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NAFTA: The times they are a-changin’

“NAFTA has fundamentally failed,” thundered Robert Lighthizer, the U.S. trade representative. Thundered perhaps overstates the delivery, but Canadians are understandably thunderstruck.

A fundamental failure sounds serious. Similar to a fundamental breach of a badly drawn contract, this time, he claims that the entire $1.3-trillion NAFTA region failed. This would be past everyone’s cumulative errors and omissions insurance, even if you totalled up all the insurance limits for all of the Canadian lawyers.

How did the United States come to this overwhelming conclusion? When examining any policy matter, one spends most of their time drilling down to find the real essential issue. The worst approach applies a perfectly executed solution to the wrong problem. We can assume that the present U.S. leader spent the same 140 characters on analyzing the issue as he does most things. We can also assume that this worst-approach solution shall soon be upon us.

The major complaint appears to be the United States’ huge account deficit. The U.S. simply imports more than it exports. Canada exports more goods, but our imports of U.S. services exceed this. Blame or thank Netflix for Canada’s trade deficit. The current Canadian account deficit increased beyond expectations last quarter. Therefore, we do not appear to be part of the problem, but, unfortunately, we will be part of the solution. Lighthizer must mean that NAFTA did not live up to its objectives.

NAFTA’s main objectives include national treatment, most-favoured-nation treatment and transparency. The most-favoured-nation treatment requires that whatever benefits are provided to one treaty country should be provided to all members of the treaty. National treatment requires that foreign goods should be treated the same as domestic goods. The U.S. administration appears to have difficulty in applying that concept to immigrants, however.

The other main objectives include eliminating barriers to trade, promoting fair competition, increasing investment opportunities, providing intellectual property rights, creating effective procedures for the resolution of disputes and establishing a framework for co-operation to expand and enhance the benefits of the agreement.

NAFTA scores highly on all these criteria. Duties have been reduced or eliminated. The U.S. sees promoting fair competition as unfair to U.S. business. The concept of free trade and fair competition relies upon comparative advantage. If a country provides some better or cheaper good or service, then it should produce more of that and less of whatever good or service it can’t produce as well as another country. The hollowing out of the U.S. textile industry flowed naturally but not willingly from this underlying concept of free trade. The U.S. objection to this type of competition appears to be that not only must the U.S. win all competitions but all other countries must lose. It’s a simple sum/zero look at the world. Canadians prefer more of a synergistic grow the maple pie type of relationship.

Under normal or average circumstances, this idea of competition should allow the best-suited country to succeed. However, times are never normal. We rely upon the averages. For example, using quantitative easing, the U.S. Federal Reserve increased its financial assets five times as before the financial crisis in an attempt to keep interest rates low and stimulate the economy.  Now that the fed intends to start selling off these assets to normalize or average things out, the chickens coming home to roost might collapse the hen house.

As part of the NAFTA negotiations, the U.S. demands that U.S. firms have access to Canadian government contracts and that Canadian firms cannot access U.S. government contracts to the same extent. This position comes across as (and please excuse the legal jargon) sucking and blowing at the same time. As U.S. President Donald Trump’s The Art of the Deal suggests, you should ask for everything and the more outrageous the better.

Some of the U.S. NAFTA failure arguments do not hold water. As a side note, we are better off to not mention water since the U.S. may look north once again. The North American Power and Water Alliance plan to divert rivers into the U.S. died a justifiable death, but rising from the dead has become very popular in the zombie-fixated culture.

Back to the main point, U.S. unemployment has dropped to levels not seen for years. The U.S. manufactures more goods than ever. The GDP for all three countries has risen threefold since the start of the agreement.

The job losses the U.S. complains about may have occurred, but they were mainly the result of increased efficiency and automation. Job loss also occurred as a result of other countries having a comparative advantage. Admittedly, NAFTA diffuses the benefits and focuses the costs elsewhere. Some groups benefit, but other groups are paying the costs in job losses.

NAFTA provides a dispute mechanism for the effective resolutions of disputes. The U.S. claims that this infringes upon its sovereignty and wants to default to the U.S. court system. Having an independent dispute settlement system remains the best practice as evidenced by the WTO’s own dispute system. It has a very fine system, but U.S. litigation lawyers would not necessarily call it effective or efficient.

NAFTA recognizes the importance of several multilateral environmental treaties and that these treaties prevail over NAFTA. The treaties cover ozone depletion, transportation of hazardous goods and prohibitions of trade in endangered species. Attempting to expand this list may prove difficult. The treaty between the U.S. and Mexico on Cooperation for the Protection and Improvement of the Environment in the Border Area takes on a degree of tragic irony.

Although NAFTA negotiation timelines were tight, Trump has recently indicated that there is “no rush” and things seem to be “moving along nicely.” The next round of negotiations begin at the end of January. Canada has developed some innovative options to deal with the U.S. requirement for 50-per-cent U.S. content for automobiles. Essentially, the concept is to include several other car components that weren’t previously taken into account in the percentage calculation. If you have a bad ratio, you can make a percentage look better by strategically adding different stuff to the numerator and the denominator.

The U.S. poison pill requirement to get rid of the objective tribunals and use the U.S. court system still stands. Canada retorted by filing with the WTO almost 200 instances of the U.S. retaliating to dumping by alleging countries exported subsidized products at artificially low prices. Lighthizer has called this WTO action “ill advised.” Although this sounds threatening, in an organized crime sort of way, it actually sounds less so than his damning observations of NAFTA’s fundamental failure.

Trump does sound a bit more conciliatory in his recent remarks. The recent WTO challenge may move his simple bluster into a simply angry notification to withdraw. Financial advisers suggest purchasing U.S. dollars if this occurs. Although, this sounds more like a gamble than an investment when trying to determine how the president might react to someone confronting him.

How does this impact the overall legal profession? Clients require legal assistance during booming and desperate economic times. Their needs become more acute during a time of economic flux. Law firms could position themselves for handling the disruption of goods and supply chains should NAFTA be amended or — worst case — terminated. The times they are a-changin’.