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USMCA

The new NAFTA

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The key negotiators for Mexico, Canada and the U.S. announce details of the USMCA.

After more than a year of bluster, negotiations, standoffs, threats and controversies, it’s a deal.

Some Canadian analysts and economists are shrugging that while the United States-Mexico-Canada Agreement (USMCA) is little more than a reworked NAFTA, the newly-accepted agreement does eliminate anxiety, fears, speculation and uncertainty that had built during discussions.

Despite the bluster and posturing controversy, the deal is not actually a big deal and – borrowing from the overused historical cliché: NAFTA is dead … long live USMCA.

“The two deals are similar in many ways,” says Calgary-based economist Trevor Tombe, associate professor in the department of economics at the University of Calgary. “There were already zero tariffs on almost all goods, so little additional liberalization left to undertake. Dairy imports will be ever-so-slightly cheaper for Canadians, with a small percentage of U.S. products now eligible for zero tariffs. And the auto sector will become slightly less open to trade due to more restrictive rules of origin.

“In the long run, the deal will mean little and Canadians may start buying more imported Japanese and European vehicles and less North American ones, as Canadian tariffs on those imports declines due to TPP and CETA while the cost of the North American production grows.”

Although most economists and business leaders are reluctant to tread into the minefield world of politics and posturing, there was uncertainty ever since the unpredictable and often volatile U.S. president announced intentions to revisit and possibly scrap NAFTA.

For more than a year, Canadian businesses were not sure what could or would happen.

“While concessions were made, the USMCA agreement does provide much-needed certainty for businesses,” says Sandip Lalli, president and CEO of the Calgary Chamber. “This was not a traditional trade negotiation where the three sides are looking to deepen the trading relationship.

“We did not end up better off than under NAFTA, but we can consider this a success because the U.S. was trying to negotiate something that was less than the original NAFTA and would have negatively impacted the long-standing benefits of free trade.”

Eliminating business uncertainty, Tombe agrees, is a key achievement of USMCA. “The largest short-term effect of the deal is not due to any of its provisions, but reaching a deal eliminates the business uncertainty created by President Trump. With withdrawal now off the table, businesses can plan their future with more security than before.”

In September, Canadian Foreign Affairs Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer made a formal joint announcement, explaining USMCA included key concessions important to both countries, giving businesses, workers in various sectors and farmers a trade agreement that will result in “freer markets, fairer trade and robust economic growth.”

Business leaders and economists are still referring to USMCA as “the new NAFTA,” suggesting the U.S. will have roughly the same access to the Canadian dairy market as what was given up by Canada after it signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade deal with 10 Asia-Pacific countries earlier this year.

While the i’s are still being dotted and t’s crossed by both governments, there is already caution for Canadian farmers as the heart of the deal is a trade-off giving greater U.S. access to Canada’s dairy market, which is heavily protected by a system of supply management.

Under the current supply management system, Canada imposes tariffs on dairy imports – which can run as high as 300 per cent – that exceed the established quota. The American president has rallied against the tariffs as unfair to American farmers, insisting that it keeps foreign products out while privileging Canadian sources.

When it comes to the USMCA impact on farmers, Lynn Jacobson, president of the Alberta Federation of Agriculture, explains there is good news and some not-so-good news for Canadian agriculture. “The most significant economic difference between USMCA and NAFTA are the market access concessions made in supply management, mainly the dairy, chicken, table eggs and turkey sectors.

“While Canada almost doubled its sugar beet sugar access into the U.S. and received a fairly significant increase in access for sugar containing products, this mainly benefits the sugar processing industry with its cane sugar imports. At this time, we really don’t know how much our sugar beet industry will actually benefit.

“In terms of trade,” he says, “the rest of the agreement for agriculture is status quo as there was never any indication that our integrated grain, pork and beef industries would experience any trade disruptions.”

When it comes to how Canadian dairy farmers are affected, Jacobson underscores some concerns. “With his populous approach, President Trump seemed to zone in heavily on our dairy industry, creating a narrative that suggested an unbalanced trade relationship was the cause of a hurting American dairy industry and he promised his base that he would do something about it.”

One contentious aspect of USMCA: U.S. exporters will now have access to roughly 3.59 per cent of Canada’s dairy market. “Unfortunately, without getting much in return, Canada gave up very significant dairy access,” he adds.

Although it’s way too early to analyze specifics, Lalli says Canadian businesses in general will notice the difference.

“Any Calgary company that does business in the U.S. will be positively impacted by the certainty provided by the USMCA. The agreement brings both positive and negative changes to Calgary sectors that are most specifically impacted: energy, agriculture and manufacturing.

“While wheat, beef and pork producers are happy that the status quo was maintained, egg, poultry and dairy producers will be negatively impacted through increased U.S. access to the Canadian market.

“For energy, the elimination of a tax on diluent – that was a part of the old agreement on oil shipments containing less than 40 per cent diluent – will provide a monetary benefit to the industry.”

However, she points out the energy industry as well as manufacturing will remain negatively affected by the steel tariffs that are still in place despite the new deal.

As the media coverage of USMCA tapers off, the economic recovery in Calgary and Alberta will proceed in largely the same way prior to finalizing the deal, according to Tombe.

“The biggest boost the economy here could receive would be through a reduction in the oil price discount currently caused by lack of pipeline capacity,” says Tombe. “That is a few years down the line, given legal delays to Keystone XL in the U.S. and the Trans Mountain pipeline here in Canada.”

According to Lalli, there is positivity but also a call to action. “The agreement is good because it provides certainty around our trading relationship with the U.S. and Mexico. It illustrates to the world that the North American market still believes in free trade.

“That being said, Canada still needs to improve our business competitiveness relative to other countries. As a country, we are falling behind both in corporate tax and regulatory competitiveness,” she cautions.

“We must also look carefully at how we can break down unnecessary trade barriers that exist between provinces. It does not inspire confidence of our international trading partners if we can’t get our act together at home.”

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