NAFTA deal close, but obstacles remain

Optimism is high that the United States, Canada and Mexico are near the finish line for an agreement on a new North American Free Trade Agreement.

But as US and Canada officials continue to meet, there are three key issues to resolve:

– Dairy sector –

President Donald Trump has complained repeatedly about how Canada treats American dairy farmers, while Canadian Prime Minister Justin Trudeau has pledged to defend “supply management” in the sector currently excluded from NAFTA.

The Canadian government dictates the production and price of milk, eggs and poultry through annual quotas and import duties of up to 275%.

The system put in place in the 1970s provides stable and predictable income for Canadian farmers, and although it remains a point of friction with its neighbor it has survived several attempts to dismantle it.

The United States, which has a dairy surplus, wants greater access to the Canadian market.

Ottawa could compromise and offer to open up a larger share of its market to US imports, as it did in talks with the European Union on the Comprehensive Economic and Trade Agreement (CETA).

But Trudeau could pay a price if he goes too far, particularly in Quebec, home to a large part of the country’s dairy farmers.

A few weeks before legislative elections in the province, and a year before federal legislative elections, Quebec’s Liberal Prime Minister Philippe Couillard warned Trudeau that he would face “serious political consequences” if he retreated on supply management.

– Intellectual property –

In announcing its agreement in principle with Mexico on Monday, the United States included stronger protections for intellectual property rights, an issue that especially touches the pharmaceutical sector.

The deal with Mexico specifically provides for the protection of drug patents for a period of at least 10 years, a provision that Canada resists in order to protect its generic drug industry.

In addition, Canada is substantially subsidizing the cultural sector, which includes films and books, which the United States is challenging.

– Dispute settlement –

Arguably the most thorny issue is NAFTA’s trade dispute settlement mechanism: the United States wants to eliminate it but Canada insists on preserving it.

Chapter 19 of NAFTA establishes binational panels to resolve disputes, including over a country’s use of tariffs to protect domestic firms from competition from cheap or unfairly subsidized imports.

Washington, which frequently uses the antidumping and countervailing duties in response to complaints from US businesses, argues Chapter 19 undercuts US law and would like to remove it.

But Ottawa has regularly used this provision to successfully challenge US duties, such as in the softwood lumber dispute.

In 1987, Canada’s lead negotiator Simon Reisman walked out on negotiations for a bilateral trade agreement with the United States — the precursor to NAFTA — over the issue antidumping policies.

“Just as strong barriers make good neighbors, strong dispute resolution mechanisms make good business partners,” Canadian Foreign Minister Chrystia Freeland has said since the start of the NAFTA renegotiation a year ago.

Mexico also has opposed elimination of Chapter 19, but had more pressing issues with the United States. This provision was not mentioned in this week’s agreement between Mexico City and Washington.