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

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THE COMPREHENSIVE AND PROGRESSIVE TPP – CRITICS GIVE THE ‘OCEANS 11’ REMAKE TWO THUMBS UP
November 30 2017 Andrea Trade Matters 0 comments

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

Two conflicting tectonic plates of trade strategy pushed up against one other in the Asia Pacific last month. Bilateral mercantilism sought to displace trade liberalizing multilateralism in a manner that befitted a rear guard assault on the Prime Minister of Montenegro at a NATO photo shoot. Very similar smugness.

The US President undertook a 12 day, five nation tour of pomp and red carpet in early November, declaring along the way that multilateralism was passé and that American bilateralism was the new (old) trade policy path to prosperity.

US prosperity, that is. The US President admonished multilateralism for enabling trading partners to take advantage of the US. The United States of America, the leading beacon of economic and military superiority, was a trade victim all these years, didn’t chya know. But no longer.

“I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and that will abide by the principles of fair and reciprocal trade. What we will no longer do is enter into large agreements that tie our hands, surrender our sovereignty, and make meaningful enforcement practically impossible,” President Trump told APEC attendees.

Solemn nods all around. But no line up for a taste of this new bilateral rebalancing. Nope, not a single taker.

In part because the US had already offered advance sampling of its “rebalancing” policy to its closest neighbours, and the rest of the world has been observing with fascination the Canadian and Mexican contortions over this new flavour. Poison pills are apparently not so easily swallowed. Think the Youtube ‘tablespoon of cinnamon’ challenge, with all the attending coughing and gagging.

“Thus far we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement,” USTR Lighthizer chided at the end of the fifth round of NAFTA negotiations in late November.

Well, no shit, Sherlock, when “rebalancing’ equates to overtly and drastically tipping the scales to heavily favour only one side…your side.

Another reason for the muted response to the US offer of new bilateral Asia Pacific partnerships is the pending resuscitation of the Trans-Pacific Partnership Agreement (or TPP). This is the trade agreement that then-candidate Trump railed against during the 2016 presidential campaign as an abomination of the Obama Administration. So no surprise that three days after Trump’s inauguration, an Executive Order was issued to formally withdraw the US from the TPP.

And the conventional thinking at the time was that the TPP minus the participation of the US was deader than a dodo bird. Or deader than a Doha, to use the trade wonk vernacular.

Well, Japan had other ideas, especially after expending significant resources and political capital in first being cajoled into joining the talks in 2011, and then finalizing a the 12-member deal in 2016. Enhanced regional trade is an integral component of Japanese Prime Minister Shinzō Abe’s economic recovery and regional revitalization platform.

Canada and Mexico have a shared stake in forging ahead with multilateral trade, now probably more that ever. Given the stark ‘America First’ positioning by the US in the NAFTA talks, both countries have felt it prudent to pursue a diversified trade strategy to dilute their heavy reliance on the US market. And with the exit of the US from the TPP, Canada has enjoyed elevated influence as the second largest economy in the new TPP ‘Oceans 11’ format.[1]

Canada was never that interested in the original leverage which drew other countries to the TPP talks. It already enjoyed preferential market access to the US through the NAFTA. Ditto for Mexico.

The real attraction for Canadian participation in the TPP was competitive positioning amongst the fast rising Asian tigers.   The worry was that if Canada sat out the TPP, its key competitors — the US, Australia, New Zealand — would gain preferential access in key markets and Canadian exporters would be left behind.

This lesson was already painfully and bluntly learned in the case of South Korea. Canadian negotiations for a bilateral FTA were put on hold while South Korea finalized negotiations with the US, which was concluded in 2012. Canada finalized and implemented its bilateral with South Korea in 2015, but that meant a three year lag in preferred market access behind the US and Australia. To this day, Canadian exporters to South Korea are playing catch-up to lost market share in this highly lucrative export destination. Once lost, that share is very difficult to recapture.

The biggest prize for Canada in a TPP ‘Oceans 11’ format would be gaining access to Japan ahead of the US, and on terms that Canada could not achieve bilaterally with respect to other competitors within the TPP ‘Oceans 11’ family.

For example, while Canadian beef is still subject to a 38.5% tariff in Japan, Australian beef enjoys much more favourable tariff access due to an existing trade agreement concluded in 2015. The TPP would be a great equalizer here, as market access rates would be levelled across the board and then decreased lock in step amongst TPP partners to 9% over 15 years. That’s just one example.

With the departure of the US, the Canada West Foundation calculates that Canada has far more to gain in a TPP ‘Oceans 11’ format than it did in the original TPP12 version. This is especially true for agriculture and food exports, where the sector would no longer compete against the US for its share in market access concessions.

Even if the US were to rejoin the TPP at a later date or were to conclude bilateral agreements with TPP members (which does not appear very likely in the near term given the US ‘winner-takes-all’ negotiating style being witnessed in the current NAFTA talks), Canadian exporters would be offered a critical head start in entrenching themselves and securing market share at the expense of the US. Basically Canada’s South Korea experience in reverse.

It is on this calculation that the Business Council of Canada, made up of the CEOs of 150 of the Canada’s largest firms, recently entreated the federal government not to delay in finalizing talks on the CPTPP ‘Oceans 11’ remake.

Earlier in November, the truncated membership of the original TPP had agreed to “core elements” of a trade package, and committed to resume talks to finalize negotiations on a ‘Comprehensive and Progressive’ TPP. The agreement – with newly amended title — would be concluded and ratified by late 2018, after negotiators had done some more tinkering.[2] The Canadian Prime Minister has suggested that Canada was in no hurry to finalize the agreement.

At this point, however, it appears that the CPTPP is too big to fail. With the NAFTA negotiations flagging, the importance of the CPTPP as a strategy of trade diversification is significantly elevated for many members, not just Canada and Mexico. And with a US Administration espousing the benefits of bilateralism and the death of multilaterism, the CPTTP is seen as a necessary and timely counterweight.

The remake of Oceans 11 is due to come to a theatre near you, with great anticipation and early critical acclaim. The thematic catch phrase remains as is: “are you in or out?”

Oh, Canada is most definitely in.

 

 

 

[1] The new CPTPP 11, or Comprehensive and Progressive TPP (minus the US), includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

[2] There are several areas of contention still to be sorted out: Canada seeks an exemption for domestic regulations regarding Canadian content and government funding of the arts and culture, especially with respect to Quebec and French language promotion; Vietnam needs an extended phase-in period to implement domestic laws on labour unions to comply with agreed-to labour standards; and Brunei and Malaysia also seek extended phase-in periods to allow for restructuring of their respective state-owned energy companies.

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GOVERNMENT PROCUREMENT: POLITICAL JUNK FOOD WITH HEARTBURN
November 02 2017 Andrea Trade Matters 0 comments

GOVERNMENT PROCUREMENT: POLITICAL JUNK FOOD WITH HEARTBURN
Bobby Seeber

As one of a growing collection of ticking time bombs the US has thrown into the NAFTA renewal conversation, US negotiators have included a demand for strict reciprocity in access to government contracts — that is, Canadian and Mexican access to US public works contracts would be restricted on a one-for-one ratio.

That translates into a cap on Canadian and Mexican access to US government contracts at the value of domestic contracts Canada and Mexico awarded to US firms.

Broader Canadian public procurement is estimated to be worth over $200 billion annually, with eleven per cent ($22 billion) of federal contracts going to foreign firms. This is dwarfed by a US public procurement market of $1.7 trillion, with three per cent (or $187 billion) in federal contracts awarded to foreign suppliers. As is often the case, the stakes are heavily weighted in favour of the US.

The recently tabled negotiating direction is consistent with an earlier “Buy American Hire American” executive order issued by the White House, reflecting a policy imperative to focus US government spending — whether in defence hardware, telecommunications, transportation infrastructure, or any of the other countless government pursuits — to more squarely benefit American firms.

“We’re sending a powerful signal to the world. We’re going to protect our workers, defend our jobs, and finally put America first,” US President Donald Trump announced in April 2017.

To be fair, ’buy local’ is not an especially new notion to the US political dialogue.

President Herbert Hoover advocated “Buy American” policies in 1933 during the Great Depression. More recently, President Barack Obama embraced “Buy American” approaches in the 2009 US stimulus legislation, The American Recovery and Reinvestment Act (ARRA). The ARRA required that all public projects use domestically produced iron, steel, and manufactured goods.

That legislation prompted Canada to successfully negotiate specific waivers to the ARRA to deflect potential discriminatory impacts on Canuck firms.

And to be even fairer, ‘buy local’ is not a notion exclusive to the US.

Closer to home, Ontario’s 2009 Green Energy and Green Economy Act comes to mind. For those that may not recall, it included domestic content requirements for wind and solar infrastructure projects, stipulating that participating electricity generators needed to source up to 60 per cent of equipment from Ontario to be eligible.

International trade rules regulate procurement policy and the protectionist tendencies of governments. Those Ontario Green Energy provisions, for example, were successfully challenged at the World Trade Organization (WTO) by Japan and the EU, forcing the province to amend its legislation in 2014. That bought the Ontario government five years of non-compliant favouritism using taxpayer dollars to benefit local goods.

It is without question that government procurement inherently involves a political calculation.

In her testimony before the House Standing Committee on International Trade in early August, Canadian International Trade Minister Chrystia Freeland referred to local content requirements in government procurement contracts as “political junk food — superficially appetizing but unhealthy in the long run”. Pass the Miss Vicky’s Salt & Vinegar, please.

Economists will argue that protectionism in government procurement reduces competition and raises the contract price. So, instead of a broad global set of suppliers competing for a government contract, only local suppliers apply…and depending on the specific expertise required, this may involve a very few. Without extensive competition, there is less incentive to innovate…the winning supplier only needs to edge out local expertise, not the full expanse of foreign-based rivals and know-how.

Governments grappling with budget austerity therefore ironically end up with less to apply towards procurement through “buy local’ approaches. Paying more for less than the best means ending up with less for economic stimulus, less for roads or bridges or hydro infrastructure, less for military hardware.

But political calculation and pure economic theory do not mix well. The natural default for politicians is to apply local taxpayer dollars to local goods and services, to spend voter dollars on local suppliers and reward local expertise. Awarding government contracts to a foreign name or brand, no matter how superior, comes with its own set of negative headlines. Guaranteed.

Elected officials therefore naturally seek to advance the interests of local industry, both in successfully securing domestic contracts and having equal access to foreign procurement contracts. For instance, Premier Wynne has aggressively and ambitiously (and to date successfully) deflected Buy American policy approaches proposed in US state congresses such as New York and Texas. But Ontario has also threatened to implement its own Buy Local legislation in retaliation to protectionist US efforts.

Back to the US NAFTA proposal for reciprocity in government procurement. The existing NAFTA prohibits preferential treatment in government procurement.

In February, a US General Accountability Office (GAO) review found that the US makes available twice as much government procurement to foreign firms, measured in contract value, as the EU, Japan, South Korea, Norway and Canada combined. The fact that much of this procurement imbalance is a result of defence spending — an area where the US remains unmatched worldwide — is lost in translation.

The prevailing view amongst US protectionists, therefore, is that the US is giving away more access than it receives. Nine US senators wrote the US Trade Representative in June in support of Buy American policies in NAFTA 2.0 to establish preferential access for US businesses competing for government contracts. The senators urged the elimination of the NAFTA procurement chapter, characterizing it as a “loophole” preventing taxpayer dollars from being used to create jobs in the United States.

Any objections, Canada or Mexico? Oh, you betchya.

And there are US business interests with a constant eye on the lucrative Canadian procurement market, made richer when the Canadian federal government signalled $81.2 billion in future infrastructure spending.

Finding a “win-win-win” on government procurement in these trade negotiations is not easy, unless parties veered in the unlikely direction of a “Buy North America” procurement policy. That’s a little less catchy than “America First” in any stump speech.

What is it they say about junk food? Appeasing at the moment, but unhealthy in the long run. And then there’s the awful heartburn to contend with.

 

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US SEEKING ADDED PROTECTIONS FOR GROWERS OF SEASONAL AND PERISHABLE GOODS
October 02 2017 Andrea Trade Matters 0 comments

US SEEKING ADDED PROTECTIONS FOR GROWERS OF SEASONAL AND PERISHABLE GOODS
Bobby Seeber

In its July 2017 report to Congress, the Office of the US Trade Representative (USTR) identified new authorities for perishable and seasonal anti-dumping (AD) and countervailing duty (CVD) investigations as a US negotiating objective for a revised NAFTA.[1]

The US seeks to create a special, fast-track mechanism for investigating fruit and vegetable imports. US negotiators are expected to table a proposal that would allow seasonal growers to qualify as speaking for the entire domestic industry in certain trade remedy cases despite not representing 51 percent of the defined industry. Regional grower organizations representing less than 50 percent of nationwide seasonal growers would therefore be able to trigger AD/CVD investigations.

Current NAFTA trade remedy provisions require that petitioners represent at least 50 percent of the domestic industry. Otherwise the call for trade action is regarded as frivolous.

Under the anticipated US proposal, the “period of investigation” to certify an AD or CVD complaint would be shortened to a few months, to better capture shortened ‘windows’ when inexpensive Mexican tomatoes compete with Florida product, or inexpensive Mexican avocados compete with Californian product.

The impetus for this initiative comes from select growers in Florida, Georgia, and California. The crosshairs are aimed squarely at Mexican product.[2] The imperative for achieving special seasonal and perishable trade remedy provisions is reflected in the last several US trade promotion authority statutes[3], enjoying bipartisan support.

 

AT THE WTO
This US proposal is not new. During negotiations at the World Trade Organization (WTO) Uruguay Round in 2006, the US had proposed that special trade remedy provisions be considered for perishable and seasonal agricultural products. The stated rationale at the time was that because of the special characteristics of perishable and seasonal products, producers were uniquely challenged to obtain meaningful relief from injurious dumping and/or countervailable subsidization.[4]

That proposal would have allowed seasonal growers to qualify as “the domestic industry” if the products were sold raw, and if their marketing seasons did not last longer than eight weeks after the products were harvested.

The US recommended then that the WTO more clearly recognize and better address the special characteristics of perishable, seasonal agricultural products in order to make the anti-dumping and countervailing duty remedies more accessible to all producers. The US proposal sought treatment of these types of investigations as cases requiring urgency, with abbreviated investigative processes and deliberations arrived at within three months.

The WTO Uruguay Round negotiations have since petered.

 

IMPLICATIONS OF THE US NAFTA PROPOSAL
The purpose of a regional, seasonal, perishable AD/CVD duty would be to limit import competition, with the consequence of reduced grocer shelf availability, selection and quality for such goods as tomatoes, avocados, bell peppers, watermelons, strawberries and blueberries, etc.

There is a concern amongst the broader US fruit and vegetable industry that the availability of expanded AD/CVD provisions for seasonal and perishable products amongst NAFTA partners may invoke similar protectionist reactions on products such as US apples, peaches and apricots which record significant exports to Canada and Mexico.[5]

Applying such provisions within the revised NAFTA risks disrupting the intricate food distribution chains that currently exist to ensure consistent continental supply of seasonal food goods. North American consumers have become accustomed to year round access to quality fruits and vegetables at a low price.

Where would the latest health food craze be if affordable avocados were not available year round for my Detox Roasted Vegetable Buddha Bowl?

The current intertwined business model sees continental distributors contract with major North American food chains to supply agreed-to volumes at specified times over the calendar year. In turn, those distributors contract with growers from Mexico and the US and Canada to ensure consistency in supply — after all, seasonal products are “in-season” somewhere on the continent.

Allowing expanded trade remedy authorities to be triggered at the whim of a small group of regional producers could severely disrupt the supply stability and cost predictability that has evolved under the existing NAFTA.

It could put a serious chill on my Buddha Bowl.

But beyond the economics, including such special trade remedy provisions in a NAFTA 2.0 would put the new agreement at odds with the existing WTO trade remedy provisions. So if accepted, either negotiators would hope that none of the Parties to the agreement would ever appeal a seasonal and perishable AD or CVD decision before the WTO, or (more likely), the issue is addressed by explicitly excluding the possibility of taking such matters before the WTO or including an explicit statement that the NAFTA provision takes precedence over WTO obligations.

Either way, adoption of seasonal and perishable AD/CVD provisions in a revised NAFTA is bound to make trade lawyers great again.

 

 

[1] The USTR report lists the following priority: “Seek a separate domestic industry provision for perishable and seasonal products in AD/CVD proceedings.” Summary of Objectives for the NAFTA Renegotiation, July 17, 2017, Office of the US Trade Representative, pg. 14.

[2] Florida Senators Rubio and Nelson sent a joint letter to USTR Lighthizer on August 31, 2017, advocating for special perishable and seasonal trade remedy authorities in the revised NAFTA. The Florida Congressional Delegation, led by House Representative Neal Dunn, did likewise.

[3] The US Trade Act of 2002, P.L.107-210; and the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, 19 U.S.C. 4201(b).

[4] Definition of Domestic Industry for Perishable, Seasonal Agricultural Products, Communication from the US to the Negotiating Group on Rules, World Trade Organization,TN/RL/GEN/129, 24 April 2006.

[5] NAFTA Mischief In Fruits and Vegetables, July 26, 2017, Peterson Institute for International Economics.

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NAFTA NEGOTIATIONS: LET THE WINING BEGIN
August 23 2017 Andrea Trade Matters 0 comments

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?

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THE NAFTA: A “DISASTER” WORTH KEEPING?
July 04 2017 Andrea Trade Matters 0 comments

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.

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TRADE RETALIATION: THE “MOOSE” THAT ROARED?
May 31 2017 Andrea Trade Matters 0 comments

mooseRoar

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.”

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CRYING OVER SPILLED MILK INGREDIENTS?
April 24 2017 cooper Trade Matters 0 comments

Bobby Seeber

milk-1543193The 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.

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