The US – Mexico – Canada Agreement (USMCA) is generally welcome news for business in Canada primarily because it provides stability in Canada’s trade relationships with the US and Mexico. There are few substantial changes from the old NAFTA and this fact has been scored as a victory for Canada given the somewhat tumultuous negotiations. Formal signature will occur in 2018 with full ratification and implementation in 2019 or perhaps even 2020. Below is a summary of some of the major changes.
1. Dispute resolution: This is unchanged from NAFTA and sends disputes to an impartial tribunal for resolution. The alternative, proposed by the US, was to have disputes settled by the domestic court systems in each country.
2. Sunset clause: The expiration of the agreement is after 16 years but substantial review will open after 6 years. The US had proposed a complete expiration and re-negotiation after 5 years.
3. Dairy Industry: The US will have greater access to Canada’s domestic dairy products market. This amounts to about 3.6% market share in Canada for US producers.
4. Intellectual Property: Current copyright extends 50 years after the death of the creator of most intellectual property (books, manuscripts, etc.). This is now extended to 70 years.
5. Pharmaceuticals: Patent protection for biologic classed pharmaceuticals is extended for 10 years before generics can be produced and sold in Canada. This is an increase of 2 years from the current 8-year protection in Canada.
6. Non-Market Economy Trade Agreements: 90 days prior to opening trade agreement negotiations with non-market economies (i.e. China, Russia, or other non-capitalist states), Canada must notify the US of its intention to do so at which point the US has the option of withdrawing from the USMCA.
7. Rules of Origin (auto industry): Duty free trade in the auto sector is ensured if a minimum of 75% of the value of the automobile or parts are produced in North America (Canada, the US or Mexico) AND 40-45%% of the labour value was added by workers earning $16.00 or above by 2023. This is a change from the current 62.5% rule of origin and no provisions for labour rates.
a. The US reserves the right to invoke “national security” duties if the total value of Canadian exports to the US exceed 2.6 million passenger vehicles and $32.4B in parts. Canada’s exports are currently about 1.6 million vehicles.
b. There is also a 70% North American steel and aluminum requirement
8. Aluminum and Steel Tariffs: There was no agreement to reduce current US tariffs on Canadian aluminum or steel exports to the US. These tariffs are based on “national security” concerns in the US and are most likely fueled by US worries that Canada could be a transhipment (conduit) for steel from China or elsewhere. Discussions are ongoing to resolve this dispute.
9. Online Shopping: For on-line purchases from the US (apparently excepting those delivered by Canada Post), the USMCA increases the dollar value (from $20 to $150) of goods purchased prior to duties being imposed. The tax emption (GST, PST, HST) value increased modestly from $20 to $40. This applies only to on-line purchases.
10. Investor Protection: For the US and Canada, previous (and complex) NAFTA provisions which allowed lawsuits against governments for policy changes affecting future profits are eliminated.
There are other provisions of the USMCA but, in general, what this means for business in Canada and BC is the following:
1. Canada retains access to the US (and Mexican) markets without disruption. Investor who may otherwise have been nervous about Canadian investment given a protectionist US should be relieved.
2. The US will have greater access to the Canadian dairy products market in Canada. There will be modestly increased competition in this sector.
3. Pharmaceutical price relief for the new biologic class of drugs is not on the horizon
4. Trade negotiations between Canada and China (or other non-market economies) will be subject to US approval. This makes agreements, in the short run, more difficult although the concern surrounds imports from such countries not exports. Where the US is concerned is that Canada (or Mexico) could become conduits or transhipment points for lower priced goods or raw materials. Canadian firms currently (and prospectively) exporting to China need not be concerned except insofar as China wishes to expand reciprocal free trade.
In the final analysis, the USMCA is remarkable for how little has changed. Nonetheless, the relative certainty offered by the USMCA will help business in Canada and elsewhere decide, wisely.