The USMCA avoids the worst of what President Trump wanted and reduces uncertainty for investors and traders about the rules for North American trade.
The unpronounceable agreement some people derisively refer to as the “U-smacka” is expected to be signed at the G20 meetings beginning November 30. Most attention is now focused on whether the United States-Mexico-Canada Agreement can get through the US Congress, but it’s worth asking first if it should get through Canada’s Parliament. Canadians, according to Angus Reid, seem disappointed in the outcome. Is the new deal merely the old North American Free Trade Agreement (NAFTA), but less? And if that’s the best that can be said of it, is the deal good enough?
The short answer is yes, it is. The status quo was not on offer. The initial ideas from the Americans were horrible, and they held on to some of them for a very long time. The USMCA is a little less than NAFTA, but in some areas it’s actually a little more — President Donald Trump pulled out of the Trans-Pacific Partnership (TPP), a negotiation that was implicitly a modernization of NAFTA, but the USMCA incorporates some of the updates introduced in TPP. The deal avoids the worst of what Trump wanted and reduces uncertainty for investors and traders about the rules for North American trade. So, on balance, it’s not bad — which is a considerable Canadian achievement…if it gets through Congress.
The complete agreement includes 34 chapters, 11 annexes and 12 side letters. Here are some of the highlights that lead me to say that on balance the deal is not bad for Canada.
In her speech in August 2017 setting out Canada’s objectives for NAFTA modernization, Foreign Affairs Minister Chrystia Freeland said that the agreement should be made more progressive. In the end, the countries agreed to several progressive changes. The labour chapter is now fully integrated in the agreement and requires parties to implement policies that protect workers against employment discrimination on the basis of sex, including with regard to sexual orientation and gender identity. The investment chapter has an article on corporate social responsibility that includes gender equality and Indigenous rights. And many other sections of the agreement reference Indigenous rights, most importantly article 32.5, which makes it clear that nothing in the USMCA precludes any trade measure necessary to fulfill legal obligations to Indigenous peoples.
The US wanted Canada to raise the minimum thresholds for express shipments from $20 to $800. The compromise is that Canada will not charge duties for goods imported by courier under C$150 and will not charge taxes for shipments under C$40.
Reviewing and renewing NAFTA
US Trade Representative Robert Lighthizer had wanted a provision to allow the US president to withdraw from the agreement, if desired, after five years. This was one of the worst poison pills in his initial position. The USMCA will last for at least 16 years, with a formal review of its functioning every six years; it will be renewed for a further 16 years if the parties are satisfied with that review. This result provides adequate certainty for Canadian investors and traders.
Rules of Origin (ROOs)
Rules of origin are the conditions on where materials and production processes must originate, in order to benefit from a zero tariff in a free trade agreement. The US wanted to move to 85 percent content from the three countries in the deal, with 50 percent of that American content, a proposal intended to bring production and investment back to the US. The auto industry hated the US idea because it would disrupt supply chains that criss-cross the three countries. And it was unacceptable for Canada and Mexico. The complicated outcome requires an increase in North American content to 75 percent. A novel provision requires that 40 percent of the “Labour Value Content” (LVC) of a car must be made by workers earning an average of at least US$16 per hour.
Can Canada cope with the auto ROOs? Yes. The new ROOs are more restrictive and cumbersome than NAFTA. Canada may see a modest increase in auto manufacturing if the new LVC requirement forces parts production out of Mexico, but North American autos may be less competitive in export markets and consumers facing higher prices may turn to imports.
The US wanted complete elimination of our tariffs on dairy, poultry and eggs. This was a long-standing objective made more urgent by the President’s continual complaints about how unfair Canada is to American farmers, despite the fact the US has a surplus in agriculture trade with Canada, including on dairy. In the end, the outcome on dairy was what it was always going to be: a little more than what the US would have gotten in TPP. The US will have “tariff rate quotas” equal to 3.59 percent of the Canadian market, mostly for milk intended for processing. This increased US access won’t kill supply management, and these small changes won’t help US dairy farmers sell their bloated surplus.
The increase from 8 to 10 years of data protection for biologics (biopharmaceuticals) will cost Canadian (and American) consumers money, but it’s not clear how much. The extra 20 years of copyright protection pleases those who own copyrights (such as musicians) but irritates users. And the US got what it wanted on extensions to patent terms.
Trade talks with non-market countries
Critics are worried that Canadian sovereignty or at least foreign policy autonomy is irreparably harmed by article 32.10: “Entry by any Party into a free trade agreement with a non-market country shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with a bilateral agreement.” This provision is of symbolic importance for the US but is irrelevant for Canada. Canada knows without being told that such negotiations would make this US government nervous, especially if they undermine the USMCA or the US trade war with China by allowing Canada even more scope to displace US goods in the Chinese market. This provision does not prevent the slow process of deepening engagement, which may lead to a free trade agreement, when both sides are ready.
The USMCA seeks to prohibit restrictions on cross-border transfer of data, as well as restrictions on where the servers that hold those data can be located. Does that mean Canada cannot impose such restrictions, as some critics say? Not at all. Data held or processed by or on behalf of a government, like health data, are excluded from the agreement. And both data provisions allow restrictions when necessary for a public purpose, such as privacy.
Revising the three NAFTA dispute settlement chapters was one of the most contentious parts of the negotiations. First, Lighthizer dislikes arbitration of disputes between investors and states (NAFTA chapter 11) because he thinks that the ability to sue a foreign government reduces the risks for firms that invest outside the US. Business likes it for exactly the same reason, especially with regard to investing in Mexico, given uncertainties about future government policies there. The USMCA compromise is a more limited version of chapter 11 for US investors in Mexico. Canada opted out of the new USMCA provision, since the CPTPP (Comprehensive and Progressive Trade Agreement for Trans-Pacific Partnership) provision is available for Canadian investors in Mexico.
Second, chapter 19 of NAFTA allows for a binational panel to review domestic decisions on such things as countervailing duties levied to counteract another country’s subsidies in a particular industry. Lighthizer is opposed to any non-US tribunal being allowed to rule on US decisions about unfair trade, but maintaining and even improving chapter 19 was a red line for the Canadian government. Knowing that the provision is there influences the actions of US officials, who make more careful decisions in order to avoid the possibility of a rebuke (or so Canadians officials believe).
Finally, NAFTA chapter 20 is the state-to-state dispute settlement mechanism used for the interpretation or application of NAFTA. It has not been used since 2001. Here too Lighthizer would have liked to limit its scope, so the fact that it is essentially unchanged pleased Canada. Improvements to make it more usable would have been great, but negotiators were satisfied that they gave nothing away, preserving the possibility of future improvements.
It is true that some parts of the USMCA do send our trilateral trade relations backward, like the more restrictive rules of origin and the export caps on three milk products. At the same time as the agreement is signed, the countries will also sign “side letters” that are related to but not part of the agreement. For example, there are side letters on the “national security” tariffs that the Trump administration has imposed on Canadian steel and aluminum. These side letters imply a tolerance of these tariffs. And there are aspects I’d rather not see in a trade agreement, like the symbolic provisions on China, and the review clause. On the other hand, the most valuable parts of NAFTA are preserved, especially tariff-free trade for most products. And many chapters succeed in updating the rules for North American commercial relations.
A similar balance sheet could be established for the US. The USMCA is a mixed bag, but the Americans got some of what they wanted, especially if the President thinks that the auto rules of origin changes will bring jobs back from Mexico and reduce the trade deficit. So there is enough in the deal for the President to declare victory and turn his attention to China. But it’s only a victory if it gets through Congress.
The USMCA is a long way from ratification. Once the agreement is signed, it has to be implemented in legislation. Nobody sees a problem in Canada or Mexico, although both countries are unlikely to implement the deal if the steel and aluminum tariffs are still in place. But the US is another matter. Implementing legislation will be tabled in the new year. We will know more about the prospects when the new Congress takes office in January. Many Democrats worry that the agreement does not go far enough to ensure Mexican enforcement of the tough new rules on labour and on the environment. Some Republicans think the language on gender and sexual identity in the labour discrimination section should be stripped. Neither Canada nor Mexico is likely to agree to reopening the deal — it is a package that required compromises by all three parties.
If enough members of Congress are unhappy, they could demand changes in the implementing legislation and the accompanying statement of administrative action that specifies how it will be implemented. Or they could accept that their concerns can be addressed in additional side letters, for example on the implementation of environmental standards. If Democrats are unwilling to give the President a victory, they may delay consideration for months, or years, or they could just reject it. The President, faced with a recalcitrant Congress, might give notice to withdraw from NAFTA to apply pressure, or he might leave NAFTA alone and move on. Trump claimed that NAFTA is the worst deal ever, but he might blame keeping it on Democrats and pivot to China and Europe. So we may yet have merely the old NAFTA, if ratification drags on.
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