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What USMCA means for Canadian businesses doing cross-border trade with the U.S.

 

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U.S. President Donald Trump has gotten his way. The new U.S.-Mexico-Canada Agreement (USMCA) was put into effect as of July 1—the earliest date possible following the agreement’s ratification in April.

Modernizing the North American Free Trade Agreement (the USMCA’s predecessor) was a key part of Trump’s campaign in 2016 and the pressure was on to deliver on that promise before his second run for office this fall. But as COVID-19 has upended global supply chains, closed borders and shut down businesses, is a global pandemic the right time to implement a new trade pact? It’s a question that many Canadian organizations are actively pondering with the implementation deadline now behind us.

Mixed emotions on USMCA

Opinion is divided. U.S. Trade Representative Robert Lighthizer, who negotiated the NAFTA update on behalf of the Americans, is clear on the Trump administration’s stance: “The crisis and recovery from the COVID-19 pandemic demonstrates that now, more than ever, the United States should strive to increase manufacturing capacity and investment in North America.” That declaration echoes a key rallying cry of candidate Trump in 2016.

Members of the U.S. Senate and Congress, the government of Mexico, as well as business groups and industry associations in Canada and the U.S.—including both the U.S. and Canadian chambers of commerce—aren’t so convinced. The Dairy Processors Association of Canada told the CBC that if activated on July 1, the USMCA could cost dairy farmers more than $100 million in lost revenue due to required changes to products and plant retooling.  The Automotive Parts Manufacturers’ Association in Canada wants the USMCA to be postponed until January 2021 to give the industry time to prepare and arrive at uniform regulations.

It’s no surprise that automakers and dairy farmers are pushing for a delay. These industries are among the most directly impacted by USMCA, even if the agreement will leave Canada-U.S. relations largely in status quo territory in the years ahead.

A legacy of trilateral trade

A little background: Canada and the U.S. share the world’s longest secure border. Prior to COVID-19, some 400,000 people and $2.4 billion worth of goods and services crossed this border each day. The U.S. is Canada’s largest trading partner and Mexico is our third-largest, while Canada is the second and fifth largest trading partner of the U.S. and Mexico, respectively.

President Trump pushed to renegotiate NAFTA because he felt trading practices were unfair to U.S. companies and consequently sought a better deal that spoke to his political base, comprised largely of trade protectionists. It was also an opportunity to create a trade agreement that better reflected the times by addressing the rise of the digital economy, e-commerce and the need for robust intellectual property protections. After more than a year of tense negotiations, which included Team Canada visiting the U.S. more than 300 times and making more than 500 individual contacts with American officials—including the U.S. President and 16 of his Cabinet members, more than 310 members of Congress and 60 governors— USMCA was announced on September 30, 2018.

The potential impact of USMCA

While USMCA is far from a perfect trade agreement for Canada—it contains good and bad news for our economy—it will have a relatively marginal impact on SMEs.

Two key areas of NAFTA remain unchanged in the USMCA. Canada was able to maintain NAFTA’s Chapter 19 dispute resolution mechanism, which allows panels with experts from participating countries to meet and resolve anti-dumping and other duty-related disputes. The Trump administration was pushing for these disagreements to move through the U.S. Court of International Trade. USMCA also leaves NAFTA’s labour mobility rules largely untouched; Canada had tried to expand visa eligibility requirements for Canadian professionals.

 

What is different under USMCA are the rules impacting how vehicles are manufactured.  NAFTA was seen to encourage outsourced production to Mexico, where wages are much lower. Under USMCA, 75 per cent of a car’s parts must be made in the three countries, up by 12.5 per cent from the current 62.5 per cent restriction. In addition, 30 per cent of the manufacturing of a car will need to be completed by workers earning $16 an hour, increasing to 40 per cent by 2023.

One of the potential problems USMCA presents for Canadian automotive manufacturers is its complexity. The new rules could push some automakers to simply accept 2.5 per cent World Trade Organization tariffs on parts, rather than taking steps to comply with tariff-free zone regulations.

New rules for dairy and digital commerce

Several changes also target the dairy industry. USMCA will increase competition and supply, and could lower prices for Canadian milk and dairy products for consumers, largely by increasing access to butter and cheese products from the U.S. This means Canada must now open its protected milk market to U.S. producers, while also eliminating the pricing system for Class 7 dairy products, milk solids used in cheese production, skim milk powder and infant formula.

USMCA also includes a chapter on cybersecurity, data flow and e-commerce, which is an improvement over NAFTA. For example, the new agreement prohibits duties on digital music and e-books. With respect to intellectual property and copyright specifically, USMCA extends the terms of copyright from 50 to 70 years beyond the life of the author. However, Canadian jurisdiction over cross-border data flow and domestic data sovereignty may be compromised.

Perhaps the greatest benefit of USMCA is that it brings much-needed trade certainty to the North American economy. The question now is whether it will help or hinder a post-pandemic recovery.

Hartley Cohen, Partner

Hartley Cohen
Hartley Cohen

905-946-1300, x. 223
hcohen@krp.ca