Canada and NAFTA: When a “Tweak” becomes a “Hard Squeeze” (But Are There Upsides?)

The “tweak” to NAFTA that President Donald Trump famously promised Canadian Prime Minister Justin Trudeau during their initial meeting in Washington in February is rapidly morphing into more of a “hard squeeze” if recently leaked documents outlining the negotiating objectives that the US Trade Representative’s Office (USTR) will be submitting to Congress are to be believed. Commerce Secretary Wilbur Ross has already talked tough in public, indicating that the US will be expecting concessions from both Canada and Mexico. The latest draft of the document that will be submitted to Congress, obtained by Inside US Trade and reported extensively in the Canadian press, indicates that the US has a long list of demands that it will be seeking.

The demands fall into a number of sectors and presumably represent a maximum wish list. Not everything will be achieved notwithstanding the disproportionate economic power of the US. All negotiations are a two-way street and with US exports of goods and services to Canada totalling $337 billion in 2015, with an overall US surplus of $12 billion (USTR statistics), Canada definitely has negotiating leverage. According to the Canadian government some 9 million jobs in the US depend on exports to Canada.

The leaked negotiating mandate draft laid out more than 40 objectives in various categories. Some of them include; tightened safeguard measures against import surges into the US, revised NAFTA rules of origin, greater access to government procurement (the irony of tightening “Buy American” procurement policies in the US while demanding that NAFTA partners open their procurement markets wider seems not have occurred to the US negotiators); improved access to agricultural markets; revising NAFTA’s dispute settlement process, and several objectives in the area of intellectual property and digital commerce, among a number of others.

If this sounds like a long hit list, it is important to keep things in perspective. There has been commentary about how changes to NAFTA, described by the Canadian government as “improvements”, could be of benefit to Canada as well as the US. It is worthwhile remembering that while the objective of US negotiators is to serve US interests, that doesn’t necessarily mean that changes to NAFTA rules that might benefit US industries and workers (sometimes these interests are synonymous, sometimes not) won’t also bring benefit to Canada, or at least to significant stakeholders in Canada. It might depend on whether you are a family with young children, or a protected dairy farmer. It might also depend on whether you are part of the creative industries in Canada, or among those who prefer to take a free ride on the content of others. Let me cite a concrete example that has nothing to do with copyright but is relevant in providing context.

Canada is a generally open agricultural market and is a significant exporter of agricultural produce globally. But, in the area of dairy, poultry and eggs, Canada maintains an outdated and inefficient system of “supply management” whereby domestic production is limited and allocated by quota in order to prop up the consumer price. In effect it amounts to legalized price-fixing. To maintain this socialist-like system, imports have to be blocked or they would quickly undercut the artificially high domestic price (limited exceptions are made for specialty products, like European cheeses). Exports are virtually impossible under this system because Canada refuses to reciprocate by allowing imports. The US would like to export more dairy products and poultry to Canada. In the dairy sector, this is vigorously resisted by groups like the Dairy Farmers of Canada who have effectively lobbied successive governments over many years to keep their protected monopoly. This is despite the fact that owing to a reduced per-capita demand, and consolidation in the industry, the number of dairy farmers in Canada has shrunk over the years to less than 12,000 in 2016 from over 120,000 in the 1970s.

The artificially high price of milk is translated into higher prices for all products incorporating milk (read cheese on pizzas) imposing a further burden on Canadian food processors, restauranteurs and consumers. A few years ago Canadian police busted a ring that was smuggling cheese into Canada, dubbed by the media as the “mozzaralla mafia”. Seriously! It is estimated that supply management costs families in Canada with children almost $600 per year in extra costs (just under $400 for families without children). This is a direct subsidy from millions of consumers including many low income families to 12,000 well off dairy farmers. And what happens to milk that cannot be sold? Because of supply management, excess milk is poured into the fields as it cannot be exported because Canada is a closed market. The system is so distorted that a major Canadian dairy processor, Saputo, had to purchase a dairy in Australia in order to be able to get into the business of exporting dairy products to Asia.

What is the point of all this milk-talk, especially in a copyright blog? The point is to underline that achievement of some US negotiating objectives in the NAFTA renegotiation will not necessarily be detrimental to broad Canadian interests, although some lobby groups won’t be happy. Forcing the government of Canada to dismantle the supply management regime would be one of the greatest gifts that the NAFTA negotiations could provide to Canadian consumers and food processors. (Given the amount of money invested in quota it could not be done overnight, although the market could be opened progressively). This same logic could be applied to some of the negotiating objectives in the area of intellectual property.

Well-known IP blogger Michael Geist has done a deep dive on the leaked negotiating draft, analyzing in detail each of the four IP subheads that are included in the draft letter to Congress.

These were, in abbreviated form;

Seek to establish standards to be applied in NAFTA countries that build on the foundations established in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights and other intellectual property agreements….

-Seek to secure fair, equitable and non-discriminatory market access opportunities for US persons that rely on intellectual property protection

-Seek commitment from the NAFTA countries to strengthen their laws and procedures on enforcement of intellectual property rights, such as ensuring that their authorities have the authority to seize and destroy pirated and counterfeit goods…

-Seek commitments from the NAFTA countries to strengthen their measures to provide for compensation of rights holders for infringement of intellectual property rights and provide for criminal penalties…sufficient to have a deterrent effect on piracy and counterfeiting

For Prof. Geist these objectives represent potential problems for Canada. He speculates that the objective of seeking standards that build on existing international IP treaties could result in expansion of the term of copyright protection in Canada from 50 to 70 years (as was agreed in the TPP) and could lead to tighter rules against hacking technological protection measures. “Fair, equitable and non-discriminatory” market access opportunities could mean, according to Prof. Geist, that measures to protect Canadian culture could be threatened (by restricting the ability to require currently exempt services from contributing to Canadian content funds). The objective of enforcing intellectual property rights by ensuring that customs officials have authority to seize and destroy counterfeit and pirated goods could well be read as an attempt by the US to close a loophole in Canadian law where Canadian officials are not required to take action against such products passing through Canada to the US, unless there are health and safety concerns. Finally, he speculates that the objectives regarding compensation for rights holders and criminal penalties for IP violations may relate to US desire to see changes in the existing statutory damages regime for copyright infringements (where there is a $5000 cap for non-commercial infringement) and for violations of trade secrets laws.

All of this is speculation, and fair enough as at this point we have no information to suggest how these broad objectives may be translated into negotiating demands. My point, as in the milk example, is that the achievement of some of these outcomes should not be seen as a negative result for the Canadian creative sector. US rights holders would benefit from an extension of the copyright term in Canada certainly, but so would Canadian creators. As I have pointed in an earlier blog there is no evidence, contrary to what some claim, that this would lead to a massive outflow of royalties from the country. The whole issue of Canadian content restrictions and forced subsidies is a fraught one in Canada, with creators and creative industries lining up on both sides of the issue. The failure of Canada to do anything other than turn a blind eye to the passage of counterfeit and pirated goods in-transit through the country does not serve Canadian interests if Canada wants to work with the US, as it must, to build a secure North American customs inspection regime where the border becomes increasingly seamless for the passage of goods. And why wouldn’t strengthened penalties against violation of trade secrets benefit Canadian businesses?

To be sure, if Canada’s negotiators are skilled—and they are—they will ensure that they extract offsetting benefits for these “concessions”. Some of these “concessions” were included in the now-sidetracked TPP. For Prof. Geist, that means that Canada “caved”; for me I see it as Canada extracting other benefits in return for measures that in the short or long run are for Canada’s benefit.

We don’t know how hard a squeeze the US will apply to Canada in the NAFTA negotiations, or which areas will be of highest priority. IP issues may not be that high on the list, but they will still likely form part of the final equation of balancing interests and objectives. Not everyone will be happy with the outcome–on both sides of the border–but if at the end of the day the end result is to improve IP protection in Canada, and reduce some longstanding trade barriers (such as in the dairy industry) to the benefit of the average Canadian, then maybe the trite phrase “win-win” will actually mean something.

© Hugh Stephens 2017. All Rights Reserved.


Author: hughstephensblog

I am a former Canadian foreign service officer and a retired executive with Time Warner. In both capacities I worked for many years in Asia. I have been writing this copyright blog since 2016, and recently published a book "In Defence of Copyright" to raise awareness of the importance of good copyright protection in Canada and globally. It is written from and for the layman's perspective (not a legal text or scholarly work), illustrated with some of the unusual copyright stories drawn from the blog. Available on Amazon and local book stores.

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