Canada's concession on dairy not enough to seal NAFTA deal, U.S. economists say

There have been growingcalls from both sides of the border for Canada to make concessions on its protected dairy sector in order to finally reach a new North American Free Trade Agreement with the United States.

Many arguethat Canada has already made concessions in the sector to secureother trade agreements like the Trans-Pacific Partnership (TPP), and the dairy industry is a relatively small part of the economy.

But even if Canada does give in toU.S. President Donald Trump's repeated attacks on the country's tariffs on dairy imports andits supply management system, some economists south of the border say it will not be enough to seal a new trade deal.

"Even Canadian concessions on dairy may not be enough to make the U.S. keepthe current dispute resolutions," said Carlos Capistran and MingziYi, economists at Bank of America Merrill Lynch, in a note.

"Our baseline is that Canadawilljoin the U.S.-Mexicoagreement, making concessions on dairy, but that it likely will have to make some concessionon dispute resolution as well."

The current NAFTA's dispute resolution mechanism, known as Chapter 19, allows companies that feel their products have been impacted by anti-dumping or countervailing duties to request arbitration.

Prime Minister Justin Trudeau said just last week that the process was needed, because Trump "doesn't always follow the rules."

But U.S. economists argue the dispute resolution is"on the balance."

They think Canada will make concessions on the mechanism to reach a trade deal with the U.S. this month.

Value of Chapter 19

However, there are questions overthe value of a trade deal without the key resolution mechanism.

"Without Chapter 19, NAFTA is utterly useless as it would subject Canada and Mexico to the vagaries of the U.S. political system and its courts when determining trade policy actions," said Derek Holt, vice-president at Scotiabank Economics, in a note recently.

"Abandoning Chapter 19 is the Trump administration's way of attempting to gut NAFTA."

Holt adds that Mexico has left it entirely to Canada to stand up for a dispute resolution by agreeing to eliminate it, and onlykeepsome safeguards. Canada has the right to oppose such an agreement, he said.

"Prime MinisterTrudeau is right in that no deal and waiting for more reason in futureis better than permanently signing onto a feature that guts NAFTA," Holtsaid.