The NAFTA Negotiations — and Canada’s “Priority Watch List” Designation: It’s All About The Leverage

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If you are a trade negotiator, a key objective is to get maximum leverage (aka negotiating “coinage”) in order to extract concessions from the other side or as a trade-off against concessions that you don’t want to make. The NAFTA negotiations are no different, even though at one moment they seem to be close to completion, and the next to be going backwards as new demands are piled on, or seemingly settled issues resurface.

One tactic that U.S. Trade Representative Robert Lighthizer uses to increase pressure is to add new demands and threats as the end game nears, in order to gain a negotiating advantage and keep the other side off balance. As an example, the U.S. announced that threatened special steel and aluminum tariffs – ostensibly applied for national security reasons because imports of foreign steel are alleged to be undermining U.S. national security – will be applied to both Canada and Mexico if NAFTA is not concluded soon. No matter that Canada is a NATO and NORAD defence partner and has been an integrated part of the North American defence production base for decades, or that the announced penalties are unrelated to NAFTA, the tariffs were still announced—and then suspended for 30 days while the NAFTA negotiations continued. With the negotiations ongoing, the tariff exemption for Canada and Mexico has been extended for another 30 days, but only until June 1. These “emergency” tariffs have nothing to do with NAFTA, but by linking them to the negotiations the U.S. has just put a couple of more bullets into its chamber. It’s a smart negotiating move. So why not throw some other issues into the NAFTA mix as well?

It was thus no coincidence that on April 27, in its annual Special 301 report on global intellectual property standards, the USTR downgraded Canada from “bad” to “worst”, putting it on the Priority Watch List (PWL) along with countries such as China, Indonesia, Algeria, Russia, Venezuela, India, Kuwait, Ukraine, Colombia, Argentina and Chile. (For a more detailed description of the annual 301 process, see this post that I wrote a couple of years ago). Canada, the only G7 country—and virtually the only western country— the to be designated on either the PWL or WL, just happens to be in the midst of renegotiating NAFTA with the US (and Mexico). While Canada’s IP record has blemishes and could be improved, does any reasonable and fair-minded person actually believe that IP protection and enforcement in Canada is as bad as in the other 11 countries on the PWL and worse than in Pakistan or Egypt (some of the countries on the lesser-transgressor WL?) To claim that a rule-of-law country like Canada, with a long and proven track record in IP legislation and regulation, has a worse IP regime than the countries named above, or than any other western country, is clearly a case of classic over-reach and exaggeration done primarily if not exclusively for NAFTA negotiating purposes.

Even though the 301 process has always had a degree of politicization, in so overtly using 301 to add another card to its trade-negotiating hand, the USTR risks undermining a useful exercise in identifying IP shortcomings affecting both U.S. and domestic businesses and creators.

Of course copyright is not the only IP itch that the USTR wants scratched. The report criticizes Canada (rightly, in my view) for a failure to take more concerted action against counterfeit goods in transit. In the patent area, the U.S. pharmaceutical lobby is not happy with proposed changes to patent term restoration or to the Patent Medicine Prices Review Board. But Big Pharma is never happy with countries (like Canada) that have national health plans that lead them to establish price control mechanisms. The USTR is also not happy with Canada’s agreement to protect a number of European geographical indications (GIs) as a result of the Canada-EU Trade Agreement (CETA). U.S. agriculture doesn’t like the GI system which Europe has perfected over many years (think Champagne, Feta cheese and Parma ham). However, is any European country on the Watch List as a result of its attachment to GIs? The answer is “No”.

Finally, copyright in Canada comes in for examination in the USTR report. Again, rightly in my view, concern is expressed about the overly broad educational exception, introduced in 2012, that negatively affects both U.S. and Canadian publishers. Indeed, this is one of the issues currently under review as part of the Copyright Modernization Act update. The parliamentary committee responsible for the review (the Standing Committee on Science, Industry and Technology) has begun hearings and has just completed a cross-country road show to hear from witnesses. The committee will hear from those who argue that the educational exception should be narrowed because of the economic damage it is causing to copyright holders. The committee will also hear from anti-copyright groups who want to weaken the regime by further broadening existing exemptions and by rolling back some of the protective measures introduced five years ago, such as making illegal the hacking of technological protection measures.

The issues facing U.S. and Canadian copyright holders are often—although not always—the same. Thus it is not surprising to find many of the concerns voiced by Canadian stakeholders such as the Writers’ Union of Canada, the Association of Canadian Publishers and l’Union des écrivaines et des écrivains québecois (UNEQ) are echoed in submissions to the USTR by U.S. copyright stakeholders, such as the International Intellectual Property Alliance (IIPA), a copyright industry group based in Washington. The education fair-dealing exception is a legitimate issue for U.S. copyright holders to raise and to be included in any external evaluation of Canada’s copyright regime. But do these issues merit lumping Canada in with Algeria, Ukraine and Venezuela, among others, on the PWL? I think not, unless trade leverage is the real name of the game.

U.S. organizations make recommendations to the USTR regarding the designation they would like to see applied to various countries on the Special 301 lists. It is worth noting that the IIPA recommended that Canada stay on the WL, not placed on the higher-profile PWL. Similarly, the Global Innovation Policy Center (GIPC) of the U.S. Chamber of Commerce has just published its own global rankings on the intellectual property performance of 50 world economies, comparing them across a range of indicators from copyright to patent protection to trade secrets, and so on, as well as measuring progress year-over-year.

According to the Chamber’s study, in 2017 Canada improved in four of the six categories measured and scored the same in the other two. Canada ranked 18/50 – not great and it should do better, but let’s look at the 11 other countries that the USTR grouped with Canada on the PWL. How do they stack up according to the US Chamber? China is the closest at 25/50. Others range from Colombia at no. 27 to Venezuela, dead last at 50/50. And as for Pakistan and Egypt – countries that the USTR has placed in the “lesser transgressor” category – according to the U.S. Chamber of Commerce, they ranked 47th and 48th respectively. Recall that Canada, a “worse transgressor” according to the USTR’s 301 report, was ranked no. 18.

The U.S. Chamber does take Canada to task for leading the charge on suspending a number of IP provisions in the newly negotiated Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the regional trade agreement originally led by the U.S. but from which it withdrew when Donald Trump assumed office. Canada (and the other 11 countries) had agreed to these IP provisions in the original TPP (when the U.S. was a member) but suspended them after the U.S. withdrew. Why? Was it because Canada wanted to undermine IP standards in the region, or because any good negotiator will reserve some of the best cards for another round?

If the U.S. re-evaluates its rash decision to leave the TPP (a possibility raised recently in Trump’s musings), it will be useful for Canadian negotiators to have something in hand that the U.S. wants. In fact, if the U.S. has been skilful in adding to its negotiating leverage by throwing steel and aluminum into the NAFTA mix, Canada and Mexico could also have a card to play if and when the U.S. asks to get back into the TPP, since all current members have to agree on potential new entrants. Canada may be willing to accept the IP provisions that it agreed to originally in the TPP, but like any good negotiator, it will seek to make the US “pay” by offering concessions in some other areas. From a trade negotiators’ perspective, you never give anything away ”for free”.

The NAFTA renegotiations are now entering what may be their final phase. (If agreement is not reached by the end of this week, an alternative may be a declaration of agreement in principle, with the details to be worked out after the summer Mexican presidential election and the U.S. mid-terms in November, and legislation not submitted to Congress until 2019). This is a critical time and the annual release of the Section 301 Intellectual Property Report has provided the U.S. with another opportunity to lean on Canada through designating it a “very bad actor” under the 301 process. Objectively, putting Canada in this category is hard to square with reality, but as with love and war, when it comes to negotiating trade agreements, the end is often deemed to justify the means.

© Hugh Stephens, 2018. All rights reserved.

 

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