NAFTA – Another Round Begins

A new round of negotiations regarding the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States began on Wednesday October 11. The occasion was marked by a face to face meeting at the White House between US President Donald Trump and Canadian Prime Minister Justin Trudeau.

Harsh criticism of NAFTA was a staple of candidate Trump’s presidential campaign and helped craft his identity as a credible agent of change willing to challenge the status quo represented in the minds of many by the career politician stalwarts of America’s two major political parties.

As President, Trump has remained a vocal critic of NAFTA and he continued to advocate meaningful change in his public comments this past week. The Trump Administration’s current proposals regarding NAFTA are aimed at reducing its influence and, failing that, pulling the US out of the agreement. “If we can’t make a deal, it will be terminated and that will be fine,” Trump stated.

Trump has said, both as candidate and President, that he prefers direct bilateral trade deals and that he would pursue such one- on- one deals with Canada and Mexico if indeed the US was to end participation in NAFTA.

The relationship of US automakers with Mexico is the most visible sore point in America with respect to NAFTA because of the loss of so many US auto manufacturing jobs due to NAFTA. Some of the Trump administration proposals are clearly designed to bring back some of these manufacturing jobs to the US.

For instance, there are currently no country-specific rules of origin in the pact. Cars can cross the continent’s borders duty free if they have a specified amount of content from within the Nafta region. With respect to cars and pick-up trucks, this NAFTA bloc requirement is 62.5%. The Trump administration is proposing a change to this rule to require 50% U.S. content—and 85% NAFTA bloc content.

The US auto industry, both car makers and their suppliers, have invested a great deal in their Mexican production plants and view Trump’s proposals with trepidation. Publicly they are generally quiet, to avoid antagonizing portions of their customer base. However, big business lobbying organizations such as the American Chamber of Commerce have been vocal critics of the Trump proposals.

However, intracontinental unhappiness with NAFTA extends far beyond issues related to the US auto industry, as Prime Minister Trudeau’s personal visit to the White House demonstrates. Many Canadians contend that the US and its companies do not adhere to the letter and spirit of of the current dispute resolution process entailed by NAFTA. The Trump Administration and many American companies want to gut existing NAFTA dispute resolution mechanisms even further and enable American companies to resort to outright litigation more frequently.

These divergent perspectives on the dispute resolution process are exemplified by the recent imposition by the US of a 220 percent import tax on Delta Corporation’s proposed purchase of 125 small jets manufactured by Quebec based Bombardier. [Delta Corporation is discussed in a separate article in this issue.]

This action was taken based on a determination by the US Department of Commerce (DOC) that Bombardier was able to avail itself of unduly high amount of state aid in setting its sale price to Delta. As a result, the American manufacture who had lost out in bidding for the contract, Boeing, had suffered “material injury”.

Some Canadians argue that the DOC is not a neutral dispute resolution body with respect to such a dispute and resorting to DOC is contrary to the dispute resolution procedures specified by NAFTA. These critics argue that American companies skirt NAFTA’s international arbitration resolution mechanisms in situations like this simply because the Americans often lose on the merits and would prefer to use their financial muscle to irresponsibly litigate their way to unjust results the way they do against smaller US rivals.

DOC’s intervention on behalf of Boeing is also instructive in that it demonstrates that there will always be cultural divides with respect to NAFTA that will be hard to bridge. Consider that Bombardier as a company has total revenues of about $16 billion. Boeing has revenues of over $94 billion, a full 40% of which (at least $37 billion) comes from military and defense contracts. In other words, Boeing’s revenue from the US government dwarfs Bombardier’s revenue from all sources.

Many outside the US find it disingenuous (to say the least) that the US Commerce Department does not recognize Boeing’s virtual status as the Canadian equivalent of a ‘crown company’ with respect to the US Defense Department. To such critics, ignoring this obvious reality is merely a convenient posture to engage in trade protectionism.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

One comment

  1. Yes, harsh criticism of NAFTA was a staple of candidate Trump’s presidential campaign and helped craft his identity as a credible agent of change willing to challenge the status quo represented in the minds of many by the career politician stalwarts of America’s two major political parties.

    As President, Trump (the Clown Prince of Egotism) has remained a vocal critic of NAFTA and he continued to advocate meaningful change in his public comments this past week. The Trump Administration’s current proposals regarding NAFTA are aimed at reducing its influence

    Donald Trump and Barack Obama after Mr. Trump’s inauguration on January 20. Credit Ruth Fremson/The New York Times
    It must be cold and miserable standing in the shadow of someone greater and smarter, more loved and more admired. It must be infuriating to have risen on the wings of your derision of that person’s every decision, and even his very existence, and yet not be able to measure up — in either stratagem or efficacy — when you sit where that person once sat.

    This is the existence of Donald Trump in the wake of President Barack Obama. Trump can’t hold a candle to Obama, so he’s taking a tiki torch to Obama’s legacy. Trump can’t get his bad ideas through Congress, but he can use the power of the presidency to sabotage or even sink Obama’s signature deeds.

    In fact, if there is a defining feature of Trump as “president,” it is that he is in all ways the anti-Obama — not only on policy but also on matters of propriety and polish. While Obama was erudite, Trump is ignorant. Obama was civil, Trump is churlish. Obama was tactful, Trump is tacky.

    There is a thing present in Obama and absent from Trump that no amount of money or power can alter: a sense of elegant intellectualism and taste.

    The example Obama set makes the big man with the big mouth look smaller by the day. But I believe that this nonadjustable imbalance is part of what has always fueled Trump’s rage against Obama. Trump, who sees character as just another malleable thing that can be marketed and made salable, chafes at the black man who operated above the coarseness of commercial interests and whose character appeared unassailable.

    America — even many of the people who were staunch opponents of Obama’s policies — admired and even adored the sense of honor and decency he brought to the office. Trump, on the other hand, is historically unpopular, and not just in America. As The Pew Research Center pointed out in June: “Trump and many of his key policies are broadly unpopular around the globe, and ratings for the U.S. have declined steeply in many nations.” Trump is reviled around the globe and America’s reputation is going down with its captain.

    All of this feeds Trump’s consuming obsession with undoing everything Obama did. It is his personal crusade, but he also carries the flag for the millions of Americans — mostly all Republicans — who were reflexively repulsed by Obama and the coalition that elected him.

    Trump has done nearly everything in his power to roll back Obama’s policies, but none are as tempting a target as the one named after him: Obamacare.

    Republicans — including Trump — campaigned for years on a lie. They knew it was a lie, but it was an enraging one that excited their base: Obama was destroying America’s health care system, but Republicans could undo the damage and replace it with their own, better bill.

    First, Obama wasn’t destroying America’s health care system. To the contrary, he simply sought to make it cover more people. He moved to take American health care in a more humane, modern and civilized direction, to make it more universally accessible, even by the sick and poor who often took its absence as a given.

    Second, the Republicans had no replacement plan that would cost less and cover as many or more people. That could not be done. So, their repeal-and-replace efforts failed. But that also meant that Trump’s promise was proven a lie. Trump has no problem lying, but in the end he wants his lies to look plausible.

    Trump makes assertions for which there is no evidence — either knowingly lying, recklessly boasting or wishfully thinking — then seeks support for those statements, support that is often lacking because the statements are baseless.

    He violates a basic protocol of human communication: Be sure of it before you say it. His way is to say something wrong, then bend reality to make it appear right. This is why the age of Trump is so maddening and stupefying: He is warping reality.

    Last week he took more swipes at undermining the A.C.A.: Asking his administration to find ways to increase competition among insurers (a move many worry will move younger, healthier people out of the marketplace) and stopping the so-called “cost-sharing reduction” (CSR) payments — federal subsidies paid to insurance companies to help finance coverage for low-income Americans (a move many believe will send premiums soaring for those people).

    Trump is doing this even though it will likely wreak havoc on countless lives. He is doing this even though a Kaiser Health Tracking Poll released Friday found that most Americans want Trump and Congress to stop trying to repeal the law, and instead work on legislation to stabilize the marketplaces and guarantee health care to Americans.

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    Furthermore, six in 10 Americans believe Congress should guarantee cost-sharing reduction payments, as opposed to only a third who view these payments as a “bailout of insurance companies,” as Trump has called them. There is no real reason to cut these payments, other than to save face and conceal the farce.

    Trump isn’t governing with a vision, he’s governing out of spite. Obama’s effectiveness highlights Trump’s ineptitude, and this incenses Trump. Mucho sad!! GET THIS FAKE PRESIDENT OUT-OF-OFFICE ASAP….. PLEASE!!!!!

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