U.S. procurement demand on Canada, Mexico fading from NAFTA: sources

The United States has backed away from its contentious demands for lucrative procurement projects in the renegotiation of the North American Free Trade Agreement, The Canadian Press has learned.

Mexico and Canada are both quietly taking credit for standing firm against the controversial U.S. position that would have effectively limited their respective countries' ability to bid on valuable American government infrastructure projects.

Multiple sources, speaking on the condition of anonymity, cited the competing claims as one example of the animosity between Canada and Mexico that has arisen since Mexico reached its own NAFTA deal with the Trump administration last month.

Canada and the United States are trying to renegotiate their portion of the three-country trade pact at the heart of the continent's economic prosperity, but major sticking points such as dairy, dispute resolution and culture remain.

Canada has credited Mexico with making significant concessions in its deal with the U.S. on automobiles and for permitting large wage increases for Mexican auto workers — something Canada and the U.S. both wanted to stop the growing flow of automobile production into Mexico because of its cheap labour.

But Mexico believes it has also done much of the "heavy lifting" on getting the Americans to back down on its demand to limit the ability of Canadian and Mexican firms to bid on U.S. infrastructure projects, while seeking greater access for American firms to Mexican and Canadian government projects.

The proposal offended Canada and Mexico when it was tabled by U.S. trade czar Robert Lighthizer last fall during the early rounds of the 13-month-old NAFTA renegotiation.

The U.S. proposed a dollar-for-dollar approach that would have limited access for Canadian firms because Canada's economy is so much smaller.

Sources say Lighthizer withdrew that demand during this summer's one-on-one negotiation with Mexico, returning the continent's procurement rules to the status quo.

Canada has privately expressed frustration with Mexico's decision to strike its own deal with the U.S. last month.

But one source familiar with how the negotiations have progressed said Canada was fully informed every step of the way on the Mexico-U.S. deal, noting Freeland and chief negotiator Steve Verheul were kept in the loop.

The source said Canada transgressed first with a surprise auto proposal last spring that it gave directly to the U.S. without consulting Mexico.

Mexico still wants Canada in a three-way deal, and ensured that the language in its deal with the U.S. was written to facilitate a trilateral agreement, the source said.

Mexico feels its agreement works in Canada's favour on a number of fronts, added the source.

With dispute settlement very much a live issue between Ottawa and Washington, the U.S. and Mexico reached agreement on NAFTA's Chapter 20, the government-to-government dispute settlement mechanism, sources said.

Mexico believes that opens an opportunity for Canada to preserve Chapter 19, which is a deal-breaker for the Trudeau government.

Chapter 19 allows for independent panels to resolve disputes involving companies and governments, but the U.S. wants it removed because it views it as an infringement of its national sovereignty.

One proposal on the table is to fold Chapter 19 into Chapter 20, a development that may not be fair to smaller and medium-sized companies, said Cyndee Todgham Cherniak, an international trade lawyer currently on Canada's roster for Chapter 19 disputes.

She said governments will be likely more inclined to take Chapter 20 cases forward in the interest of large enterprises such as softwood lumber or metals companies.

"The problem with it being in Chapter 20 is you've got to convince your government to bring the case," she said. "The government may not want to because it's too small of an industry to spend the resources.

"This will create an injustice for small and medium-sized businesses, who quite frankly are the backbone of North American business."

The U.S. and Canada are also working towards finding common ground on two other Canadian priorities: reflecting the rights of Indigenous people and women in the NAFTA text, sources say.

Canada originally wanted distinct chapters on each but that fell off the table earlier this year, as the Trudeau government tried to break the NAFTA logjam with its so-called "skinny NAFTA" compromise that focused mainly on autos and dairy — a proposal that Lighthizer ultimately rejected.

Sources say the Canada-U.S. agreement could contain some language on women and Indigenous Peoples — none of it binding on either the U.S. or Mexico — that could potentially help Prime Minister Justin Trudeau claim a political victory back in Canada.

Mexico had objected to the inclusion of a full Indigenous chapter, but sources say it has no problem with including the non-binding language if it helps Canada reach a deal with the U.S.