A closer look at Round Six of the NAFTA negotiations

Note: This article was written before Round Seven of the negotiations began on Feb. 26.

Round Six of the NAFTA negotiations concluded in Montreal on Jan. 29, 2018. Trade ministers from Canada, the United States and Mexico rejoined the talks this round with the aim of creating movement on contentious chapters. Speaking from Davos before the commencement of negotiations, Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Secretary of the Economy Ildefonso Guajardo said they would be approaching this round with creative proposals for the highly disputed chapters.^Footnote1 The round was noteworthy in that a bipartisan delegation from the United States House of Representatives Committee on Ways & Means attended as well – a useful development, since Congress will have to approve whatever newly negotiated agreement is presented.

Notwithstanding Congressional interest in advancing a modernized NAFTA, the Montreal round was characterized by the deep differences in approach between the parties that pervaded the negotiations in previous rounds. For example, in their closing statements, United States Trade Representative Robert Lighthizer and Freeland provided contrasting trade deficit numbers.^Footnote2 Lighthizer also took the opportunity to discuss Canada’s World Trade Organization filing against Washington’s use of anti-dumping and anti-subsidy duties, calling the filing “unprecedented” and a “massive attack on all of our trade laws.”^Footnote3 Freeland responded by saying that the WTO challenge was a separate issue from the negotiations.^Footnote4 She has subsequently offered to stand down on the WTO challenge in exchange for a deal on the long simmering Canada/U.S. softwood lumber dispute.^Footnote5

Despite some pointed rhetoric, the talks ultimately concluded with cautious optimism.^Footnote6 In his closing statements, Lighthizer commented on the progress made this round. He stated to reporters in Montreal, “[W]e finally began to discuss some of the core issues. So this round was a step forward, but we are progressing very slowly.” This sentiment was echoed by Guajardo, who stated, “For the next round, we will still have substantial challenges to overcome. Yet the progress made so far puts us on the right track to create landing zones to conclude the negotiation soon.”^Footnote7 Significant advances were made in less contentious areas: the parties announced that a chapter on anti-corruption was closed, and chapters on digital trade and telecommunications are more than 90 per cent complete at this time.^Footnote8

With respect to rules of origin, significant dialogue took place in Round Six. In previous rounds, the United States demanded stricter content requirements for North American-made cars. Specifically, the United States proposed a raise in the requirement of regional content in cars and trucks from 62.5 per cent to 85 per cent. Coming into this round, Canadian officials commented that all three partners were open to discussing higher regional content requirements, but that a country-specific requirement would damage the auto industry.^Footnote9

In this vein, Canada proposed a new formula for determining which cars count as American. The formula included the value of intellectual property and research in calculating regional content.^Footnote10 The proposed formula would inflate U.S. content numbers without disrupting integrated supply chains. In his concluding statements, Lighthizer rejected this approach, stating that “when analyzed, [the proposal] may actually lead to less regional content than we have now and fewer jobs in the United States, Canada, and likely Mexico. So this is the opposite of what we are trying to do.”^Footnote11

With respect to Chapter 11, the Canadian and Mexican delegations jointly proposed a new investor-state dispute settlement mechanism. Responding to the U.S. proposal for an opt-in system for international investor disputes, Canada and Mexico have proposed a bilateral dispute settlement process for investor disputes that would exclude the U.S.^Footnote12 Canada and Mexico are exploring alternatives to a trilateral investor dispute settlement system, including an “investment court system” similar to the one established between Canada and the European Union in the Comprehensive Economic and Trade Agreement. Legally, this avenue could be pursued through a “side-letter” or “annex” to NAFTA or through the two countries relying on investor-state dispute settlement provisions in the Trans Pacific Partnership  or provisions in other, future, international agreements that address investor-state dispute settlement and investor protections.^Footnote13

Regarding the sunset clause, Canada has signed on to Mexico’s proposal for periodic reviews of the agreement, suggesting that NAFTA’s central body, the Free Trade Commission, create regular progress reports. The U.S. has not officially responded to this proposal and consequently the issue remains live into the seventh round of negotiations. Chapters 19 and 20 were given little-to-no public attention this round and little movement was made on chapters involving government procurement, labour and agriculture. Given the progress of the talks, it is unclear whether negotiations will conclude before the informal March 31st deadline.^Footnote14 All three countries and key stakeholders are considering the impact that impending U.S. and Mexican elections will have on the negotiations should they continue past the deadline. The frontrunner in the Mexican presidential campaign, Andreas Manual Lopez Obrador, has called for negotiations to pause until after the election.

The countries remained optimistic heading into the seventh round of negotiations, which took place in Mexico City from Feb. 26 to March 6.^Footnote15 Lighthizer emphasized his still positive outlook in his closing remarks, stating, “The United States views NAFTA as a very important agreement. We are committed to moving forward. I am hopeful progress will accelerate soon.”^Footnote16 The U.S. has also floated the notion of pursuing two bilateral deals – one with Mexico and one with Canada – if progress is not made on NAFTA.^Footnote17

Paul M. Lalonde, Yohai Baisburd, Gregorio G. Canales, Joaquín Contreras, Rakesh (Raj) Kumar Bhala, Gary Doer, Brenna Evans, Gordon D. Giffin, Maryscott (Scotty) Greenwood, Rachel A. Howie and James Moore contributed to this article, with assistance from Emily Quail, Articling Student at Dentons Canada LLP.