THE COMPREHENSIVE AND PROGRESSIVE TPP – CRITICS GIVE THE ‘OCEANS 11’ REMAKE TWO THUMBS UP

NAFTA NEGOTIATIONS: LET THE WINING BEGIN
Bobby Seeber

NAFTA negotiations have commenced under a commonly held view that the 1994 agreement could use some “modernization”. Much has transpired in continental commerce and economics over the last 20 odd years, so like a solid house where the owners are disinclined to move, the consensus is that renos are about due.

But reopening the NAFTA is also seen as an opportunity by some to redress long standing grievances. There are those that have felt concessions made in the original agreement were unjustified and have vehemently complained about them ever since.

The US wine industry has impatiently awaited an opportunity to revisit the NAFTA for some time.

Sure, the fact that provincial liquor boards hold a monopoly on alcohol sales in most provinces has been a long, festering sore point for the US wine industry. Besides restricting points of sale to only provincial liquor board outlets, the regulations and policies of those boards create a host of other perceived barriers disadvantaging foreign wines. These relate to cost-of-service mark-ups, restrictions on foreign product listings and distribution, discriminatory shelf positioning, maximum or minimum price points, to name a few. All are highlighted annually in the Office of the US Trade Representative’s report on Canadian discriminatory trade practices.

Even Ontario’s recent efforts to move closer to the 21st century and allow wine sales in grocery stores has been deemed suspect, but mostly through guilt by association.

Earlier this year the US — joined by the EU, Australia, Argentina and New Zealand — initiated a WTO trade challenge against BC’s regulations offering grocery shelf space to only 100% BC wines. Ontario wisely refrained from adopting similar openly trade non-compliant regulations, providing instead imported wine with an alternative retail channel to the LCBO through grocer sales…but under narrow conditions. The US wine industry suggests that these conditions disproportionately favour home (Ontario) product, and the US government is closely monitoring implementation amongst the 70 odd grocery outlets.

But the real source of consternation dates back to Article 804(2)(b) of Canada-US Free Trade Agreement. Later incorporated into the NAFTA, this provision allows for the grandfathering of 292 off-site private wine outlets in Ontario which were in existence as of October 4, 1987.

Only a handful of wineries have benefitted from this historical retail advantage: Constellation Brands, Andrew Peller, Colio Wines, Magnotta Winery, and Château des Charmes. The vast majority of existing provincial kiosk wine stores belong to the first two, with Constellation Brands holding more than 164 Wine Rack stores and Andrew Peller registering 104 Wine Shop outlets.

They are the ones offering those sample wine shots as you exit your local grocers, presenting an opportunity to negotiate the grocery cart full of bags and kids with a slight buzz.

The rationale behind the grandfathering provision for kiosk wine retail outlets was the perceived need back in the late ’80s to protect the fledgling Canadian wine industry from US competition.

According to the April 2015 report by the Premier’s Advisory Council on Government Assets, Striking the Right Balance: Modernizing Wine and Spirits Retailing and Distribution in Ontario, imported wines enjoy a favourable position in the Ontario marketplace. Imported wines account for approximately $1.5 billion in sales (or two thirds of the total), with Ontario wines accounting for the remaining third – about $700 million annually. Imports comprise around 75% of wine sales at the LCBO; 96% of Vintages sales are foreign imports.

So the home-grown industry is well acquainted with foreign competition.

Today, there are more than 180 wineries in Ontario producing about 71% of total Canadian wine volume. That translates into 17,000 acres of vines in eastern, southern and southwestern Ontario, with a focus on premium vinifera and French hybrid crops in Niagara, Lake Erie North Shore and Prince Edward County. The Ontario grape industry boasts that for the first time in 30 years, grapes are the most valuable fruit in Ontario in terms of farm gate value, comprising 35% of the total farm value of Ontario commercial fruit crops.

That’s the very point of the US wine industry.

They argue that Canada’s now thriving and well-established wine industry is no longer in need of the overt protectionist practices conceded by US negotiators in 1987. They contend that the NAFTA is indeed in need of modernization, of the kind that would remove past discriminatory trade practices in bilateral wine trade. Without exception.

Canadian negotiators have been put on notice. More favourable wine access terms are a priority objective for the US in these negotiations. The arguments for maintaining past discriminatory practices to benefit a nascent Canadian industry no longer carry the same weight.

Changes are afoot, changes that the average Canadian consumer would not necessarily protest. And Ontario’s wine industry needs to prepare for such change, for adjustment to even more import competition.

Where some might see reason for distress, this may instead be an opportunity for Ontario grape and wine producers to seek enhanced exposure to the lucrative American market. Quid pro quo. Negotiations are about the

Change is inevitable. Ontario wines will be up against more Mondavi Cabs in their home market. The difference however is that the provincial industry is more mature now, more established and more competition savvy.give-and-take, after all.

If the status quo is no longer available, wouldn’t the Ontario wine industry want to be in a position to set the context for change, and perhaps even benefit from it?

THE NAFTA: A “DISASTER” WORTH KEEPING?
Bobby Seeber

Within days of being confirmed as the new US Trade Representative, Robert Lighthizer issued an official notice to the US Congress in early May advising of the Administration’s intention to enter into NAFTA negotiations.

All through the long and relentless 2016 US presidential campaign, then-candidate Donald Trump railed against the NAFTA as “the worst trade deal maybe ever signed anywhere”. He committed to renegotiating “a better deal by a lot” or withdrawing from the deal altogether.

So why is the official notice of an intent to renegotiate the NAFTA newsworthy? It was certainly telegraphed enough long beforehand. Loudly… and repeatedly.

Well, providing notice to Congress triggers a 90-day timetable for consultations. It also sets out when negotiations can commence in accordance with the most recent version of US fast-track trade negotiating authority, the Trade Preferences Extension Act of 2015.

The real news therefore is that NAFTA negotiations can now commence sometime on or after August 16, 2017.

In the lead-up to late August, officials from all three countries are undertaking preparations, including stakeholder consultations on the various perspectives of their respective industry stakeholders, consumers and citizens.

And the various interests, especially in the US, have been keen to make themselves heard with respect to NAFTA.

Since announcing public consultations in May, the USTR has received over 12,000 written submissions. Three days of marathon public hearings involved 130 witnesses with perspectives that ranged from anxiety over the possible demise of the Agreement, to bottled-up anger over the Agreement’s perceived failures, and everything in between.

Textiles, plastics, steel, the recording industry, the NFL, automakers, freight, environmental groups, home builders, farm groups, pet food manufacturers — representatives from all these sectors offered testimony.

To illustrate the extremes of the stakeholders’ perspectives resurfacing, one of those submissions entered is from R-CALF — the US western-based Ranchers-Cattlemen Action Legal Fund.

Yes, R-CALF is back.

After spending nearly a decade in a losing effort to impose protectionist US country-of-origin labeling measures — which then morphed into a WTO dispute wherein the US government was forced to ultimately rescind the measure — R-CALF now advocates for reinstating US COOL.

And nary a mention of the past legislative and protracted trade dispute history to mar their twenty-five or so pages worth of undistilled diatribe about the ills of imported product.

Ask any Canadian cattle producer, and they will have much to say about R-CALF and US COOL. About how much the ensuing fiasco cost the industry on both sides of the border. About how the effort came close to unraveling the intricate supply chain integration of the North American beef industry upon which its global competitive position is built.

Supply chain integration is one of the key benefits and successes of the NAFTA. It goes to the competitive edge of many sectors with North American-wide operations, whether that be in beef, pork, steel, autos, etc.

Autos is the poster child for sector integration and resulting cost efficiencies attributable to the NAFTA. Auto parts crisscross North American borders at least eight times before final vehicle assembly, according to the Alliance of Automobile Manufacturers’ recent submission to USTR.

The uncertainty alone attached to announcing NAFTA renegotiation has put a chill on future investment plans in that sector, and across industries. If the continental business model is to unravel, then industry will simply adapt to using inputs from outside North America.

Multinational mobility guided by profit, not patriotism.

Acknowledging the high stakes at risk in the upcoming NAFTA negotiations, US Commerce Secretary Ross — the Administration’s co-lead in these talks — has repeatedly committed to a first rule of “do no harm” when talks get underway.

The implication from the Administration is that the NAFTA is not all that bad after all— that some parts deserve careful preservation.

And therein lies the contradiction in narrative that presents a serious challenge for the new US Administration. For they are the ones that got this party started, more as a call to arms to correct “the disaster” wreaked by the worst trade deal ever signed. Anywhere.

A counter message voiced by a growing aggregate of American industry and government representatives points to the benefits of the NAFTA as amassing the world’s largest free trade area, spurring commerce in a collective marketplace of some 450 million people representing a combined GDP of some $20 trillion (or about 28% of the global economy).

Within US circles, the fact has not been lost that Canada and Mexico have consistently been the top destinations for US exports, collectively accounting for more than 34 percent of US shipments abroad in 2016.

Secretary Ross has indicated in the past that NAFTA negotiations could be completed by the end of this year or early 2018. USTR Lighthizer has been more circumspect, suggesting that he wouldn’t be bound by “artificial deadlines”.

In a revealing assessment of the high stakes politics at play offered during his first public testimony before the Senate Finance Committee, USTR Lighthizer stated: “I’m very focused on the fact that when we bring something back, it has to pass, and that there’s almost no margin for error.”

An added complication is the Mexican presidential elections in July 2018 and US mid-term elections in November next year, which suggests that the clock is already ticking on these negotiations.

Talks haven’t even begun yet, and still: tick, tock, tick, tock.

Expectations have been raised high in the US regarded outcomes. After all, NAFTA renegotiation was promised to produce “a better deal by a lot”.

This makes the politics of selling a renegotiated NAFTA problematic. A mere “tweak” to modernize the Agreement would not address the grand promises made to US auto and manufacturing workers in the Rust Belt.

Yet a serious overhaul of the Agreement will take time.

The new Administration, which denounced the NAFTA as a product of previous administrations and their poorly-assembled negotiating team, will own the outcome of this coming renegotiation. And they know it.

After all the vitriol and political toxins poured on the trilateral agreement during the campaign, can the new Administration sell a tweaked version of the existing Agreement or is a substantive overhaul of the NAFTA now the only way?

Are the political considerations the same for both US partner countries, or distinguishable as between Canada and Mexico?

If the latter, would a bilateral negotiating construct be more efficient?

Would the compromises deemed acceptable to each of the three country participants in order to complete negotiations be able to pass a jaded US Congress?

All pressing questions.

The USTR will issue a more detailed listing of what the US Administration hopes to gain from these talks on July 17th. This will offer some sense of the anticipated scope of the upcoming talks.

But there will be no crystal ball answers until the reality TV show called US politics airs its new spin-off series, The NAFTA, in late August/early September.

The title of the first episode: Do No Harm.

Tick, tock, tick, tock.

TRADE RETALIATION: THE “MOOSE” THAT ROARED?
Bobby Seeber

Trade disputes have a way of eliciting knee-jerk responses, where governments raise the noise level and flex whatever retaliatory muscle may be available to them. And while this may be gratifying to politicians in this age of “narcissistic populism” — as Justice Rosalie Abella recently coined in her commencement speech at Brandeus University in Massachusetts — the tools of trade retaliation are blunt and imprecise and decidedly messy.

And Canada and the US are not immune to a little messiness every so often.

For the record, Canada and the US have enjoyed a special bilateral relationship, sharing the world’s longest international border with limited fuss. For the most part, our bilateral trading relationship along “the 49th Parallel” has been exceedingly positive and mutually prosperous, enshrined first by the Canada-US Free Trade Agreement in 1989 and later the North American Free Trade Agreement (NAFTA) in 1994.

Bilateral trade between Canada and the US is worth in excess of US $635 billion (in 2016). Nearly nine million US jobs depend on trade and investment with Canada, and a preponderance of those reside in US states that were critical to the electoral college victory of the current US Administration.

Those are the kind of 
numbers that are reflective of a relation-
ship borne of proximity
, where cross-border movement of
 people, goods, services and investments speak to an economic interdependence. Where sector growth and competitiveness on both sides of the border are rooted in supply chain integration, whether we are talking beef or pork or autos.

When it comes to trade disputes, however, these aren’t the numbers that count.

Mutual benefit does not equate to mutual dependence. While Canada accounts for about 18% of total US exports, the US is Canada’s primary export destination capturing over 76% of total exports. The next largest market destination for Canadian goods is China, at just over 4% of total exports.

Juxtapose that reliance against that of the US, where it’s top 15 trading partners account for a little over 73% of total exports.

With a US population of over 324 million and a GDP of US $18.56 trillion, Canada’s

market of 35 million peeps and US $1.5 trillion GDP is hardly comparable.

Despite various efforts to diversify trading partners, the US has been Canada’s overwhelming go-to dance partner since the late eighties. In trade relations, you just can’t beat location… or the allure of a concentrated market.

Take the Great Lakes region, which alone is home to 105 million people, generates a regional GDP of US $5.8 trillion (or roughly 28% of combined US and Canadian economic activity), and supports 46 million jobs (or almost 30% of the combined US and Canadian workforce).

All within a one day drive radius for any transport truck. Now that is some serious market allure.

So when it comes to trade disputes with the US, Canada is most certainly in way above its (economic) weight class.

The new US Administration’s America First trade agenda has added some tension to the relationship, to be sure. Recent US pronouncements on BC wine, on dairy, on softwood, on steel, on airbuses, on ‘Buy American’, on tearing up or renegotiating the NAFTA — cumulatively these have put Canadian governments, federally and provincially, on high alert.

The Canadian government reaction has been full-court press, and rightly so.

In the lead-up to the recent BC provincial election, Premier Christy Clark threatened to implement a ban on thermal coal exports traveling through BC ports to Asia (94% of which originate from the US) in retaliation for implementation of US softwood lumber duties. The Prime Minister agreed to fully consider that option.

Also, the federal and BC governments are collaborating on collecting evidence to support the prospect of applying Canadian duties on purportedly subsidized Oregon products such as plywood, flooring, wood chips, packaging material and wine.

US Commerce Secretary Wilbur Ross issued a stern message in response suggesting that retaliatory threats by Canada were “inappropriate” and that the DOC’s decision to impose preliminary duties on Canadian softwood lumber was “based on the facts presented, not on political considerations”.

Secretary Ross is the co-author of a trade policy paper for the Trump campaign which argues that international organizations like the WTO do not supersede US law or “American sovereignty over matters of trade policy”. So when Secretary Ross starts sounding like the thoughtful defender of the rule of law…

Ontario has jumped into the retaliatory fray as well. In successfully dissuading New York State from adopting a ‘Buy American’ provision in its March budget, Ontario lobbied Albany congressional lawmakers extensively. The Province also let it be known that if the NYS measure passed, Ontario would be prepared to retaliate with in-kind measures of its own.

The federal government is also reported to be considering potential retaliatory responses to ‘Buy American’ procurement measures, such as restricting the use of US iron or steel in federally-funded infrastructure projects.

To be sure, much of this “retaliation” bluster is just that, bluster. The “moose” that roared.

As Secretary Ross put it in his trade manifesto: “America’s major trading 
partners are far more dependent on American markets than America is on their markets”. Harsh, but true.

In recognition of this harsh reality, the real energies and resources of Canadian governments are being put into government-to-government relationship building and on-the-ground advocacy. This strategy is critical and laudable.

The real prize is landing a bilateral deal that will add stability to a relationship that both sides see significant merit in pre- serving. This is the aim in resolving the softwood lumber dispute (for the fifth time running). This is the aim in renegotiating and ‘modernizing’ the NAFTA.

Establishing an agreed-to set of rules to manage future trade relations adds much needed stability and predictability to the equation, allowing businesses in both countries to get on with doing what they do best — doing business.

For Canada, setting out the parameters for future trade relations with its market-largesse-gifted neighbour is a necessity, an equalizer of sorts. Trade rules tend to minimize political grandstanding.

Trade rules make retaliatory action allowable only when warranted under certain fact-based circumstances, and limit that action to that which is authorized within the rules — like dumping or countervail duties, or actions in the event of non- compliance with established commitments.

Trade rules are essential to countries like Canada that find themselves up against a super heavyweight. It is somewhat akin to the addition of gloves, head guards and a referee to a fight. The result may still be one-sided, but at least anything under the belt is disallowed.

Retaliatory action is attractive to many governments because it signals action on behalf of a home industry feeling harmed. But keep in mind that border duties end up being paid by importers (local companies) who pass on the increased expense to local consumers. And for those that cannot adjust to the increased input costs, local jobs are placed at risk.

As I indicated earlier, messy.

A past life has taught me that real solutions to bilateral trade disputes comes from industry-to-industry dialogue. Often the dispute is borne of misunderstanding or a lack of knowledge or empathy for the producer/processor/manufacturer operating in the other jurisdiction. Much can be accomplished through a simple conversation.

Retaliatory measures tend to place a chill to any attempt at bilateral dialogue.

And Canadian governments know this. You can just see them reach for the boxing gloves marked “retaliation” while whispering to those within earshot: “Hold me back. Someone. Anyone.”

Bobby Seeber

The new US Administration has made renegotiation of the NAFTA one of its top priorities, although when you accumulate a long, long list of “top priorities”, the “priorities” part starts to lose some gravitas. Treating everything as a top priority means that nothing gets the attention that a top priority deserves — a rotation as chief-of-staff gets one wise to that lesson real quick.

But the other day, during an America First event in Wisconsin to showcase his “Buy American, Hire American” agenda, US President Trump pointed to “some very unfair things” happening in Canada that was hurting US dairy farmers.

The President indicated that the situation demanded an explanation from the Canadian government, that it further illustrated how the NAFTA is a “one-sided deal against the United States”. President Trump vowed that “it’s not going to be happening for long”.

Recall that earlier this year Trudeau and Trump met in Washington DC, and the indication by the US President then was that with respect to Canada, the NAFTA merely required a “tweak”. You could hear the sigh off relief, wary as it was, all across the northern tier.

What has changed since then? Well, the President learned about dairy ingredients.

Dairy ingredients, you say. What’s a “dairy ingredient”?

Apparently milk processors can now breakdown milk into constituent parts, and concentrate those ingredients to an extent that long-haul transportation is more cost-effective than previously was the case with (water heavy) milk. And the bonus is that Canada’s border tariff structure, established to protect the domestic industry from imports of milk or milk products with a 200% to 300% tariff wall, doesn’t recognize dairy ingredients as “milk”. So entry to Canada is tariff-free.

Not surprisingly, processors in the US northeast were quick to catch on to the market opportunities presented by send- ing dairy ingredients to Canada, which have been accepted by Canadian processors as less costly inputs in the manufacture of domestic innovations in cheeses and yogurts and dairy drinks.

The uptake has been significant. Between 2012 and 2015, US exports of milk ingredients to Canada increased over 500%. Cha-ching.

It did not take long before the Canadian dairy industry also recognized the opportunity. After some wrangling, it was agreed that Canadian dairy ingredients would be priced competitively at world prices… meaning the same price as imported inputs. No border restrictions applied to US goods. No favouritism applied to domestic product. Just more competitive market conditions at home.

Well, needless to say, this amendment to the Canadian market is perceived some-what differently south of the border.

A number of letters involving various US dairy industry coalitions and US state government representatives have been sent to the new Administration urging action.

And in mid-April, Wisconsin Governor Walker had the ear of the President while the two toured a Snap-on tool manufacturing facility, and complained that dairy farms in the Cheese State were on the brink of collapse because of the “unfair” actions of Canada. The new Canadian pricing policy for domestic dairy ingredients caused those lucrative trade flows to Canada to dry up.

In fairness, the intricacies of bilateral trade in dairy ingredients is insider’s baseball. It is little wonder that the US President chose to take on Canadian dairy policy more generally, which on this side of the border was translated into an attack on supply management. And the usual suspects at home have sounded off since.

But for or against, supply management per se is not on the NAFTA renegotiation table. Domestic policies do need to evolve with the times, but on the basis of internal, domestic considerations and pressures. Domestic policy is not changed at the behest of foreign interests. Foreign interests do not translate into votes at home.

NAFTA renegotiation will entail concessions impacting our supply-managed sectors, to be sure. There will be some form of greater access for US dairy products at the end of the day — the concessions provided to the US at the close of the now defunct Trans-Pacific Partnership deal demonstrated that greater access to the Canadian dairy market is negotiable.

But it is a bit rich to suggest that it would be more “fair” to allow US imports of dairy ingredients to compete at an advantage in the Canadian market. If the roles were reversed, there would be no question what Wisconsin producers, the Wisconsin Governor, or the White House might deem as “fair”.

If Canadian processors were selling in the US or in a third market, and thereby displacing US product, maybe the argument would carry more weight. But giving local farm families the opportunity to compete, especially in their own market… well I would have thought that is the quintessential American way? Made local, buy local… right?

In any event, it does showcase that a NAFTA renegotiation may involve more than a mere tweak.

Rhetoric aside, there are proponents in both countries that understand the enormous benefits derived from integration and efficient bilateral trade flows. Revisit- ing the NAFTA should be embraced as an opportunity to build upon a North American brand for quality, to reinforce a worldwide recognition for safe, healthy foods based on the highest of food safety standards.

Canada and the US should be taking the occasion to work together to harness a regional competitive advantage built on regulatory cooperation in food production.

There are hardworking farm families on both sides of the border looking to their governments to protect a way of life that they hold dear. Is there a way to advance local interests and address the bigger picture concerning global competitiveness? That will be the conundrum of trade negotiators tasked with revisiting the NAFTA.

It will not be easy.

And this is only one of a number of issues likely to complicate trade talks. Autos and auto parts, steel, softwood lumber, energy, Californian Cabernets — there is a lengthy list. We haven’t even started to scratch the surface.

Now I have to tell you, it’s an unbelievably complex subject. Nobody knew [trade] could be so complicated.