A Brief Outline of CUSMA And Its Impact on Canada

Summary

• The new Canada-United States-Mexico Agreement (CUSMA) preserves the key elements of the 26-year-old trillion-dollar NAFTA, but with some major tweaks
• Automotive industry most affected with new provision that calls for 75 percent vehicle manufacturing in US, Canada or Mexico to qualify for zero tariffs; dairy sector also hit.
• The accord has evoked severe reactions in Canada, with lawmakers expressing concerns over provisions that allow US veto rights on future Canadian trade pacts with other nations.

The Canada-United States-Mexico Agreement (CUSMA), also known as USMCA in the United States and T-MEC in Mexico, is the successor of the trilateral accord, North American Free Trade Agreement (NAFTA). CUSMA came into effect on July 1, 2020, and attempts to address the three nations’ recent trade, labor, and environmental concerns.

In its latest avatar, the treaty preserves key elements of the trillion-dollar NAFTA along with some major tweaks to automotive and dairy sectors, labor laws, intellectual rights and other 21^st-century trade issues.

Before delving into the CUSMA and its impact on Canada, let us first understand NAFTA and the circumstances under which it was replaced.

North American Free Trade Agreement (NAFTA)

The three-country accord NAFTA came into force in January 1994 to become the largest trade bloc in the world by gross domestic product (GDP). Negotiated by the governments of Canada, United States, and Mexico, the 26-year-old agreement sought to liberalize trade deals in auto, agriculture and textile sectors, and abolish tariffs and other trade barriers. It also aimed to protect intellectual property, establish dispute resolution mechanisms, and enforce labor and environmental security.

NAFTA fundamentally reshaped the North American economy, driving cross-border investment and unprecedented integration between the three countries. The free trade pact hoped to bring “stronger and steadier economic growth to Mexico” with new jobs and opportunities for its expanding workforce and discouraging illegal migration, says independent global think tank Council on Foreign Relations (CFR).

For Canada and the US, Mexico was seen as a “promising market for exports” and a low-cost investment location “that could enhance the competitiveness of US and Canadian companies,” it adds.

Under the accord, the total tri-nation merchandise trade (based on imports) reached nearly US$ 1.1 trillion by 2017, as per Canadian federal government data. Imports between Canada and Mexico grew over nine times since 1993 and more than doubled between Canada and the United States.

Apart from generating economic value, the trade liberalization raised the standard of living for the citizens of all three nations. Canada saw strong cross-border investment and became the United States’ largest trading partner.

NAFTA and its trade liberalization model also ushered in a new era of free-trade agreements across the world and engineered strong labor and environmental enforcement mechanisms.

Despite uplifting economies of the three nations, NAFTA had its critics.

The treaty came under heavy fire for causing job losses and suppressing wages, especially in the US. Then there were concerns over environment and agricultural losses. There were also broader economic debates over free trade, intellectual and labor rights, and tariffs.

Canada-United States-Mexico Agreement (CUSMA) & its Impact On Canada

The CUSMA, also labeled as the NAFTA 2.0, was signed on sidelines of the G20 Summit in Buenos Aires in November 2018 by Canadian Prime Minister Justin Trudeau, US President Donald Trump and former Mexican President Enrique Peña Nieto after more than a year of intense negotiations.

CUSMA has the potential to regulate commerce worth US$ 1 trillion in North American markets with a consumer base of more than half a billion.

Under the new and updated provisions, the CUSMA seeks to address 21st-century trade issues and maintain the tariff-free market. The key restructuration points include:

1. Automotive Industry

Automobiles must have 75 percent of their components (up from previous 62.6 percent) manufactured in Canada, Mexico, or the US to qualify for zero tariffs. Carmakers must ensure at least 40 to 45 percent of the vehicle components are produced in facilities with average hourly worker wage of at least US$ 16 by 2023. Plus, automakers need to source 70 percent of the steel and aluminum from within North America.

2. Dairy & Agriculture

Under the CUSMA, Canada will allow the US to access its markets for dairy, poultry, and egg products. Canada, too, will have access to new markets for refined sugar, sugar-containing products, and certain dairy products.

3. Environment

For the first time, a segment on environment has been introduced that makes sure the three nations do not lower their levels of environmental protection laws to attract trade or investment.

4. Intellectual property & Digital rights

The treaty extends copyright terms to 70 years beyond the life of the author, up from 50 years currently. Other provisions include ways to deal with the digital economy such as prohibiting duties music and e-books and protecting internet companies.

5. The Sunset Clause

Under this clause, the deal must be reviewed every six years, during which the parties can choose to extend the terms of the agreement for 16 years.

3. Trade Tariffs

The updated trade pact continues to eliminate most tariffs, making trade duty-free. New provisions facilitate free flow of goods and improve technical barriers for Canadian exports within the CUSMA region. Canada now has “de minimis thresholds” for express courier import shipments of C$ 150 for duties, and C$ 40 for taxes “at the point or time of importation”.

4. Labor & Dispute Settlement

A three-member labor panel has been formed to address labor violations in a time-bound manner. The CUSMA will also focus on quick and transparent expedition of state-to-state dispute settlement process.

5. Gender, Culture & Indigeneity

To ensure gender equality and women’s economic empowerment, provisions under CUSMA ensures no employment discrimination is based on gender. The updated agreement ensures the country’s cultural diversity and unique identity is maintained, and protects over 660,000 Canadians working in industries such as publications, broadcasting, film, music, books and so on. Canada also retained the policy flexibility for indigenous peoples and their businesses.

Reactions

NAFTA 2.0 has evoked severe reactions in Canada, with many lawmakers expressing concerns over provisions that allow US veto rights on future Canadian trade pacts with other nations.

Questions were also raised on the safety and quality of these American dairy products, with dairy farmers pointing at Canada’s gold standards in the world in the industry. Currently imported milk must meet Canadian health and safety standards. However, there is no such requirement for farms, leading for many in the industry to question the use of genetically engineered hormone that increases milk production in cows in US dairy farms.

Canada’s dairy industry has also claimed it may end up losing C$ 100 million because of CUSMA.