May 22, 2017

May 22, 2017

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NAFTA Renegotiation Goes Live

USTR Lighthizer yesterday delivered the Administration’s official 90-day notice to Congress that it will renegotiate NAFTA.

The notice says that the process will be carried out “consistent with Congressional priorities and objectives outlined in section 102 of the Trade Priorities and Accountability Act,which is the TPA fast-track legislation passed in 2015. This is a welcome indication that the Administration is proceeding, at least for now, in the manner that Congress contemplates. While President Trump could change course, there is for now at least reason to believe that the negotiation will proceed in the manner typical of FTA negotiations, with Congressional notification and ratification of the final agreement, rather than a Presidential assertion of unilateral authority to make revisions under the Trade Act of 1974 or the Trade Expansion Act of 1962.

USTR Lighthizer’s notice states that the objective of the renegotiation is “to support higher-paying jobs in the United States” and “improv[e] U.S. opportunities under NAFTA.”

The specific topics listed for “new provisions” are: “intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labor, environment and small and medium enterprises. . ., [and] establishing effective implementation and aggressive enforcement.” 

It is interesting that NAFTA rules of origin (the rules that determine which goods qualify for duty-free NAFTA treatment) are not expressly mentioned given that Secretary Ross and others have criticized them repeatedly in recent weeks. The letter is so general in its wording, however, that it does not exclude any existing NAFTA provisions from negotiation. Dispute resolution and currency manipulation are two other topics that Lighthizer has told Congress will be negotiated but they also are not mentioned explicitly in the notice. The overall impression is that the Administration is keeping its options wide open for now. We expect NAFTA revised rules of origin to be discussed. 

Kevin McAleenan, President Trump’s nominee to be the new Commissioner of Customs and Border Protection (CBP), said on Wednesday that CBP wants to be an active participant in the NAFTA renegotiation. He cited inequities in the de minimis rules allowing duty-free entry without formal paperwork as an area where CBP can contribute to the negotiations. In light of this, some observers believe Lighthizer’s reference to “customs procedures” could be aimed at trying to grow U.S. exports under NAFTA by making it easier for small U.S. companies to qualify for duty-free treatment of their exports without the compliance burden that large firms address by hiring lawyers and trade specialists to manage their NAFTA compliance. A 2015 Thomson Reuters Global Trade Management survey of small business owners found that complying with rules of origin and other regulations was the principal difficulty that they faced in exporting their products.

On Thursday morning USTR Lighthizer confirmed that the Administration hopes to renegotiate NAFTA, rather than scrap it altogether. He also said: “I would note that many of these negotiations will be bilateral and many of the issues are bilateral, but our hope is that we will end up with a structure that is similar to what we have now. If that proves to be impossible, we will move in another direction.” This is a back-handed way of confirming that the Administration will indeed begin on the basis of a new trilateral agreement.

USTR Lighthizer also said he hopes that the softwood lumber dispute with Canada and the sugar dispute with Mexico can be amicably resolved before NAFTA negotiations begin. The 90 days end in mid-August. The earliest negotiations can begin is on August 16th

Congressional reaction to Lighthizer’s notice has been mixed. Ways and Means Chairman Brady said: “The United States has a tremendous advantage through our NAFTA supply chain, which allows us to partner with Canada and Mexico to create an integrated production base that improves our competitive edge against China and other competitors,” but he acknowledged the need for modernization of NAFTA.

Senator Wyden called the notice “disappointingly vague,” but added that he was pleased Lighthizer had told him that elimination of NAFTA Chapter 19 on AD/CVD dispute resolution would be a priority in the discussions.

Democrats who support President Trump’s protectionist position were more critical. Representatives Neal and Pascrell called the notice disappointing “for those of us who believe that U.S. trade policy — and NAFTA — need fundamental reform.” Representative DeFazio said he was disappointed to hear the White House is looking to transfer parts of TPP to the new NAFTA.  

Democrats see a friend in USTR Lighthizer but some of them feel that he is not really the one calling the shots. They believe Commerce Secretary Ross is still making the key decisions on trade policy. If that is true, it could result in a somewhat less protectionist revision of NAFTA, but it would not reduce the risk of rule of origin changes.

Under the TPA fast track legislation, the USTR is required to publish more-detailed objectives at least 30 days before formal negotiations begin. These should be available, therefore, by mid-July. Democrats are already using this to press USTR Lighthizer to provide greater transparency in the NAFTA renegotiations.

Mexican Foreign Minister Luis Videgaray said yesterday that “We are willing and we are prepared to start the constructive negotiation once the 90-day period goes by.”

Canadian Foreign Minister Freeland likewise confirmed Canada’s willingness to renegotiate NAFTA, citing modernization in the labor and environment chapters as two areas Canada has in mind. She suggested Canada would draw on its experience with how these areas were handled in the Canada-EU Trade Agreement (CETA). Freeland will be in Mexico next week to discuss NAFTA renegotiation. She says she is in very close contact with Mexican Economy Minister Guajardo and Foreign Minister Videgaray, who are leading the NAFTA talks for Mexico. She also said again that Canada wants a trilateral agreement with all three parties at the table.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Curtis M. Dombek, Government Contracts Lawyer, Sheppard Mullin Law firm
Partner

Curt Dombek is a partner in the Government Contracts and Regulated Industries Practice Group, based in Los Angeles who spends time regularly in the Firm's Shanghai office on international trade matters.

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