USMCA and Canadian manufacturing

• Industry Update

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The recent signing of the United States-Mexico-Canada Agreement – also called NAFTA 2 – may have come as a relief to businesses on both sides of the US-Canada border, but the deal is complicated, and there are different takes on the impact it will have on the Canadian economy.

Canadian manufacturing in particular still faces challenges, given that US tariffs of 10 per cent on Canadian steel and 25 per cent on Canadian aluminum are separate from the USMCA and remain in place, as do retaliatory Canadian tariffs. According to the Globe and Mail, more than 11 million tonnes of steel was traded between the two countries last year, worth more than $14 billion.
But the basic rules for exporters haven’t really changed, says Prof. Robert Wolfe, professor emeritus at the School of Policy Studies at Queen’s University.
“For small businesses in the auto industry, the changes may actually be good, but we’ll have to wait and see,” Wolfe told the Globe and Mail in an October 23 report.“Every company will have to look at its own supply chain and figure out what’s in it and make sure it meets the rules-of-origin rules [under USMCA].”
Those rules of origin come into effect in 2020. A vehicle will qualify as “originating” and cross the border duty free only if the engine, transmission, body and chassis, axle, suspension, steering system and advanced battery each qualify as “originating.” The complex documentation required will likely be a headache for smaller companies.
Other factors continue to have an impact irrespective of the USMCA. For example, Canadian manufacturing – and other sectors – still benefit on labour costs thanks to the low Canadian dollar, which is trading at around 76 cents to the US dollar.
One new and controversial provision requires a party to the USMCA to notify the other two before starting trade negotiations with a non-market economy, and to disclose the text of any trade deal within 30 days for review by the other two – who may then opt to remove that country from the USMCA. While this provision, targeted at China, has been described as giving the US a “veto” over Canadian trade policy, in fact any country can leave the USMCA for any reason as long as they provide six months’ notice.
More importantly for some observers, the ‘anti-China’ orientation of USMCA means that any push within the US to abrogate the agreement can be attacked as ‘weak on China.’ This may be a strong motive for the US to keep the pact alive, which in turn means increased assurance for Canadian businesses that the deal will be in place for some time, and that Canada-US trade relations will finally stabilize.