After more than a year of talks to renegotiate NAFTA, there’s a new agreement in place. Pending approval, the United States-Mexico-Canada-Agreement will replace the 25-year-old trade pact between the three countries.
To put the new deal into perspective, BMO recently gathered the industry’s leading experts on markets and international trade to discuss what’s next for the economy and businesses.
These are the biggest changes:
Country of origin. Automobiles must have 75 percent of their components manufactured in Mexico, the U.S. or Canada to qualify for zero tariffs. NAFTA required 62.5 percent.
Dairy markets. U.S. dairy farmers will get access to 3.5 percent of Canada’s protected market, slightly above the 3.25 percent Asia-Pacific nations got under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Canada has also agreed to eliminate its Class 6 and Class 7 milk categories within six months.
Sunset clause. The new deal will last for 16 years, with a review to be made at the six-year mark. At that point, the three countries can agree to continue on for another decade (10 years); or, if they are unhappy with how the deal is playing out, formal negotiations will begin.
Dispute settlements. The dispute settlement mechanism for countervailing and antidumping duties in NAFTA, which was not part of the U.S.-Mexico deal, is retained. The investor-state dispute settlement mechanism will be eliminated between Canada and the U.S. A scaled back version between the U.S. and Mexico was retained covering oil and gas, infrastructure and telecommunications.
Sense of relief
The agreement must be ratified by all three countries, and the U.S. Congress must give its approval—something it is unlikely to do until 2019. Assuming the USMCA is approved in its current form, what does it mean for the U.S. and Canadian economies?
“In Canada, I think there’s been more of a sense of relief rather than a sense of euphoria in terms of getting to this deal,” says Donald Campbell, senior strategy adviser at DLA Piper Canada and a former Canadian deputy minister of trade and NAFTA negotiator. “Canada had been very concerned that there would be a sunset clause, and that is now gone, although there is a review clause. So we do have some long-term certainty in the agreement itself.”
Given that Canada’s trade exposure to the U.S. is 10 times the U.S.’s trade exposure to Canada, any changes to a trade deal are magnified in the Canadian economy, notes Michael Gregory, BMO Capital Markets deputy chief economist and head of U.S. economics. The new auto sector rules, for example, were designed for dealing with the trade deficit the U.S. has with Mexico, but they should provide residual benefits for Canada as well. As a high wage producer, rules of origin requiring a larger percentage of higher wage production should benefit Canada in the long run.
Gregory adds that a new trade deal should boost business investment activity in both the U.S. and Canada. “The other issue too is that with NAFTA under the scope and the risk of trade action and further tariffs, there’s been a lot of uncertainty, which clearly suppressed business investment,” he says. “That likely is going to be alleviated.”
“As the U.S. goes, so goes Canada,” says Brian Belski, BMO Capital Markets chief investment strategist. “We expect global money will return to Canada. With the cloud of uncertainty lifted off the Canadian markets, we can expect positive results for the financial, industrial and energy sectors, especially businesses with strong cross-border activity.”
Tariff issues remain
The steel and aluminum tariffs the U.S. imposed on Canada still casts a shadow over the agreement. Gary Clyde Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics, believes there will be an effort to eliminate the tariffs within the next two months.
“The 232 tariffs are very unpopular in the U.S., obviously in Canada and Mexico as well,” Hufbauer says. “The retaliation is very unpopular, and we’re facing a midterm election. So two months at the outside.”
The tariff issue is why Campbell characterizes the USMCA as a “managed trade agreement” rather than a free trade agreement. Nonetheless, he sees it as an important step forward.
“From a Canadian perspective, it’s still very difficult to see national security provisions on the United States’ closest trading partner, ally and friend,” Campbell says. “But the bottom line is that we now have a sense of certainty well into the future.”
The views and opinions expressed do not necessarily reflect the views or positions of BMO Financial Group.
