NAFTA talks stymied by uncertainty over U.S. agenda

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Donald Trump's unpredictable personality and hostile opposition to free trade is looming over NAFTA talks as Prime Minister Justin Trudeau and his negotiating team remain uncertain as to what the U.S. President wants from a reformed pact, or whether he would even sign a deal and risk alienating his base, according to high-level sources.

Negotiating teams from Canada, Mexico and Washington sat down for a second day of talks in Ottawa on Sunday, with sources saying progress is being made around less-significant matters affecting small- and medium-size business as well as the environment and competition.

The more contentious issues involving trade dispute-resolution mechanisms and rules of origin for the auto sector are expected to be raised on Tuesday evening and Wednesday when Foreign Affairs Minister Chrystia Freeland, her Mexican counterpart Secretary of Economy, Ildefonso Guajardo and U.S. Trade Representative Robert Lighthizer hold trilateral discussions.

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The Globe and Mail has spoken to key players – who were only authorized to speak on background – to lay out the key challenges ahead as negotiators aim to complete a deal by February, 2018, at the latest.

"Really nobody knows what Donald Trump wants. Does he want a deal or does he want something that he can then turn down and say to his base: 'I told you these Canadians and Mexicans are untrustworthy. This is a bad deal for America,'" a senior adviser to Mr. Trudeau told The Globe on Sunday. "They are not sure yet what he wants."

In conversations with Mr. Lighthizer and U.S. Commerce Secretary Wilbur Ross, Canadian officials have gotten the impression that they have a "constituency of one" (Mr. Trump) and are stuck in a "position where they want to please" the President rather than negotiate on issues of substance to benefit all three countries.

Mexican and Canadian officials have come to the meetings well-prepared and briefed while the U.S. negotiating team is not performing to the standards expected of them, one source said, noting the Americans have still not provided a full range of texts for the negotiations.

Complicating the talks is apparent friction between Mr. Lighthizer and Mr. Ross, who had originally been told by Mr. Trump that he "would be the big shooter" in the North American free-trade agreement negotiations, a source said.

Mr. Lighthizer, who is a more experienced trade negotiator and more comfortable with Washington politics, has been able to persuade the White House to let him run the NAFTA file. He has made it clear to his Canadian and Mexican counterparts that he answers only to the President and Congress.

Canadians are still waiting for the United States to propose a text about rules of origin for automobiles and for the Chapter 19 dispute mechanism, which the United States alleges hinders it from pursuing anti-dumping and anti-subsidy cases against Mexican and Canadian firms.

On the eve of the Ottawa talks on Friday, Mr. Ross fired a salvo when he released a study he commissioned that argued there is not enough U.S. product manufacturing – known as rules of origin – in Canadian- and Mexican-made autos.

Mr. Ross's study claimed U.S. content of manufactured goods imported from Canada dropped significantly – to 15 per cent from 21 per cent. U.S. content in goods imported from Mexico fell even more – to 16 per cent from 26 per cent.

The U.S. study was swiftly refuted by Canadian auto-industry executives who estimate that there is between 60 per cent and 70 per cent U.S. content in Canadian-assembled vehicles. U.S. content in Mexican-assembled vehicles is estimated at 40 per cent.

A Canadian adviser to Mr. Trudeau acknowledged that the "Ross statistics are false," but said Canada should not engage in a public war of words with the Americans and should instead confront them with the facts at the negotiating table.

So far, chief U.S. negotiator John Melle has yet to table or even hint at what the Americans expect for new rules of auto origin, which presently stand at 62.5 per cent North American vehicle content to qualify for duty-free movement between Canada, the United States and Mexico.

Another big issue that has yet to be raised and could prove to be a deal-breaker is the Chapter 19 dispute-resolution mechanism. This provides for independent, binational panels to adjudicate countervailing duty and anti-dumping cases. The United States wants these disputes solved by judicial review in domestic courts.

A senior Canadian official said Mr. Trudeau regards Chapter 19 as the "red line" that Canada will not cross. The official said Mr. Trudeau is ready to walk away from the negotiations if the United States makes Chapter 19 a make-it-or-break-it scenario.

One adviser to Mr. Trudeau cautioned that talks are at the early stage and noted that the Prime Minister could play a crucial role in saving the deal because he has an excellent relationship with Mr. Trump, similar to what Brian Mulroney had with with Ronald Reagan. The source said that Mr. Trudeau, Ms. Freeland and their team of advisers have aimed to develop personal bonds with Mr. Trump, his family, closest advisers and Mr. Ross and Mr. Lighthizer.

An August poll conducted for The Globe shows a majority of Canadians were supportive of the Trudeau strategy of building relationships with the Trump administration to advance Canadian interests.

A Nanos Research Poll, conducted between Aug. 30 and Sept. 1 of 1,000 Canadians, found that 65 per cent of Canadians were comfortable or somewhat comfortable with Canadian officials being friendly with members of the Trump administration. The margin of error of the random survey was 3.1 percentage points, 19 times out of 20.

Insiders say progress is being made to rewrite NAFTA's Chapter 11 Investor State Dispute Settlement (ISDS), along the lines of the arrangement in the recently concluded Canada-EU trade agreement (CETA). Ms. Freeland and her team have been pushing hard on CETA-style investor-protection provisions, including the establishment of a roster of judges to arbitrate disputes.

Canadian and U.S. negotiators are open to reforming Chapter 11 to recognize a country's inherent right to protect on issues such as the environment or health and safety. The Trans-Pacific Partnership agreement, which Mr. Trump walked away from, had similar language.

Sources also say Canada and the United States are taking a firm stand on the enforcement of labour standards. They want a renegotiated NAFTA pact to include penalties if Mexico tries to keep its wages low by not living up to the labour standards set by the three countries.

At the end of Sunday's talks, chief Canadian negotiator Steve Verheul said over all the three sides are making "good solid progress … but the end game is always the hardest and impossible to predict."

With a report from Reuters