Trump’s NAFTA plans (and the impact on Canada) beginning to take shape

After denouncing NAFTA during his presidential campaign as the worst trade agreement ever signed by the United States, the President Donald Trump has been vague about specific objectives with regard to renegotiating the trade agreement. However, some indication of the U.S. administration’s priorities were revealed in a draft notification letter circulated by the U.S. trade representative’s office to members of Congress. The letter is ostensibly the start of the domestic legal process that the administration must go through to revamp NAFTA.

The eight-page letter to Congress outlines the administration’s negotiating objectives. The consensus assessment of trade experts is that the draft letter proposes surprisingly modest changes to NAFTA compared to President Trump’s campaign rhetoric. Most striking, perhaps, is what’s not included in the draft letter. In particular, there was no mention of a currency policy whereby retaliatory tariffs could be levied by a member country for “currency manipulation” on the part of another member country. Also noteworthy was the absence of any call to scrap NAFTA’s arbitration tribunals to address complaints by private corporations against member governments. Rather, the letter proposes to maintain and seek to improve procedures for settling such disputes.

The letter does disclose several U.S. government priorities that some Canadian trade experts suggest might make for "hard slogging" negotiations. One is a proposal to reinstate so-called snapback tariffs that are meant to act as safeguards to protect domestic industries from serious injury from increased imports. A second is the elimination of a requirement that anti-dumping and anti-subsidy disputes be settled by a special dispute panel. This priority has particular salience for the long-standing softwood lumber dispute between the U.S. and Canada, as Canada has relied on the dispute panel procedure to seek redress from U.S. trade actions against Canadian softwood lumber exports.

The letter also mentions a U.S. goal to establish rules allowing for domestic procurement preferences with regard to U.S. government purchasing, i.e. the so-called Buy American plan. Any such preference granted to the U.S. government would also presumably be extended to the Canadian and Mexican governments. Given the prominence of federal government purchasing in each of the member countries, domestic procurement preferences would constitute a significant anti-free trade initiative.

Perhaps unsurprisingly, the draft letter calls for curbing the percentage of parts and components from non-NAFTA countries that are used for manufacturing in North America and that qualify manufactured goods for tariff-free treatment. It also calls for protections of digital trade and commerce and tougher intellectual property protection. The latter initiatives might also raise difficult negotiating issues for Canada, particularly if they impinge on Canadian government privacy laws or drug patent and pricing policies.

While the overall tenor of the draft letter is more benign than what might have been anticipated given Trump’s prior vilification of NAFTA, it’s still early days for Canadian trade negotiators. Indeed, White House Press Secretary Sean Spicer downplayed the significance of the draft letter suggesting that there would be substantial changes to the letter after Trump’s nominee for U.S. trade representative, Robert Lighthizer, is confirmed by the Senate. President Trump also ordered a 90-day study of foreign trade practices that contribute to the U.S. trade deficit on a country-by-country, product-by-product basis.

An item which is sure to come up in the study is foreign value-added taxes applied to U.S. imports. The draft letter mentions the administration’s goal to seek a level playing field in tax treatment. The upcoming study might therefore provide some momentum to calls from key Republicans in Congress for the imposition of a border adjustment tax (BAT), which would exempt U.S. exports from the corporate income tax while taxing U.S. imports.

At the end of the day, the imposition of a BAT by the U.S. government might be the most problematic change in the bilateral trade environment from Canada’s perspective that might arise in the foreseeable future.