Meet the new NAFTA

Following thirteen months of tense and, at times, bitter negotiations, Canada and the United States have finally agreed to a new trade pact that will replace the decades-old North American Free Trade Agreement.

The new deal, officially titled the United States - Mexico - Canada Agreement, or USMCA, is being hailed as a political win on both sides of the border. U.S. President Donald Trump has long railed against NAFTA, claiming it had been one of the worst trade deals his country ever signed. For Trump, this is an election promise delivered that will please his base, and ease at least some of the concerns among his Republican colleagues by getting an agreement signed with Canada and Mexico ahead of the pivotal primary elections next month.  

For Trudeau, the deal has the potential to score major political points ahead of next year’s general election. Standing up to the unpopular American president will only do wonders for the prime minister who faced unprecedented personal attacks from the Trump administration. The negotiations have seriously strained relations between the two countries, and while the ink hasn’t even dried yet, it is hard to imagine that things will improve anytime soon despite assurances from Trump at a news conference today.

While both leaders are claiming victory, there are some who feel Canada gave up too much, especially with the country’s heavily protected dairy industry. American politicians and farmers have long complained about lack of access and high tariff barriers to the dairy market which is regulated through supply management. Under the new deal, Americans will get access to about 3.6% of the market, which accounts for some $20 billion to the economy. The Canadian dairy lobby, which has a lot of sway particularly in Quebec, is not happy about the new terms, claiming their interests were essentially sacrificed for the deal to go ahead.

In what may be a surprise to those who were following negotiations closely, Chapter 19, the dispute resolution clause that was a lightning rod of criticism from U.S. Trade Representative Robert Lighthizer remains intact, essentially unchanged. It’s believed that the U.S. conceded this in return for greater access to Canada’s dairy market, which currently has tariffs as high as 300%, and which Trump claimed to be the deal breaker.

Meanwhile, the auto industry is breathing a sigh of relief this morning, as USMCA seems to have neutralized Trump’s threat of using national security tariffs that would see crippling 20-25% duties imposed on cars and auto parts going across the border. Had these tariffs been imposed, the impact on the Ontario auto sector would have been devastating, throwing thousands of jobs into jeopardy. While there is a new cap on the amount of Canadian-made cars and auto parts that can go south, this isn’t expected to have a major impact on the $71 billion Canada exported last year.

Unfortunately, for the steel and aluminum sectors, those 25% national security tariffs are still in place despite efforts by Canada’s trade negotiators to have them lifted. While it’s unclear how long these will remain in place, there is greater optimism that this will be resolved following the signing of USMCA.

Given we are only a few hours since the deal was announced, we have yet to see full reaction from the opposition parties here in Canada and the Democrats in the United States. Our analysis is that this deal is better than no deal, and is a win for the middle class. Prime Minister Trudeau said USMCA removes uncertainty for business and improves labour rights across North America, but stressed the deal is not done yet and must be ratified in the three countries. We’ll be keeping a close eye on these developments for all of our clients.