Mutually Assured Trade Devastation

National Newswatch
By Peter Clark
March 2, 2017

Yesterday, President Trump tabled his 2017 Trade Agenda.  If it is put into effect, Canada may find it more difficult to exercise our WTO rights. The United States’ determination to change its tax system — in ways which could seriously impact Canada — makes the WTO challenge system more important than ever.

I am frequently asked how Canada should defend its interests if the anticipated excesses of President Trump’s trade policy will hurt us.  It is clear that new taxes or tariffs at the border of our largest export market or export subsidies on U.S. exports would be devastating for Canada. Canada needs to be able to employ and rely on the rules-based WTO system to defend its rights and export markets.  We should be concerned that President Trump’s trade Svengali Peter Navarro (officially, the head of the President’s National Trade Council) is scheming with the Office of the US Trade Representative (USTR) to avoid WTO disciplines.

Let’s be clear: the United States will be in breach of its WTO obligations if it:

• denies deductibility to imports for income tax purposes;
• introduces tariffs or surcharges on imports; or
• provides income tax credits for rebates to U.S. exports.

Yet, all of these scenarios are apparently being contemplated by the Trump Administration.  Is the U.S. capable of such irresponsible silliness?  Never say never.  We should keep in mind the core supporters President Trump is playing to. They want heads on posts.

However, it is also worth remembering what transpired after President Richard Nixon imposed a broadly based 10% surtax on imports in August 1971. Following universal condemnation and threat of countermeasures, the Nixon Shock was resolved in just a few months.

Canada may not be able to rely on the WTO to protect us.  Why? Because the Trump Administration is unlikely to be swayed by adverse WTO decisions.

If the normal rules that we have been relying on no longer apply, Canada will need to adapt to the law of the jungle. As we are Bambi to the U.S. Godzilla, we will need to be very nimble, strategic and smart.

Future USTR Bob Lighthizer has long been critical of WTO dispute settlement.  He accuses the WTO Appellate Body of re-writing the rules – a task which should be left to negotiators. As a result, the President’s 2017 Trade Agenda could be a horror show in the making.

The Trump Administration appears to be prepared to disregard any rulings it believes challenge U.S. sovereignty.  In the face of this possible onslaught on its authority, WTO Director General Roberto Azevedo did not foreclose the possibility that there might be some flexibility to meet U.S. concerns on tax credits for exports.

It is likely that implementing the President’s 2017 Trade Agenda will be a bumpy roller coaster ride.  It is encouraging that Congress is urging the President not to abandon the rules-based global trading system. Break a leg, Speaker Paul Ryan.

Much of the Trade Agenda seems routine – the same old, same old America first mantras. But what’s new is that the Trump Administration appears to be ready to throw out the baby with the bathwater.

The 2017 Trade Agenda has four key trade priorities for the new Administration:

1. defend U.S. national sovereignty over trade policy;
2. strictly enforce U.S. trade laws;
3. use all possible sources of leverage to encourage other countries to open their markets to U.S. exports of goods and services, and provide adequate and effective protection and enforcement of U.S. intellectual property rights; and
4. negotiate new and better trade deals with countries in key markets around the world.

On NAFTA, Canada is lumped together with Mexico to claim a trade deficit of more than $74 billion.  The American people did not expect this result – so let’s fix it. The Administration will hold its trading partners to higher standards and will not hesitate to use all possible legal means in response to trading partners that continue to engage in unfair activities. Clearly, fairness and unfairness is determined unilaterally by the U.S.

President Trump and Commerce Secretary Wilbur Ross were overheard chatting about using food security measures to bring Japan into line. And, with respect to the infamous 10% surcharge border adjustment tax: ten percent is no big deal, according to POTUS.

The Trade Agenda pledges that the Administration will be more aggressive in tackling unfair trade practices, including by self-initiating trade remedy cases.  I have never encountered a USTR negotiator who did not put out 120% effort. Perhaps the new ringmasters in Washington will force them to jump through different hoops.

There will be resistance and potential pain to U.S. exporters and manufacturers.  Mexican Economy Minister Ildefonso Guajardo has made it clear that if the U.S. proposes increased tariffs, Mexico will walk.  For autos, Mexico’s most important export, the WTO rate is 2.3% – not a great barrier – and without bothersome rules of origin.  Understandably, Mexico sees re-opening of NAFTA tariffs as a Pandora’s Box.

Canada should consider measured responses to any U.S. actions that would run contrary to WTO rules. There will be little point in trying to use WTO dispute settlement.  President Trump’s Trade Agenda makes it clear that this would be a waste of time – meanwhile, Canadian manufacturers, farmers and ranchers would suffer.  President Trump intends to allow 30 days for negotiations.  We should reciprocate.

With $2 billion a day crossing the border, it does not take long for harm to reach devastating proportions.  Canada must be prepared to respond – and U.S. stakeholders must understand they could be in the crosshairs.

The Trump Administration and U.S. exporters must be sensitive to what Canada can do, and they must be made to understand that we are prepared to do it. We need to hope for the best, prepare for the worst and not simply turn the other cheek.

However, we should hope that cooler heads and sober thoughts in Washington will prevail. Retaliation is a mug’s game.  As a medium-sized economy, Canada must rely on the rules, and if there are no rules, its wits.  Canada was able to handle and ultimately win a satisfactory resolution in its Country of Origin Labelling dispute with the U.S. (2008-2015) because:

• a list of potential targets for retaliation was published in the Canada Gazette;
• Ministers and officials ensured that Washington and U.S. exporters to Canada knew we were serious.

Canada does have its own trade arsenal. Any U.S. tax rebate on exports will be an export subsidy prohibited by the WTO.  Countervail duty measures may be imposed without an injury test.  A simple amendment to Section 7.1 of the Special Import Measure Act would add a hair trigger to this weapon.  Canada could employ it to impose a countervailing duty to any or all imports crossing the border.

Canada could impose a “leakage” tax on selected imports from U.S. states which do not have carbon taxes or cap and trade systems.  Carbon taxes are consumption taxes; arguably they could be imposed at the border on terms no less favourable than they are applied to domestic production.

Canada could respond to attacks on its exports under the Royal Prerogative – God Bless the Queen.  The Royal Prerogative includes reserve powers which enable the Crown to act in unprecedented emergencies which are not provided for by constitutional convention or existing law.

No doubt constitutional experts and nervous nellies around the country will debate the pros and cons of using the prerogative to declare a trade war on the U.S.  (In fact, the prerogative may even be used to start a military war).  But I am not recommending an all-out war.  Canadians would be shooting ourselves in our collective feet, one toe at a time.

If a problem arises, and only if it arises, our approach should be to make it clear to U.S. exporters that targets of retaliation will be identified and surtaxes will be imposed in 30 days.  The potential targets (which could be sectors, specific industries or products) must be carefully selected to create maximum concern – by selecting soft underbelly targets, sensitive to influential legislators and their constituents.  Furthermore, it should be made clear that our potential targets would be subject to a carousel approach – changing the items affected annually or periodically.

This is a risky game – indeed, trade retaliation is a mug’s game.  No one wins a trade war, and the smaller combatant is clearly at the greatest risk.  Let us all hope that Canada never needs to adopt such draconian measures – but unless we are prepared to defend our interests, the trade skirmishes will accelerate and intensify.

There have been positive changes in several key planks in President Trump’s election platform. There is some support for tax change in Congress – even for re-balancing NAFTA.  But, for all the tough talk about how the existing trade system disadvantages U.S. exporters, the Republicans will likely have no appetite for being challenged at town hall meetings back home for destroying the lives and livelihoods of their constituents who are affected by targeted retaliation (or by increased prices of imported goods, for that matter).

Motivating U.S. voters and business to resist the folly of President Trump’s Trade Agenda will be based on the public and legislators understanding just how destructive the President’s initiatives would be for everyone in North America.

Too good to be true? – probably so.  Canadian Press survey suggests opening NAFTA is a Pandora’s Box…

NAFTA: Trump’s ‘tweak’ talk just empty talk? That’s what trade experts say

National Newswatch
By Alexander Panetta – The Canadian Press
February 16, 2017

WASHINGTON — U.S. President Donald Trump gave reassuring words to Canada this week when he lauded an outstanding trading relationship and suggested that changes to the North American Free Trade Agreement would involve just minor “tweaking.”

Invited by The Canadian Press to analyze the president’s promise, a trio of trade experts agreed: that’s not a promise the president can make.

Presidents don’t singlehandedly control U.S. trade negotiations, they say — the process involves numerous actors, all of whom will push their own priorities.

The end result is a Pandora’s box: Either Trump keeps it closed, tinkering superficially with NAFTA through regulatory changes, or he opens it — and all sorts of issues start spilling out.

Here are their views on why Trump’s tweak talk could prove to be empty talk. ….

Peter Clark, trade strategist involved in Canada-U.S. Free Trade and NAFTA negotiations

‘‘He really doesn’t have a clue. Trade is all about detail — and (Trump) doesn’t strike me as being a details person…. He’s addressed it in a broad-brush approach, (like), ‘We want to make it easier to export.’ He also wants to make it more difficult to import. So I’m not sure the tweaking is necessarily going to help us. I don’t see the tweaking helping our dairy farmers and poultry farmers. I don’t see the tweaking helping our grape and wine industries. These are standard targets — they’re always after anything we happen to do differently, which has to, of course, be unfair, depriving Americans of their God-given right to dominate our market. He hasn’t got anybody at USTR (yet) — he hasn’t got Bob Lighthizer there, and Bob hasn’t nominated his four deputies that also have to be confirmed. Without those guys you can’t really do much…. Their normal practice is to ask stakeholders to indicate what they’d like them to do. There will be a lot of things on that list…. You can never count out Congress…. (Trump) can’t control what stakeholders want. Congress controls what stakeholders want (in the deal) because…. they always seem to be in election mode… You get hit by surprises. (New issues) get traction. I can’t anticipate what the problems are going to be, but there’s going to be problems…. That’s a Pandora’s box — once you open it, everything’s open. How can you say, ‘We want to reopen NAFTA for you, you and you — and all you other guys, go play in the traffic?’ You can’t do that.’’

Click here for the complete article.

Trying to assess the future effects of Trumpian trade policy is becoming a full time focus of our practice.

It is prudent to do on the ground research and outreach.

What happens next with Trump and trade

iPolitics Insights

Peter Clark

Thursday, January 26th, 2017

President Donald Trump continues to peel back the Obama legacy like an onion. With the stroke of a pen he unblocked TransCanada’s Keystone XL pipeline project and will try to expedite the completion of the Dakota Access pipeline. If it gets past the protests and litigation, Keystone will have important benefits for the United States — and for Canada.

Prime Minister Justin Trudeau celebrated the decision for the benefits it’s expected to bring to struggling Alberta. The Buy American requirement for steel will not be welcomed by Premier Brad Wall, though; Saskatchewan has introduced important tax concessions to expand the Evraz large diameter pipe mill at Regina.

During the Republican primaries and the election campaign, Trump said he (or the U.S.) would want a piece of the Keystone action; now he wants to re-negotiate the deal. That Buy American rules will apply to steel for pipelines is not a surprise. Trump is trying to make the Keystone approval a gift that keeps on giving, but not for Canada. (Will Canadian line pipe stockpiled in the U.S. have to come home now?)

Trump and Trudeau will not be conducting day-to-day negotiations; at least, history suggests they won’t. President Trump has been very hands-on so far and may fancy himself as Closer-in-Chief. To him, strategy appears to be at least as important, if not more important, than ideology. The business of running the largest economy in the world is very time-consuming, and these are early days. It’s important to understand who is behind the development and delivery of administration trade policy.

As Secretary of Commerce, Wilbur Ross will be the guiding force for the implementation of trade enforcement and for bringing jobs home. Mr. Ross made his fortune buying steel, auto parts and textile assets out of bankruptcy, restructuring and selling them. His confirmation hearing before the Senate resembled a love-in. He is very capable and comfortable being in charge. Mr. Ross is the steel fist in a velvet glove — a seasoned gunslinger who will not accept failure.

The Department of Commerce is responsible for anti-dumping and countervailing duty investigations and enforcement. Trading partners should be wary of his willingness to self-initiate trade remedy anti-dumping and countervailing duty investigations. The usual detailed complaints — with evidence of dumping, or subsidies and injury — will be waived on his watch. This will help small businesses get faster relief with minimal upfront costs — and signal to the bad actors that the U.S. means business. Don’t expect these self-initiations to be limited to helping small or fragmented industries.

Robert Lighthizer will be the United States Trade Representative — if his work decades ago for foreign governments does not disqualify him first. Lighthizer, a former deputy USTR in the Reagan administration, is a veteran of the U.S. steel wars and other high-level trade battles. He is smooth but tough. He will be the chief negotiator and — more important to the Trump Administration — the Enforcer-in-Chief in a trade policy regime focused on enforcement.

Lighthizer knows all of the levers available to the USTR — how to use them, how to bend them and, if need be, how to invent new ones. He has been a harsh critic of WTO dispute settlement for going beyond strict interpretation of the agreements and thus creating new obligations. (While the WTO Appellate Body has generally performed well, I share his concerns.)

Current USTR General Counsel Tim Reif will be staying on as a special advisor to Lighthizer. Mr. Reif is a Democrat and former Hill staffer respected on both sides of the aisle. Lighthizer knows and trusts him. The Trump agenda will be more attractive to some Democrats than to most Republicans. Mr. Reif, who is close to Rep. Sander Levin (D-MI), is a valuable link to that support.

China will be the principal target for enforcement trade challenges (at the WTO) and trade remedy actions, but not the only one. There will be other challenges as the USTR and the administration work to clean up or reduce outstanding irritants in its extensive Foreign Non-Tariff Measures inventory. While Canada is not in the crosshairs yet (isn’t NAFTA enough?) we will not escape the enforcement squad.

Finally, University of California economics professor Peter Navarro will head up the National Trade Council in the White House. He is an extreme China-phobe whose public criticisms of Beijing have reportedly influenced President Trump’s thinking.

The act of bringing Navarro into the White House has shocked China and perhaps a few other U.S. trading partners. This helps to soften up the opposition and might lead to acceptance of less-extreme-than-advertised solutions.

Navarro’s extreme views are illustrated in his documentary, “Death By China: How America Lost Its Manufacturing Base”. (I watched it — can’t recommend the experience. Cruel and inhuman punishment.)

The Trump administration will enforce (and likely expand) U.S. rights through jawboning and immoral suasion, trade remedy investigations or WTO dispute settlement. Washington has been working to put its stamp on the Appellate Body, vetting its own nominees and blocking re-appointment of those who march to their own drummer.

The extreme, exhaustive U.S. style of litigating trade disputes does not facilitate prompt relief. In the case of Country of Origin Labelling — which cost Canadian livestock producers billions in lost exports — it took six years to litigate before two panels, two trips to the Appellate Body and the unprecedented publication of a possible retaliation list. This practice of exhausting all remedies is not likely to change under a president who is proud of never settling — unless he has to.

The likely Canadian targets of U.S. enforcers could range across many sectors. I touched on the perennial softwood lumber dispute, border tax adjustments and NAFTA Chapter 19 dispute settlement in a previous column. These are the big issues.

NAFTA re-negotiations will focus on Trans Pacific Partnership concessions of interest to the U.S. This will be a starting point, not the end game. I have written extensively on the TPP — widely hated by civil society and anti-corporate activists — as a good ground-breaking agreement. And while Trump has kept his promise to withdraw from the TPP, U.S. negotiators will use it a starting point for re-negotiating NAFTA.

We should expect that the NAFTA 2.0 template will become a model for other negotiations. It will avoid repetition and, if the partners are willing, lead to speedier agreements. This makes sense: Much of the text is boilerplate and the negotiations are about exclusions. In TPP, most of the asks originated with the United States — others wanted access to the U.S. market — while for Canada the real prize would be access to Japan and a bridge to Asia.

The USTR shopping list will include a number of specific Canadian targets.

Challenging provincial Liquor Board practices favouring local producers and increased access for dairy and poultry products are always near the top of the U.S. shopping list. The latest challenge — of excluding imported wine from B.C. grocery stores — was launched in the dying days of the Obama Administration.

In Washington, consistency is the bugbear of small minds. USTR and Congress will ignore the extensive U.S. preferences for small breweries and wineries and pass them off as tourism promotion. And the “deep pockets” support for U.S. farmers and ranchers is protected by rules which exempt from WTO discipline the most egregious practices by labelling the support “green” or non-actionable.

Canadians are always concerned about possible demands to divert our water to shore up U.S. irrigation systems. Refusal to divert lakes and rivers to the U.S. would fall outside WTO prohibitions on export controls. Controls on bulk water exports could be an “iffy” situation. Given that about 45 per cent of U.S. agricultural production is from the 17 states most dependent on subsidized irrigation, and water tables under these states are declining – we should not assume that this won’t become an issue.

Other items on the shopping list will likely include:

– Eliminating restrictions on grading U.S. wheat and barley exported to Canada.

– A Personal Duty Exemption for returning residents who have been out of Canada for less than 24 hours. Currently there is none – but CBSA officers at the land border tend to be flexible about small purchases, particularly those which are not subject to GST/HST. The United States considers that the $800 limit for longer stays should apply to all absences from Canada. This would be great for Canadians living close to the border and U.S. retailers. It likely would be a nightmare for Canadian retailers already trying to cope with burgeoning e-commerce alternatives.

– Increasing the duty/HST exempt limit for courier packages from $20 to $200. Amazon.com, FedEx and U.S. e-commerce merchants have been lobbying hard for this. Increasing the exemption would be an important revenue drain for Canada — and more problems for Canadian retailers (and manufacturers). U.S. efforts to sell this approach in the TPP negotiations did not gain much traction. In a bilateral negotiation the pressures will be more difficult to resist.

– Support for the aerospace industry is on USTR’s list. Brazil has already raised concerns about subsidies to Bombardier. Expect Washington to join in. The C-Series competes with smaller Boeing aircraft. General Electric has also expressed concerns about support to Pratt & Whitney for its successful new engine.

– Notwithstanding Canada’s frustration with U.S. state-level Buy American requirements, Hydro Quebec local-content procurement requirements have raised a red flag in Washington.

– Should the consolidation of federal government technology systems under a single platform be handled by U.S.-based “cloud” computing suppliers? Canada says no for national security reasons.

This is not an exhaustive list. When the re-negotiation process begins there will be no shortage of U.S. stakeholders with new issues. This is a glimpse of the continuing reality in the largest and most balanced bilateral trading relationship in the world.

Some of these issues may seem relatively small, but they are important to affected Canadian stakeholders. The cumulative effects can be serious. It does not matter if you are guillotined or nibbled to death by ducks; the end result is the same.

This column is about the pillars of President Donald Trump’s Trade Policy.

America First is not a new concept. U.S. negotiators always put America first. We can hope for the best, but prepare for the worst.

NAFTA 2.0: Buy American, Hire American

Canada not likely a first target in Trump’s war on NAFTA, but changes are coming

iPolitics.ca – Opinions
By Peter Clark
January 23, 2017

Prime Minister Trudeau appears to have done as much as possible to avoid direct hits from the Trump trade howitzers.

Former Prime Minister Brian Mulroney and Canada’s Ambassador to Washington David McNaughton are savvy interlocutors who can help steer Canada through the inevitable rough patches. Still, even the most optimistic observers agree there are potential problems.

The Cabinet retreat in Calgary is being briefed by senior advisors to President Donald Trump, including Blackstone Group CEO Steve Schwarzman, an opportunity engineered by Mr. Mulroney who is on the Blackstone Board.

The Prime Minister’s Office and the Canadian Embassy explain that Canada is not in the crosshairs, at least for now. Clearly, Canada is an important customer for U.S. and this should matter. I hope that repetition of that fact does not wear thin.

There has been no Executive Order on NAFTA yet. U.S. stakeholders will target Canadian practices and interests – and the administration will have no choice – it will pursue the complaints. We must hope for the best and prepare for periodic turbulence.

While softwood lumber may not be fully a NAFTA issue, tends to dominate the trading relationship, and it drains resources badly needed to address other issues.

There will be battles between Congress and the White House over details of the trade program. Trade agreements are all about detail. And Congress will do its best to block what it opposes – like prohibitive taxes on trading partners and outsourcing American companies who fail to be persuaded by the President’s jawboning.

Trump Cabinet nominees Wilbur Ross (Commerce) and Steven Mnuchin (Treasury) have signalled that the President finds the border tax promoted by House Speaker Paul Ryan confusing and that he does not support it. But I have learned over the years to never say never about Congressional initiatives.

President Trump, the communicator, wants a clear signal to his base – a very visible one – which will likely be used to only deal with special evils and recalcitrants (read China). It will not simply fall from the sky overnight. Such action will likely flow from failed negotiations.

The GOP tax mavens could introduce a Value Added Tax (VAT) similar to Canada’s HST. But VAT is a four letter word to the GOP. Visible taxes are never popular.

The Trans-Pacific Partnership (TPP) is dead. I agree with those in Congress who think this is a mistake. Evidence of real benefits to the U.S. in TPP is demonstrated by its objective to include the best bits of TPP in NAFTA.2 or in agreements with other TPP participants.

More than five years of detailed negotiations have been thrown out with the bathwater. Why? For a sound bite? – or to deny President Obama an important part of his legacy? But perception in “Fly Over America” is reality – so TPP had to go.

In theory, the NAFTA re-negotiation will be comprehensive. Don’t expect the process to be a give and take negotiation. It will be much more “take” – a rebalancing in favour of the U.S. Washington wants to sell Canada and Mexico the same fish twice.

The new bilateral negotiating thrust will not benefit Canada. Washington has the market and leverage to dominate negotiations with individual trading partners, Canada does not. We need a broader rules-based trading system to protect and advance our trading interests.

Don’t expect to secure concessions which are contrary to America First, Buy American and Hire American. Improved access to Buy American procurement rules may be easier in a bilateral deal than in TPP, but far from a slam dunk or no brainer.

Without the TPP, Canada will need to reach a bilateral agreement with Japan. That is not likely to happen until Japan is finished with the U.S. This means that Japan’s market access cupboard could be bare – or not very attractive – for Canadian beef and pork exporters. Japan has rejected a possible TPP-lite agreement.

Allowing Japan and the U.S. to negotiate automotive trade and rules of origin on their own should be worrisome to Canada’s auto parts producers and assemblers. Looser origin rules, allowing Japanese assemblers more Chinese and Thai content were the basis for Japanese acceptance of TPP and its implementation bill. Is change possible?

Watch for more Japanese investment in U.S. automotive assembly to sweeten the pot. And U.S.-specific access for agriculture will increase support from U.S. farmers and ranchers. Canada does not need a repeat of its experience with Korea.

Another important, big give – more likely a take – will be the death of special NAFTA Chapter 19 dispute settlement for anti-dumping and countervailing duty investigations.

Canada-U.S. FTA bilateral dispute settlement which morphed into Chapter 19 in NAFTA, is a major part of P.M. Mulroney’s trade legacy. No other country has it. No doubt Mr. Mulroney has discussed maintaining it with his West Palm Beach neighbour – future Commerce Secretary Wilbur Ross.

The U.S. Lumber Coalition wants to get rid of Chapter 19. Judicial review by domestic courts is less intrusive than Chapter 19. It is much more petitioner-friendly. The Coalition has been tireless in its efforts – and now has a White House prepared to listen.

This issue is much more important to Canada than to the USA. U.S. trade remedy targets in Canada, like lumber, beef and pork, are high volume exports. U.S. dumpling is challenged less frequently. I don’t recall any Canadian trade remedy investigations where U.S. exports were measured in billions.

Be prepared for a shotgun approach from U.S. negotiators – it will not be focussed – it will be comprehensive. In the confirmation hearings, Mr. Ross highlighted reductions in the value of the Mexican peso and the loonie as being not by accident. This is bizarre when President Trump is trying to talk down the value of the U.S. dollar to increase exports.

Dealing with unrealistic, emotional demands and President Trump’s shock tactics will not be easy. While we may not be the worst actors in this global vaudeville show, we may have to cope with more than being hit with cream pies.

It will be very difficult to monitor developments on specific products from outside the U.S. During the CUSTA negotiations I was in Washington scoping out client interests twice a month. I expect to be stocking up on flight passes.

In my next column I will discuss key U.S. players – those who will be charged with delivering the better agreements and more jobs President Trump has promised.

My views on the U.S. challenge of B.C. wine in grocery store rules.

Twenty-five years ago we challenged U.S. practices at the General Agreement on Tariffs and Trade (GATT). U.S. lost on federal excise tax discrimination, as well as measures in 41 states and two territories.

GATT dispute settlement had no teeth – the WTO does. Time to re-do the challenges.

WTO wine challenge shows up U.S. double-standard on trade

iPolitics.ca – Opinion
By Peter Clark
Wednesday, January 18th, 2017

The Obama administration has launched a World Trade Organization challenge over how imported wines are denied access to B.C. grocery store shelves.

This challenge was expected to come early in the Trump administration. But the principal U.S. senators driving the bus are Democrats (no doubt they want the credit). A second challenge — of Quebec’s retail system for wine — is reportedly in the works.

This is not a simple regional complaint. It has very broad implications. It is about all U.S. wines, not only those from California. Senator Ron Wyden (D-Oregon) and Senator Patty Murray (D-Washington State) have supported the complaint.

Should the complaint succeed, improved access to U.S. wines would be extended to all imported wines, as required by the WTO Most-Favoured Nation obligation. At a minimum, I would expect to see the EU, Australia, New Zealand and perhaps Chile will join the parade as third party participants.

I was part of the Canadian team defending against EU and U.S. General Agreement on Tariffs and Trade (GATT) challenges of provincial beer and wine purchasing, mark-up and distribution practices. These disputes resulted in major changes to Canadian and provincial liquor board practices.

The U.S. does not come to the WTO with clean hands on wine distribution and taxation. In 1991, Canada brought a GATT challenge of U.S. excise tax discrimination and alcoholic beverage taxation and distribution at the state level. Canada won resoundingly. The GATT found against federal excise tax discrimination in favour of small wineries and a variety of measures in 41 states and two territories.

The U.S. declined to implement the findings because they were not prepared to engage state governments to change GATT-illegal practices.

The U.S. has a double standard when it comes to sub-national government trade practices. Washington finds it virtually impossible to regulate state practices. Thus, in practice, U.S. states have few (or no) real WTO obligations. ‘Buy American’ policies are the most egregious examples. At the same time, the U.S. insists on full compliance by Canadian provinces with Canada’s NAFTA and WTO obligations.

Don’t expect the double standard to change under the next U.S. administration. Indeed, we should expect, within NAFTA, different standards for the U.S., Canada and Mexico.

If the leaks from the transition team are accurate and the U.S. is successful in achieving some of its extreme initiatives, the implications of NAFTA re-negotiation will be broad and deep. Don’t count on Canada’s special relationship with the U.S. saving us from extreme disruption; that relationship no longer exists.

Negotiations towards a pre-emptive softwood lumber agreement were too slow for the U.S. industry.  The U.S. Lumber Coalition has launched Round V in the war on Canadian dumping and subsidies.  None of this has been proven yet – but while the process continues to some kind of settlement, Canadian exporters and the federal and provincial governments are about to be mired in tens of millions of (U.S.) dollars in legal fees and duties which could be in the billions.

My column in National Newswatch describes the launch of Lumber V and why it was necessary:

• the U.S. Lumber Coalition’s ability to hamstring the Administration, and
• British Columbia’s inability to design its own poison.

More coming early next week on why the fight this time will be much more difficult for Canada to manage.

Softwood Lumber – The Other Shoe Drops

National Newswatch
By Peter Clark
November 25, 2016

International Trade Minister Chrystia Freeland’s office has confirmed that the U.S. Lumber Coalition will file petitions in the fifth round of anti-dumping/countervailing duty today (November 25). Lumber V is moving from threat to reality.

The Coalition was pleased to see the end of the 2006 SLA. It did not work well for them. Cross border lumber wars are always fiercely fought. Trade remedies (anti-dumping and countervailing duties) have provided quick and effective relief for the Coalition – and the nightmares for the Canadian lumber producers. The Coalition has little incentive to settle for a deal that it does not want with Governments it does not trust.

Mutually unsatisfactory agreements are generally the best solutions and work well between governments. Canada understands this. Washington understands this. The Coalition does not care. In softwood lumber, the private interests represented by The Coalition have leverage which must be satisfied. Compromise for reasons which might motivate governments is not in the Coalition’s DNA.

The Coalition has a clear right to file complaints if the evidence supports its position. If the facts appear to support their position, the Coalition has nothing to lose by launching investigations. Indeed, recent tightening of U.S. Anti-Dumping and Countervailing Duty laws was not and is not targeted only at Chinese steel. These tougher trade remedy laws will apply in Lumber V investigations.

This filing was inevitable. Canada was not prepared to cap its exports at 22 percent of U.S. consumption. While managed lumber trade with the U.S. has become the norm, this was too much for Canada.

While the negotiations are between Canada and the United States, the Coalition has a veto over the settlement. The Coalition wants nothing to do with an extension or restoration on the same or similar terms as the 2006 Softwood Lumber Agreement. The Coalition is not a trusting lot when it comes to Canada. British Colombia has refused to abandon its favoured export tax mechanism of controlling exports.

The Coalition has made it clear that it would not accept an export tax based settlement. Some analysts suggest that the U.S. fared better under the 2006 deal than Canada. The 2006 agreement was done in part because the Coalition could avoid NAFTA and WTO dispute settlement, and partly because half a billion dollars in Danegeld. The new arbitration forum – the London Court of International Arbitration – didn’t work in the Coalition’s favour. There is no prospect that it can.

Within the Coalition, the distrust of British Colombian governments is even deeper than its distrust of the Government of Canada. That is reality. Prime Minister Trudeau has admitted that the Coalition has a veto which could kill an unsatisfactory deal.

With no hope of Canada buying into the Draconian trade restrictions, the Coalition has stepped up the pressure. This is not a case of no more Mr./Ms. Nice Guy. The Coalition has no need to feel loved. It has been sending clear and unequivocal messages for several years that it wanted nothing to do with a further extension of the 2006 Softwood Lumber Agreement.

The filing is not about President-elect Trump. President Obama could not derail the Coalition’s determined initiative. Nor could Minister Chrystia Freeland’s repeated meetings with USTR Michael Froman move the game in Canada’s favour.

Canadian Ambassador to Washington, David McNaughton, is a formidable political operator who has made fixing the lumber war a top priority. He is supported by a very competent team of negotiators including veterans of several iterations of the lumber wars. They are well connected and tireless in their determination. The surprise election results do not make their task any easier.

President-elect Trump has modified or appears to be modifying some of his more extreme campaign rhetoric on trade. But appearing to give Canada a pass on perceived unfair trade would be too big a flip flop for Mr Trump. The Coalition has a solid core of 25 Senators who would keep the Administration’s feet to the fire. Among them are Senators Ron Wyden, Marco Rubio, and Diane Feinstein. These high powered Senators have many other friends in the Senate who owe them favours and support. There is little love or tolerance in Congress for subsidized import competition.

Canada-U.S. lumber disputes are mainly about “stumpage” – the fee the provinces charge for harvesting standing timber on Crown lands. The Coalition claims Canadian stumpage charges are too low, which means they are lower than in the U.S., where the timber is harvested on lands owned by private companies. Compounding the Coalition’s complaints is a B.C. prohibition on whole-log exports which prevents U.S. lumber mills from buying less expensive Canadian logs and milling them in their U.S. operations.

Why have there been five rounds of litigation? Because the Department of Commerce rules and methodology determine that stumpage rates, in British Columbia in particular, are a subsidy. And because the Coalition, in pursuing its various initiatives, understands how to unleash the power of its supporters in Congress.

Ontario and Quebec have reformed their stumpage regimes since the 2006 SLA entered into force. Industry employment in Ontario has shrunk by 42 per cent or 26,000 jobs, while Quebec has reduced availability and charges much higher fibre costs than B.C. While Ontario and Quebec could agree to a new SLA, they will likely insist that it transition to free trade with clear and workable “exit ramps” for their good behaviour.

Achieving consensus within Canada on the need for another Softwood Lumber Agreement has been elusive. Other provinces have from time to time argued that government support for the B.C. industry distorts trade and competition in Canada.

Mr. Richard Garneau, CEO of Resolute Forest Products, the biggest Canadian softwood lumber producer east of the Rockies, seems to prefer to fight.

Mr Garneau is a very vocal critic of the 2006 deal. In testimony at the April 12 Commons Standing Committee on International Trade meeting, Garneau ran roughshod over supporters of the SLA. He said the 2006 deal worked well for B.C. but has been a disaster for Quebec and Ontario. He rejected claims of subsidization and wanted nothing to do with another agreement.

We now have the fight. Resolute may do well if the U.S. Department of Commerce is prepared to investigate and assign Resolute an company-specific rate, rather than a national one which could be inflated by subsidies in B.C.

To expect looser U.S. Administration of unfair trade laws in the U.S. at a time when the U.S. (as well as Canada and the E.U.) is determined to “modernize” their own trade remedies laws is likely a futile exercise.

The Trump Administration may bob and weave around the future of NAFTA. However, it will need to show increased toughness on enforcement of unfair trade laws. On trade, the Administration will not be fully organized or focussed for several months into 2017. Expect the United States Trade Representative, if it is ex-Nucor CEO Don DiMicco, to be absorbed with the China and steel overcapacity.

The U.S. Lumber Coalition will have an unimpeded run down the field until the countervailing duty rates and AD margins are announced, and perhaps thereafter. The pressure to negotiate and compromise is entirely on Canada. The Coalition benefits from delays.

Canadian exporters will now need to comply with the burdensome demands for information from U.S. investigators. Soon NAFTA and WTO dispute settlement will once again be bogged down with the latest Canada –U.S. lumber war.

No doubt there is some mutually unsatisfactory market share which astute negotiators can find. But as long as the Coalition is faced with demands for the 2006 model, which it does not like and does not trust, is there any incentive to move? If a hard cap quota is the only option, is there a deal to be found?

The negotiations have been dragging on because British Columbia wanted to extend (re-initiate) the 2006 Agreement. The Coalition did not agree and had been sending clear messages about this for at least two years. Premier Clark wouldn’t agree. The Coalition has raised the stakes. This would be an expensive bluff.

Trade remedy investigations are very time consuming and expensive. The legal fees will be mind-boggling with extensive legal teams racking up thousands of dollars per hour – U.S. dollars – in fees. Dispute settlements under NAFTA and the WTO are a slow, expensive and uncertain process. Delay and uncertainty will benefit the Coalition, and Canadian exporters will be seeking government help to finance until the matter is settled.

Lumber trade is very important to Canada and particularly to British Colombia. But there is a different mood in Washington. Trade agreements will be tested against benefits to the U.S. This is not a new or novel concept. The perception is that Mr. Trump won by trashing trade agreements and Secretary Clinton’s opposition was not persuasive.

Premier Clark has lost round one by refusing to move away from the 2006 SLA model. Now she hopes that proposed reconstruction and rebuilding infrastructure will protect Canadian lumber exports. I predicted recently that the infrastructure spending would involve a serious Buy American focus for steel, concrete and other inputs. Why not softwood lumber?

Hope is not a sound business strategy.

Will NAFTA renegotiations be a Godzilla vs Bambi affair?

Will the Trump Administration be able to run roughshod over Chinese rights?

Is the TPP really dead?

The answers are in my National Newswatch column – Trumpian Trade Policy – Welcome to the Twilight Zone