Fire burning between U.S., Canada as NAFTA Round 5 winds down Presented by Semiconductor Industry Association

With help from Sabrina Rodriguez, Adam Behsudi and Doug Palmer

FIRE BURNING BETWEEN U.S., CANADA AS NAFTA ROUND 5 WINDS DOWN: As the seventh and final day of NAFTA Round 5 kicks off today in Mexico City, the host country is in some ways staying under the radar as its two North American counterparts face off at the negotiating table.


Amid a relatively quiet fifth round of talks, Canadian negotiators have begun using their time in closed-door meetings to point out how U.S. proposals would hurt not just North America but the U.S. in particular. In conversations on automotive rules of origin, government procurement and the five-year sunset review, Canada is challenging the U.S. proposals with its own data and asking for explanations of the rationale behind the need for change.

Canada’s strategy, which involves putting down red lines and rejecting U.S. proposals in public while doing little in private to put forward counter proposals of its own, has become increasingly irritating to U.S. officials who feel it does little to advance the state of the negotiations, sources close to the talks say.

Part of Canada’s reasoning behind its unwillingness to engage could be chalked up to the age-old mantra in trade negotiations that “the first one to give is the first one to lose,” one private-sector source familiar with the discussions said.

But Canada argues that it is only holding back its own counter proposals on aspects of the negotiations where it feels that the U.S. offer is completely unworkable even as a starting point.

"Certain figures, or certain proposals, are just nonstarters," a Canadian source said.

IT’S TUESDAY, NOV. 21! Welcome to your final (for now) Mexico City edition of Morning Trade, where your host is sad to be saying goodbye to days of endless sunshine and tacos but looking forward to a few days of lazy recovery back on the East Coast. Any trade tips or restaurant recommendations for our last day south of the border? Let me know: [email protected] or @mmcassella.

PROGRAMMING NOTE: Morning Trade will not publish from Nov. 23-Nov. 26. Our next Morning Trade newsletter will publish on Nov. 27. Please continue to follow Pro Trade issues here.

MEXICO’S PERSPECTIVE: IT’S THE U.S. THAT WON’T BUDGE: As U.S. officials criticize its northern neighbor’s lack of engagement, it has welcomed Mexico’s willingness to put forward ideas and proposals — its sunset review counter offer, for example — that have provided a basis for negotiations.

But Mexico has had its own criticism to unleash. While Mexico’s NAFTA team is trying to close chapters and move proposals, the U.S. negotiators aren’t fully responding, according to the head of Mexico’s private sector-government engagement on trade. “There’s some chapters that could apparently have advances or almost close, but the will from the U.S. team hasn’t been seen,” Moisés Kalach, a Mexico City-based businessman who serves as lead intermediary between the Mexican government and private sector in the NAFTA negotiations, told reporters Monday. More here.

At the same time, Mexico’s chief negotiator offered signs of optimism late Monday evening as he exited the Camino Real hotel, where talks are taking place. “We feel that there’s space to continue advancing towards an eventual conclusion of a trade deal that’s beneficial for Mexico,” Smith said when cornered by a herd of journalists at the Mexico City venue. Talks are progressing well at both the chief negotiator and technical level, he said.

THE DAY AHEAD: ‘THINGS ARE GOING TO START TO RAMP UP’: Negotiators are scattered throughout the Camino Real this morning for talks focused on agriculture, technical barriers to trade, rules of origin, dispute settlement and investment, according to a schedule obtained by Morning Trade.

“Some of the real sticking points,” said Jerry Dias, the head of Unifor, Canada’s largest labor union, when describing what would be discussed during the final day. “So things are going to start to ramp up.”

With no ministers in town, there will not be a concluding ministerial conference, as has been the case at the close of previous NAFTA rounds. But the three top trade officials are expected to issue a trilateral statement by late afternoon, and individual countries are likely to provide further statements or press briefings as well.

VAUGHN: ADMINISTRATION WANTS FAST NAFTA DEAL TO REDUCE UNCERTAINTY: About 860 miles straight north of Mexico City, the Senate’s No. 2 Republican, Sen. John Cornyn, conducted a field hearing in San Antonio on the state of the negotiations. The setting was doubly symbolic because San Antonio is the city where the original NAFTA agreement was signed 25 years ago, and Texas is now the top U.S. exporting state.

The star witness, USTR General Counsel Stephen Vaughn, repeated many of the administration’s concerns about trade deficits in his opening remarks. But in response to a question from Cornyn, Vaughn seemed to say the administration views bilateral trade deficits as a sign of underlying trade problems and ultimately is most concerned about addressing those. Still, his exact meaning was not clear.

Vaughn did stress the administration wants to quickly complete the negotiations to reduce uncertainty in the business community about the future of the pact. “At the same time, I must emphasize that [U.S. Trade Representative Robert] Lighthizer agrees strongly that the current version of NAFTA is a bad deal for America,” Vaughn said. “Of course, there are Americans who benefit from NAFTA and we want to avoid harming them. But USTR must look at trade deals from the perspective of the country as a whole, and from that perspective there are serious problems with NAFTA.”

Against that backdrop, several witnesses said the administration’s idea of including a “sunset review” provision in NAFTA that could potentially terminate the pact after five years would make it too hard for companies to make plans. Todd Staples, president of the Texas Oil and Gas Association, told Cornyn a sunset review provision would have “a chilling impact” on business, while Paola Avila, chairwoman of the Border Trade Alliance, said talk about the provision has already had a negative effect on investment plans.

Vaughn seemed to back away from the idea of a strict sunset review mechanism, referring to it instead as a periodic “performance review.” That would provide an opportunity for countries to make changes to parts of the agreement that aren’t working as well as hoped, he said. Meanwhile, Cornyn sent a warning to the administration not to jeopardize the current benefits of the agreement, while acknowledging it could be improved in areas like digital trade and energy. “NAFTA’s impact on the state of Texas has been overwhelmingly positive, for both our economy and our security," the senior Republican said. For more on the hearing and Cornyn’s questioning, click here.

TEXAS ENERGY PRODUCERS: KEEP ISDS: Staples made a plea for keeping a strong investor-state dispute settlement mechanism in NAFTA, amid signs the administration wants to weaken it by making the system voluntary. “Preserving ISDS means preserving the necessary legal protections in place that defend our property rights, ensure the absence of discrimination, and promise fair treatment from governments while doing business both at home, and abroad,” Staples said in his prepared remarks. “Without these provisions, our industry will lose value, our position as an energy superpower will be endangered, and the thousands of American jobs that fuel our economy will be jeopardized.”

MEXICO’S 2018 ELECTION COULD MEAN SHIFT AWAY FROM NORTH AMERICA: The current Mexican presidential race front-runner, Andrés Manuel Lopez Obrador, and his campaign team underscored Monday that Mexico’s future lies in building a stronger relationship with countries outside North America. Mexico “has been obsessively focused on North America in detriment to our relationship with the rest of the world,” said Héctor Vasconcelos, secretary of foreign affairs for Morena, the left-leaning political party created by López Obrador.

Expanding trade relationships is hardly a new idea – President Enrique Peña Nieto has actively expressed diversifying trade partnerships as an administration priority. By the numbers: Mexico has 10 free trade agreements with 45 countries, 32 reciprocal investment promotion and protection agreements with 33 countries, and nine other trade agreements within Latin America, according to ProMéxico.

Hold off NAFTA renegotiation until after July 2018? During an event before a crowd of more than 10,000 supporters, Vasconcelos also urged that NAFTA renegotiation should happen after the nation’s elections – a point that López Obrador has repeatedly emphasized. The NAFTA talks should occur after the election because “a government like the current one does not have the legitimacy required to represent our country’s interests in this negotiation,” Vasconcelos said to an auditorium that loudly applauded the idea. More from Sabrina here.

ENERGY CHAPTER IN NAFTA? COULD BE. Mexican negotiators are seeing “positive signals” on getting to include a chapter on energy or integrated in other chapters of a new NAFTA, Kalach told reporters Monday. “Given the energy reform and everything that’s happening in Mexico’s energy sector, it’s very important that it gets integrated” regardless of if it’s through its own chapter or through other texts, Kalach said. A negotiating session on energy met on Friday.

It’s all part of Peña Nieto’s strategy. Getting Mexico’s energy reforms in a new NAFTA deal would help preserve the leader’s 2014 reforms, which opened up Mexico’s gas and oil industries to private investment after more than 70 years of being solely under state control. Trade experts have previously noted that boosting energy trade between the U.S. and Mexico could go far toward dealing with the trade deficit between the nations.

FARMERS FOR FREE TRADE ADDS FIREPOWER: A new bipartisan campaign to elevate the voice of farmers in the trade debate is bolstering its ranks with new advisers and strategists focused on rebuilding grass-roots support for agriculture trade.

Darci Vetter on the job: Former chief U.S. agriculture negotiator Darci Vetter, who served under the Obama administration, will join the group as a chief adviser to the board of the organization, which is co-chaired by former Sens. Max Baucus (D-Mont.) and Dick Lugar (R-Ind.). Vetter, also a veteran of the Agriculture Department, is currently strategic consultant. She also serves as diplomat in residence at the University of Nebraska, where she is launching the Yeutter Institute in International Trade and Finance, named after the late Clayton Yeutter, who served as Agriculture secretary and USTR.

Farmers for Free Trade also announced recently it was retaining national agriculture consulting firm K·Coe Isom to manage the group. The firm’s head of federal affairs, Brian Kuehl, will serve as the group’s executive director. International affairs firm World Strategies LLC was hired to conduct policy and grass-roots advocacy for the group

FISHERIES SUBSIDIES TEXT TAKES SHAPE: World Trade Organization members hashing out a new agreement on fisheries subsidies have a ways to go before they can close the gaps on some pretty substantive issues, but at least there’s a text to work off of less than a month before the big ministers meeting in Buenos Aires in December.

The good: Countries have shown some willingness to agree on how members are required to report information on their fisheries subsidies and management programs. The United States has also appeared to back off a proposal that would include inland or freshwater fisheries in the new disciplines.

The bad: Still, there’s some fundamental disagreement over the scope of the subsidies that could be regulated. India came forward last week with a proposal to exclude fuel subsidies entirely from the agreement or at least ask for special treatment for developing countries. The U.S. said it couldn’t accept an all-out exemption for fuel subsidies, arguing them to be the largest chunk of subsidies countries usually provide their fishing industries, according to a Geneva official.

The ugly: India also threw the talks for a loop by demanding an exemption allowing developing countries to avoid outright prohibitions on illegal, unreported and unregulated fishing. The proposal would go beyond previous demands from developing countries that would give poorer WTO members a transition period to comply with prohibitions on illegal, unreported and unregulated fishing. The U.S. also opposed that proposal.

THE CASE FOR AN $800 DE MINIMIS STANDARD: Morning Trade reported in this space on Friday on the argument in support of the U.S. lowering its de minimis threshold back down to $200, where it stood before Congress raised it last year. The item referenced an argument from customs brokerage firm Livingston International, which said the $800 level would endangers citizens' health and safety, intellectual property rights protection and U.S. national security.

But on the other side, supporters of the $800 level, such as Matt McAlvanah, a former assistant U.S. trade representative now at Monument Policy Group, dismissed the Livingston item as “scare tactics.”

Added Rufus Yerxa, who leads the National Foreign Trade Council: "Congress made clear in 2015 that USTR must work with other countries to address customs red tape — including harmonizing de minimis levels. NAFTA presents a great opportunity for our negotiators to follow through.”

“By simplifying, modernizing, and expediting customs procedures, including raising de minimis levels, we can cut red tape for American exporters,” he continued in a statement to Morning Trade. “That's going to help level the playing field for our companies, increase exports, grow jobs in the U.S., and benefit consumers in Canada and Mexico.”

De minimis has not been a major topic of conversation during NAFTA talks so far. But sources close to the talks point out that there is a lot of space to compromise between Canada’s $20 level and the United States’ $800, indicating that both countries might be willing to move somewhat and agree on a level somewhere in between.

For Canada, which is facing tougher political issues in areas like dairy and supply management more broadly, de minimis levels could likely be one area where it’s more willing to give in to the United States, one private-sector source close to the talks noted.

INTERNATIONAL OVERNIGHT

— NAFTA negotiators will head to Montreal in late January for the sixth round of talks, Canada’s Global News reports.

— Texas Farm Bureau says NAFTA withdrawal would be 'devastating,' POLITICO Pro reports.

— Canada’s chief NAFTA negotiator is urging U.S. businesses to step up pressure on the Trump administration to save the trade deal, Bloomberg reports.

— Farm-state senators request economic analysis of NAFTA withdrawal, POLITICO Pro reports.

— U.S., Canada face NAFTA standoff over government procurement, POLITICO Pro reports.

THAT'S ALL FOR MORNING TRADE! See you again soon! In the meantime, drop the team a line: [email protected] and @abehsudi; [email protected] and @mmcassella; [email protected] and @tradereporter; [email protected] and @jmlauinger; and [email protected] and @pjoshiny. Also follow us @POLITICOPro and @Morning_Trade.

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