Oil Is Canada’s Ace in Any Revisiting of NAFTA

(Globe & Mail via CSCB)

Both Hillary Clinton and Barack Obama are threatening to opt out of NAFTA if elected, which means re-negotiate, a position that is quite tenable particularly with a protectionist Congress. This really is about more than politics – this threat is genuine.

Negotiating treaties involves horse trading and results are uncertain. In preparation for negotiation of the predecessor 1989 Canada/U.S. Free Trade Agreement, the Hon. Donald MacDonald concluded after exhaustive study that Canada should make a "leap of faith" and plunge in.

Should Canada do so again? There may be no choice. And if that happens, we need to pay heed to at least three key areas.

NAFTA and US AD/CVD Law
A prime objective in negotiating the FTA was to obtain an exemption from U.S. laws against dumping and export subsidies.

U.S. anti-dumping and subsidy laws are regularly used by "injured" U.S. industry associations. The U.S. has a large trade law bar that, some say, encourages (if they needed it) U.S. industries to use these laws as a "sword." Canada hoped, based on our two integrated economies, that the U.S. would be sympathetic to granting the exemption.

What did Canada end up with in the FTA (carried over into NAFTA without the "improvements" to the "temporary" FTA solution)? A "binding" dispute settlement regime with panels of arbitrators reviewing decisions of the imposing country to assess whether its laws, not any objective, international standard, were properly applied. There were more than 20 panel reviews in the most recent case against Canadian softwood lumber (one of four) – and the issue is still unresolved.

But there is an alternative. The 1994 World Trade Organization agreements created the international standard and an enforcement regime. Thereafter, Canada could also go to the WTO for dispute settlement …

NAFTA and energy
… NAFTA's energy section broadly unfetters energy trade between the U.S. and Canada. But it adds a virtual guarantee of U.S. supply. (Mexico got a "pass" on energy.) Neither country may reduce the proportion of its energy exports to the other relative to the "total supply" of the exporting country during the prior 36-month period. The rub is that "total supply" includes shipments to its domestic and foreign users.

But if you look at the current energy landscape, China wants to buy Canadian energy. Canada imports more than 55 per cent of its oil needs. Canada continues to be the largest oil and gas supplier to the U.S. Let's assume Canada continues to consume the same quantities of its own energy production and importation. If so, could Canada sell energy to China, or any country other than the U.S.? No. The proportionality maintenance obligation prevents that.

When negotiating the FTA, Canada's concern was that the U.S., then desiring energy self-sufficiency, might impose restrictions on Canadian energy imports to stimulate U.S. production. Canada won the articles prohibiting restrictions on Canadian exports, and the U.S. won the proportionality maintenance commitment. The U.S. now looks to safe, stable and friendly suppliers, now a good idea considering politics in Venezuela, Iran and Iraq…

… the prospect of the U.S. walking from NAFTA and watching China and others scoop Canada's energy exports is slim to nil…

NAFTA and investment protection
… Foreign investment protection is alive and well world-wide. There are more than 2,000 bilateral investment treaties and they are based on the NAFTA model. Importantly, there is an "manager" for settlement of foreign investment disputes at the World Bank — the International Centre for the Settlement of Investment Disputes, under the ICSID Convention. All 144 signatory countries promise to enforce ICSID awards and not one has gone unsatisfied since the convention was established in 1966…