What the USMCA means for Canada

Trade between the U.S. and Canada has long provided millions of good livelihoods across both countries. Many people thus supported the 1988 Free Trade Agreement (FTA) and its expansion in 1994 to include Mexico in the North American Free Trade Agreement (NAFTA).

After more than a year of negotiations, the three national governments, sometimes referred to as the “Three Amigos,” recently agreed in principle to change and rebrand NAFTA, which today regulates what has grown to more than (U.S.) $1.2 trillion yearly trade in goods and services. The new agreement is renamed the U.S.-Mexico-Canada Agreement (USMCA).

What else has changed?

USMCA will limit the number of cars and value of automobile parts Canada can ship to the U.S. without paying higher duties. Beginning in 2020, in order to qualify for zero tariffs, a car/truck will have to have at least 75% of its parts produced in the U.S., Mexico or Canada.

Also beginning in 2020, at least 30% of the work done on a qualifying vehicle will have to be done by workers earning a minimum of (U.S.) $16 per hour - roughly three times more than Mexican auto employees nowearn. This will be a boost for auto industry workers, but it will increase car prices and make it harder for North American-made cars to compete on international markets.

The steel and aluminum tariffs Trump imposed on Canada under the pretense of U.S. national security have done damage to both economies. Ford Motor announced that the two levies cost it more than (U.S.) $1-billion last year alone. The head of the U.S. steelworkers’ union has come out against both measures. They remain in place because Canada has already responded to them with dollar-for-dollar retaliation; now is an excellent time for both governments to call a truce.

USMCA forces Canada and Mexico to respect the long patents the U.S. gives to its pharmaceutical companies. Specifically, the intellectual property chapter includes an extension of the length of time new, very costly biologic drugs will be protected from generic drug competition.

The extension means that U.S. drug companies will be able to sell their biologics in Canada for a full decade, delaying the entry of cheaper generics by two years. McGill law professor Richard Gold, an expert on intellectual property, says this could cost Canadians “tens of millions” annually.

One of USMCA’s new features is a clause which effectively provides the U.S. a veto over any free trade deal the other two partners might wish to negotiate with a listed “non-market country”, such as China (which is already on the U.S. list). The Nobel laureate economist Paul Krugman correctly predicted years ago that Beijing's ongoing refusal to let its currency float would cause retaliation from economies where a manipulated yuan creates an enormous competitive advantage for China.

American dairy farmers get improved access to the Canadian market - a victory for U.S. President Donald Trump. Canada has agreed to expand duty-free access to its domestic market - reportedly slightly more than was already offered in the renamed Pacific Partnership (TPP) negotiations with the Obama administration.

The contentious class 6 and 7 milk products are normalized. Canadian dairy farmers are understandably displeased with the Trudeau government’s decision to let more American milk pass through the tariff wall that protects the supply-management system. There will be subsidies for Canadian dairy farmers to compensate. but the agreement will have little or no impact on consumer prices in Canada.

The investor-state dispute provisions (Chapter 11), highly detrimental to Canada, have been removed.

The U.S. attempt to remove protections for Canada’s cultural and media industries was abandoned.

The three governments agreed to improve labor and environmental rights. Mexicans will be able to form unions more easily; their trucks crossing the U.S. border will have to meet tougher environmental standards.

A joint committee to review the conduct of macroeconomic policy in the three countries has been introduced.

The U.S. attempt to remove NAFTA’s independent dispute resolution mechanism (Chapter 19) failed. The three countries may now challenge each other’s anti-dumping and countervail duties before panels of USMCA representatives, rather than in U.S. courts.

Chrystia Freeland, Canada’s foreign affairs minister, says the new agreement preserves the successful economic architecture that has long governed North American trade. Critics judge that the U.S. is determined to dictate the terms of commerce, and the smaller partners could either go along or face years of harassment.

Despite all, the USMCA is for now seen as a “win” for all involved. Trump gets his first “major” trade deal just in time for the midterm elections. Mexico’s outgoing President Enrique Peña Nieto leaves office proudly; President-elect Andrés Manuel López Obrador avoids facing trilateral trade negotiations. Prime Minister Justin Trudeau can assert that he defended Canada from an economic calamity.