Nafta deal unlikely in ’18, Canadian attorney says

A conclusive deal between the United States, Canada and Mexico on an updated North American Free Trade Agreement (Nafta) seems unlikely by year-end, one Canadian trade attorney told American Metal Market in an interview.

Campaigning for the Mexican presidential election on Sunday July 1 is likely to start in April, and political candidates are unlikely to make any concessions on key sticking points, according to Clifford Sosnow, a lawyer at Fasken Martineau DuMoulin LLP, based in Ottawa and Toronto.

“Will there be any meaningful negotiations in the lead up to the presidential election? In April, May and June, who is going to be making significant, politically sensitive concessions and at the same time saying ‘vote for me’ to be the president of the country?” Sosnow asked rhetorically. “There’s going to be negotiations at a highly technical level, but the hard issues will have to be put aside.”

On top of that, Republican and Democratic lawmakers are unlikely to back any major concessions on the US side in advance of contested midterm elections in November, he added.

“So all of a sudden you have a bit of paralysis in the negotiations about who’s going to make the tough decisions,” Sosnow said.

“The issues they want to deal with are very, very serious... There just is no way that in this round of Nafta negotiations that they’re going to resolve them,” according to Sosnow, a veteran trade lawyer with years of experience before Canadian agencies, Nafta bodies and World Trade Organization (WTO) arbitrators.

The US is only now signaling interest in Canadian proposals on automobiles and rules of origin - key to US metals producers - while thorny issues like procurement, investor-dispute settlement and anti-dumping law remain virtually untouched, he said.

“These are extremely detailed and complex issues that are very delicate, and the idea that all will be wrapped up three months prior to the presidential elections in Mexico is frankly not realistic,” he told American Metal Market.

And once Mexico’s campaign is under way, it will be early 2019 before serious negotiations can continue since that’s when a new president takes power, Sosnow said.

By then, if there’s a Democratic House and a Mexican president not supportive of Nafta, the negotiating dynamic and agenda will be completely different, he noted. The US could lose control of the negotiating agenda.

Despite President Donald Trump and US Trade Representative Robert Lighthizer’s attempts to achieve a Nafta deal as quickly as possible, there’s a “close to zero” chance of that happening, Sosnow predicted.

That will have a direct impact on the US steel market, which both sells and imports significant steel from Canada and Mexico. Nafta negotiations have left the North American steel industry and supply chain in limbo for months.

Steel trade among Nafta countries totaled 17 million tonnes in 2016, according to World Steel Association data.

In 2017, an average of 1.51 million tonnes per month moved beteween the three countries, according to the Nafta steel trade monitor.

Section 232: The consequences for Canada
While Canada is excluded from US import barriers, Canadian steel markets must still deal with the consequences of the US imposition of Section 232 tariffs on March 23.

Some fear that global steel shipments bound for the US will find their way to Canadian shores and disrupt markets there.

Canada has legal measures, including a “market disruption safeguard” and “emergency safeguards,” that can protect its market against a flood of Chinese steel, according to Sosnow, who formerly worked at the Canadian International Trade Tribunal.

Those unilateral tools can be deployed by Canada’s cabinet, now led by Prime Minister Justin Trudeau, who has expressed support for Canada’s steel and aluminum industry.

Still, targeting China might cause a backlash against Canada, which still seeks a free-trade deal with the world’s second-largest economy. Trudeau visited China recently to seek a free-trade deal but was rebuffed, even as he continues to court politically important steel voters for Canadian elections in 2019.

In this uncertain environment, and with the real threat of a Nafta breakup, Sosnow advises Canadian steel businesses to look at setting up shop in the US. He outlined a dual-track strategy of maintaining an office in Canada and lobbying the Canadian government “heavily” to erect a safeguard against steel imports while also drawing on benefits from US tax reform at US operations.

Sosnow’s clients include companies directly affected by 232 tariffs and Nafta policy, including automotive manufacturers, general industrial firms and transportation companies.

“If I was the [chief executive officer] of a steel company right now, I’d be investing in setting up operations in the US,” Sosnow said, adding that Canadian investment in northern US or even southern US states is an “attractive option” both for tax reasons and to protect against a Nafta breakup.

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