CUSMA the New NAFTA: Boon or Bane For Canada?

Commentary, Economy, Alexandre Massaux

In 1994, the United States, Mexico and Canada created a free-trade region with the North American Free Trade Agreement (NAFTA). Considering the fact that the USA is the largest economy in the world (from 1994 to present), NAFTA was a true asset for the Canadian economy. It is estimated that the “total merchandise trade between Canada and the United States has more than doubled since 1993, and has grown over nine-fold between Canada and Mexico”. 

However, former president Trump deemed this trade deal detrimental for American jobs and wanted a renegotiation. He argued that the new treaty would “create nearly 100,000 new high-paying American auto jobs, and massively boost exports for our farmers, ranchers and factory workers. It would also bring trade with Mexico and Canada to  greater heights, with higher levels of fairness and reciprocity.” 

Ottawa and Mexico have accepted this renegotiation, resulting in the Canada-United States-Mexico Agreement (CUSMA), which replaces NAFTA. On July 1, 2020, CUSMA entered into force. 

Large portions of CUSMA are similar to the dispositions of NAFTA. For example, the tariff-free access to the North American marketplace for Canada’s export-dependent beef, pork and grain sector, with improvements to certain elements. The new deal raises Canada’s duty-free level from C$20 to C$150 and the sales tax increase from C$20 to C$40. However, it is only for US goods ordered online. This solution will be profitable for Canadian customers but not for Canadian retailers especially considering the strength of US digital giants.

In addition, there is better protection for technology firms whose copyrights are now 70 years, up from 50 under NAFTA. Further, governments can no longer request source code from tech companies, and duties on electronic transmissions are prohibited.

However, some aspects of this new treaty show that it might be more beneficial for the United States than Canada and Mexico. Developed during the trade war of the Trump administration, CUSMA will not prevent protectionist measures such as the 10 per cent tariffs on aluminum and the 25 per cent tariffs on steel imposed by the Trump administration at the end of May under Section 232 of the Trade Expansion Act. Moreover, considering that President Biden is in favour of protectionism to an extent, uncertainty remains, threatening Canadian trade.

North American protectionism is reinforced through numerous clauses under CUSMA. For example, to qualify for zero tariffs, the vehicle industry must produce 75 per cent of a vehicle’s components in North America, up from the 62.5 per cent under NAFTA, and 70 per cent of the steel and aluminum used in auto production must be produced and purchased in North America.

According to Clifford Sosnow, co-chair of Fasken’s International Trade and Investment Group, the energy space in North America will be less integrated than under NAFTA: “Under NAFTA, governments were prohibited from discriminating against other NAFTA party coal, uranium or petrochemical products with import or export taxes other than duties.” However, with CUSMA, this aspect no longer exists.

Finally, CUSMA can hinder potential trade treaties for Canada with specific countries. The Section 31.10 provision of the agreement imposes that before negotiating a free trade agreement (FTA) with a “non-market country,” the country part of the CUSMA must inform the other countries, at least three months before commencing negotiations, of its intention to begin free trade agreement negotiations with a non-market country. In the United States, eleven countries meet this definition, including China. This disposition could be problematic for potential trade agreements with Beijing, particularly for Canada. The US could act as the judge of these trade agreements and place political pressure on the negotiations. 

Finally, CUSMA is necessary for the Canadian economy. Refusal of this trade deal may prove to be worse than signing it. With most of the NAFTA disposition preserved, it remains a good tool for trade. However, Canada must be aware that protectionism has returned and will make international trade more complicated and more regulated than before. Moreover, the pandemic has increased protectionist behaviour in North America along with the rest of the world. Canada might have a hard job defending its interests.

 

Alexandre Massaux is a research associate with the Frontier Centre for Public Policy.

Photo by Rose Butler on Unsplash.