Mexico and Canada Resist Initial US NAFTA Push for Raising de Minimis, as US Still Forming Stance on Other Areas

There was a "coordinated and comprehensive pushback" to the U.S. proposal for Canada and Mexico to raise their de minimis thresholds during the first round, according to a U.S. business source. Mexico remains concerned about impacts to its retail sector and Canada is troubled about the potential of catalyzing tax revenue loss, according to a lobbyist close to the talks. Canada has rejected U.S. efforts to get it to raise its de minimis above the current $20 amount for the last 25 years, John Melle, the U.S.’s chief NAFTA negotiator, said in June (see 1706290045). While $800 might be a high bar for the U.S.’s NAFTA partners, it’s possible they will agree to some increase, though it would likely have to avoid mandating Canada change its value-added goods and services tax (GST) while reducing paperwork burdens, the lobbyist said. Canada might budge if there’s some sort of framework agreement with the private sector to collect and remit GSTs owed, the lobbyist said. “It’s just, somebody’s got to think outside the box on that,” the lobbyist said. USTR didn’t comment.

It also remains to be seen just how hard the U.S. will push on the $800 level. Some CBP officials, “the people who are actually charged with administering this, have not been entirely thrilled" with the U.S. increase from $200 to $800, the lobbyist said. Another unofficial industry adviser close to talks expressed doubt that the de minimis issue could get settled at the negotiator level, and said the matter will probably become “political,” and thus likely get passed up to the countries’ respective trade ministers for a higher-level decision on how to proceed. That topic is “going to become hotter, I predict,” the adviser said. “There’s a lot of people who care a lot about that, and I think they’re getting organized.”

The Trump administration hasn’t decided how hard it will push for its stated negotiating objective to eliminate Chapter 19 (see 1707180022), which sets a binational dispute settlement process for challenging countries’ antidumping and countervailing duties, the advisers said. “They certainly don’t have consensus enough to come forward with a definitive proposal,” the lobbyist said. “Perhaps the USTR takes saying they want to get rid of Chapter 19 as a definitive proposal, but Canada and Mexico have made very clear that they will fight that one tooth and nail. Canada … is basically saying that this is the hill they’re prepared to die on.” It will be difficult for Canada to agree to scrap a chapter that has worked well for it over the last 25 years, the lobbyist said.

The U.S. is also still in the process of forming a specific approach toward rules of origin, particularly as they apply to automobiles, the advisers said. Trade analysts have said rules of origin could be the most contentious part of negotiations (see 1708220040). U.S. Trade Representative Robert Lighthizer during the opening round expressed favor for a verified, rather than deemed, rule of origin (see 1708160037). The change would present several issues related to, for instance, whether each automobile part’s country of origin would have to be verified, and whether each individual part or simply the whole car would need to meet NAFTA’s (currently) 62.5 percent required auto rule of origin threshold, the adviser said. “If you get rid of that, you really raise a whole set of issues about how you do tracing on parts and how you actually do compliance with these rules,” the adviser said. “So I would watch that deemed originating issue, because it will be interesting to see if they ditch that concept that raises a whole set of issues about how companies will comply with these sets of rules.”

Lighthizer also said in his NAFTA Round One opening statement that the U.S. will push for higher North American and U.S. content in automobiles and auto parts, particularly. In response, Mexicans have signaled that if such rules were actually adopted, companies could more frequently opt to import under World Trade Organization most-favored nation tariff rates that are generally set at 2.5 percent for automobiles, which could then be cheaper than NAFTA rule-of-origin compliance costs under any national rule of origin, the lobbyist said.

Indications are that the Sept. 1-5 round will follow a similar path as the first, with negotiators discussing broad concepts and working papers, and steering clear of more contentious issues until the third round set for Ottawa sometime later this month, the advisers and business source said. One signal that this round will be more “workmanlike” with few breakthroughs is that few industry stakeholders traveled to Mexico City, the adviser said. But there have been signals that the parties will make more progress on some more technical items, with development of cohesive text on regulatory coordination, such as sanitary/phytosanitary standards and harmonization of rulemaking processes, the adviser said.

A short negotiation timeline and the summer vacation season has limited U.S. industry's ability to gauge the different NAFTA parties similar to previous negotiations, sources said. "I know from our conversations with our government in the United States, there’s certainly not a definition yet on some of the more challenging issues," the business source said. "I don’t think that we’re going to see really anything new in those spaces from the U.S. side. That doesn’t mean the Canadians and Mexicans won’t propose something new."