probably know that Canadian, American and Mexican companies do more than sell goods to each other. Indeed, they are increasingly pooling their efforts to produce goods. A withdrawal from NAFTA or the concession of certain issues in dispute by Canada would certainly have consequences on our manufacturing methods. Here are a few things you need to know about NAFTA renegotiations.

1- Chapter 19

One of the issues in dispute in the renegotiations is Chapter 19. This chapter is used to arbitrate countervailing duty and dumping disputes. Canada has often used this chapter in the softwood lumber dispute. Through this chapter, companies can challenge countervailing duties that they believe are unfairly imposed. For example, during the dispute between the American company Boeing and the Canadian company Bombardier, the latter used the mechanism to review this chapter, which involved a special committee made up of representatives from both countries. If chapter 19 is eliminated or amended, we may wonder what recourse the companies facing dumping will have.

2- Chapter 11

Another of the issues in dispute in the renegotiations is Chapter 11. The Americans want to dilute the procedure for settling commercial disputes. Canada is defending this chapter against the Americans, even though several Canadian players do not want it to appear in NAFTA. Chapter 11, or more specifically the dispute settlement mechanism, allows foreign companies to sue a government if they feel aggrieved for a reason. For example, a U.S. company could sue the Canadian government under chapter 11 if it believes it has been harmed if it is prevented from using a product it considers harmful to the environment.

3- Sunset Clause

The United States wants to include in the new agreement a clause allowing NAFTA to be renegotiated after 5 years and to be terminated if necessary. Canada and Mexico oppose this clause, which would leave uncertainty in the minds of companies in the countries that are part of the agreement. The problem is that companies that import and export regularly would have to think about reorganizing their supply chain, which spans all three countries. If tariffs appear overnight between countries, this could result in significant costs for these companies. Similarly, a company considering investing in the location of a new plant in Mexico or purchasing products from one of the two countries included in the agreement will need to think it through in the event that NAFTA expires after 5 years.

4- Rules of Origin in the Automotive Sector

The current agreement specifies that at least 62.5% of a vehicle’s components must be manufactured in one of the three countries to benefit from NAFTA. The United States wants 85% of auto parts to be manufactured in one of the three countries and 50% of parts to be of American origin. In addition, President Trump has asked the U.S. Secretary of Commerce to verify whether imports of Canadian cars should, for national security reasons, be subject to surcharges. Although the two files are treated separately, can we see a correlation between the NAFTA renegotiations and the surcharges on Canadian car imports?

5- Surcharges on Steel and Aluminum

Since June 1, 2018, surcharges of 25% on certain steel products and 10% on certain aluminum products have been imposed on imports from Canada, Mexico and the European Union. U.S. Trade Secretary Wilbur Ross mentioned that the renegotiations were taking longer than expected and that the administration had therefore decided to add Canada and Mexico to the list of countries affected by these surtaxes. Many businesses are wondering if they are subject to these surtaxes. You can read an article on our blog that will help you find out if your business is affected.

6- Canada Has Imposed Surcharges on Certain Imports of U.S. Origin

In response to the imposition of surcharges on imports of certain steel and aluminum products of Canadian origin, Canada has also decided to impose surcharges of 25% on certain steel products of American origin and 10% on various products of American origin that include certain aluminum products. These surcharges have been in effect since July 1, 2018. For Canadian companies importing American products, it would certainly be worth checking whether their imported products are affected by these surcharges. You can read about it in this article.

7- Presidential Elections in Mexico

The New Mexican president elected on 1 July 2018, Andres Manuel Lopez Obrador, will add his own team to the renegotiation table as soon as he takes office, on 1 December 2018. He mentioned during his campaign that he is in favour of a NAFTA agreement, but that the end of this treaty would not be fatal for Mexico. If the treaty were to end, it would redirect Mexico’s economy to the internal market and revive the rural economy.

8- Canadian Supply Management

One of the major issues in dispute blocking renegotiations is the Canadian supply management, which limits the entry of foreign agricultural products to provide income for Canadian farmers. President Trump calls for an end to Canada 270% tariff on U.S. dairy imports. The American secretary of agriculture says that he does not want to end the Canadian supply management system: “What we are saying is if you’re going to have a supply management system, you’ve got to manage the supply, and not over-produce and not over-quota where you dump milk solids on the world market and depress prices from our producers south of the border.” Prime Minister Trudeau recently reiterated that he will remain firm in his intention to retain Canadian supply management in NAFTA.

9- Midterm Elections in the United States

President Trump mentioned that he would wait until after the midterm elections to sign a new agreement, which would delay the conclusion of the renegotiations until at least November. Midterm elections could result in the Republican Party losing a majority in Congress and the Senate. U.S. voters will vote to elect new representatives on November 6, 2018.

10- Tense Diplomatic Relations

We can say that since the renegotiations began, relations between the negotiators have been tensed. President Trump’s multiple messages that an agreement can never be reached have often created uncertainty in the three NAFTA countries. Although Canadian Foreign Affairs Minister Chrystia Freeland remained calm during the renegotiations, she mentioned that the surtaxes imposed on Canadian steel and aluminum imports were absurd, illegal and unfair. President Trump also published a tweet after the G7 summit held in June 2018 to denounce Prime Minister Trudeau’s comments about surtaxes, which he considers insulting: “Because of Justin’s false statements at his press conference, and the fact that Canada is imposing massive taxes on our U.S. farmers, workers and businesses, I have asked our U.S. officials to withdraw support for the release, while we are considering tariffs on automobiles that flood the U.S. Market!” Let us hope that relations develop positively and that an agreement will be reached soon.

Please note that all information on this blog is subject to change. All blog articles are for information purposes only. We are always available to answer in detail any questions our clients may have regarding the information in this blog.

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