It appears that the United States, Mexico, and Canada now have, in principle, a new trade agreement. This new trade agreement will no longer be known as the North American Free Trade Agreement, but will instead be called the United States-Mexico-Canada Agreement.
While the media has portrayed USMCA as the “new NAFTA” or “NAFTA 2.0”, the reality is that the current iteration of USMCA is forked away from NAFTA. While there are many parts of NAFTA in USMCA, the two key words missing from the new title is “Free Trade”. This means that the whole premise of the agreement has changed from a free trade agreement to simply a trade agreement.
For Canada, this is a clear change as Section 232 tariffs on aluminum and steel remain in place, in spite of the newly negotiated USMCA. According to the technical summary, the United States will exempt Canada for a further 60 days from future Section 232 tariffs to negotiate “an appropriate way forward”. Based on the press conference by President Trump and the way the automobile tariff issue was resolved, a quota system for steel and aluminum appears to be the most likely outcome. We will have to wait a while before we know whether the quota negotiated is favourable for Canada.
There was shock in Canada when President Trump mused of imposing a 25% tariff on automobiles. With USMCA, the auto industry can rest easy in the knowledge that the prospect of tariffs has been removed as Canada now has a quota for exporting up to 2.6 million vehicles tariff-free. The quota is a generous one as Canada currently exports around 2 million vehicles. If Canada can meet the maximum quota or at the very least exceed current production levels, then USMCA will be a win for Canadian-based auto makers.
During Canada’s press conference, Minister Freeland mentioned that the proportionality clause for oil in NAFTA is now gone. This is great news for Canada as Canada will no longer have to worry about exporting a proportional amount of oil (and at what price) to the United States. Canada’s plan is clear: it is time to diversify away from the United States and access world markets. To that end, the LNG Canada project was announced soon after the USMCA announcement and, upon completion, will make Canada a player in the world LNG market. The goal to replace inefficient coal energy with LNG globally is admirable and burnishes Canada’s reputation as an energy player on the world stage. Over time, we will also see if Canada makes structural changes (hopefully now without any interference from the United States) to lower energy costs for everyday Canadians.
With a trade agreement of this magnitude, not every industry can win. Such is the case for Canada’s dairy industry as it is forced to provide a 3.6% market share to the United States. The federal government has promised compensation for dairy farmers, which should help. For myself, I enjoy eating salted Canadian butter with my toast and will continue to buy it regardless of American alternatives in the marketplace. Other industries who did not do as well as the auto industry include the pharmaceutical industry with respect to general drugs and B.C. wine.
At first glance, is USMCA better than NAFTA or the absence of a trade agreement? USMCA is certainly better than the absence of a trade agreement as Canada retains normalized access to the US market without the threat of further tariffs.
With respect to NAFTA, steel and aluminum tariffs remain in place with a possible negotiated settlement on the horizon with USMCA. Currently, however, we have tariffs with NAFTA and tariffs with USMCA. USMCA is better than NAFTA when we look at Canada’s two largest exports: oil and automobiles. According to the OEC, crude petroleum and cars accounted for 24% of Canada’s exports in 2016. In these two areas, Canada has won with USMCA as the proportionality clause is removed for oil exports and the quota level has increased for the export of cars.
But don’t celebrate yet as USMCA still needs to be approved by Congress and no one knows whether President Trump will have the required number of votes to pass USMCA.