No panic from Canada, Mexico over threat to terminate NAFTA

Donald Trump has been in full bully-boy mode about NAFTA, twice threatening to “terminate” it in recent days.

And his U.S. Trade Representative immediately tabled a demand to eliminate the Chapter 19 dispute settlement mechanism, a provision that Canada and Mexico have often said is key to protecting them against the overwhelming power of the U.S.

But Canadian farmers, as well as agriculture and food players, don’t seem too scared by the bluster. The U.S. has much less ability to play dirty than it did when Canada and the U.S. created the Free Trade Agreement and the Chapter 19 mechanism back in 1988.

“I think this is the kind of talk you hear at the beginning of negotiations,” said Canadian Federation of Agriculture president Ron Bonnett.

“It’s not actually clear (termination) would have any great effect,” said John Ross, executive director of the Canadian Pork Council.

The foundation for this non-panicked attitude is the reality that the U.S. isn’t free to nail its northern and southern neigh-bours with capricious trade tariffs and blockages, as it was in the days before the FTA and NAFTA were signed.

International trade litigator and former diplomat Lawrence Herman of Toronto law firm Cassels Brock notes that the U.S. has given up the right to hit individual countries with discriminatory tariffs in the years since the 1988 and 1993 deals were made, and it can’t really go back.

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“They can’t. They’re bound (by the World Trade Organization),” said Herman, a prominent member of the C.D. Howe Institute, in an interview.

Since NAFTA, the U.S., Canada and Mexico have become part of the WTO, which did not exist before NAFTA.

That agreement bans members from treating trading partners differently, so if the U.S. pulled out of NAFTA, Canada and Mexico would still have to be treated as “Most Favoured Nation” trading partners and would only be subject to the same tariffs that those sorts of countries face.

“Our beef would have the same tariff rate as Australian beef. Our lamb and pork would have the same tariff rates as New Zealand lamb and pork. Our dairy products would be subject to the same tariff rates as New Zealand dairy,” said Herman.

“Most countries in the world don’t have a trade agreement with the U.S.”

In many categories there are almost zero tariffs anyway, and the U.S. can’t raise those without breaching the WTO agreement.

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The threats to Chapter 19 also aren’t as scary as they would have been 25 years ago, since WTO dispute resolution panels have come into force and shown themselves to be effective.

Country-of-origin labelling, for instance, was defeated by a WTO ruling.

“Canada would not be without a dispute settlement mechanism,” said Herman.

Chapter 19 disputes have been rare. Agriculture trade has been one of the more involved areas, with a number of disputes, but the last one settled through it was the 2003 dispute over Canadian durum. Canadian industries and trade negotiators like having Chapter 19 as a weapon against unjustified U.S. trade actions, and to deter their introduction, but Herman said Canada isn’t powerless without it, if it was eliminated.

“We now have a pretty mature and robust WTO system,” said Herman. “It takes a long time, but so does Chapter 19, frankly.”

Nobody knows how serious Trump is about terminating NAFTA, or how make-or-break an issue Chapter 19 is for the U.S., but so far the threats don’t appear to be rattling most Canadian farmer and industry representatives.

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“Contrary to the impression left by media reporting, Canada would continue to have access to the U.S. market,” said Herman.