The USMCA agreement is signed. But the trade picture for the auto sector is far from clear in the months and years ahead
This fall has been a very busy period for Canadian trade negotiations.
After close to 18 months of negotiations NAFTA 2.0 or the United States -Mexico-Canada Agreement (USMCA) as President Trump has christened it, trying to underscore that the agreement is not NAFTA when it fundamentally is a slightly updated NAFTA.
After a tense few days the deal was finally agreed upon by all three countries late in the evening on September 30th, which provided the requisite 60 day review period prior allowing the agreement to be signed prior to the new Mexican president, Andres Manuel Lopez Obrador on December 1st.
So we have a new NAFTA agreed upon and it was formally signed at the meeting of the G2O Summit in Buenos Aires at the end of November.
Now that the agreement is signed, the next challenge for the agreement becomes the ratification of the agreement in all three countries.
Realistically neither Canada nor Mexico pose a challenge in this regard but — oddly — it is in the United States where the process to ratify the NAFTA faces its most difficult hurdle as a result of the U.S. mid-term elections on November 6th.
You will recall that the Democrats regained majority control of the House of Representatives. The Democrats — who have been traditionally the less reluctant of the two parties to embrace free trade and trade agreements have another reason, beyond their traditional stance, not to ratify the USMCA and that is simply because the agreement represents a fundamental Trump achievement and a fulfillment of an election promise.
While there is a very slight possibility that there will be a push to ratify USMCA in the current “lame duck” session, this option is a very remote one.
The more likely timeline for ratification is some after mid-March, because under U.S. trade promotion authority the International Trade Commission is required to undertake a detailed analysis of the economic impact of any trade agreement within 105 days after the agreement is signed.
It is not, however, an absolute requirement that Congress wait for the ITC results before they vote, but that has been the tradition because otherwise there is no real purpose in undertaking the economic analysis if you are not going to consider it.
Regardless, when Congress does decide to consider the USMCA, one has to wonder how contemptuous the President will become, if the Democrat-controlled House of Representatives decides to give him a hard time on the ratification of the deal.
The long and the short of it is that we are not out of the woods yet, as there remains a possibility that the President becomes perturbed with the Democrat stonewalling of the deal, which could result in the President throwing up his arms and terminating the existing NAFTA deal — leaving everyone to start all over again. What’s the likelihood that this will happen? Who knows, but it remains a possibility.
The other deal that was ratified by the Canadian government that pretty much flew under the radar this fall was the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) that received Royal Assent on October 25, 2018.
As such, with Australia coming on board as well, there was the requisite majority of CP-TPP members to move the trade agreement towards implementation at the end of this year. Thus on December 30th of this year the CP-TPP will be implemented.
The long and the short of it is that we are not out of the woods yet, as there remains a possibility that the President becomes perturbed with the Democrat stonewalling of the deal, which could result in the President throwing up his arms and terminating the existing NAFTA deal — leaving everyone to start all over again
What does this mean for the Canadian automotive industry?
Unbeknownst to most Canadians, and to probably most in the industry as well, securing the USMCA and more importantly securing the CP-TPP will eventually create an environment in Canada in which all manufacturers and distributors currently in the marketplace are competing from a level playing field for Canadian consumers. This level playing field has only taken 50 years to achieve!
However, when all of our trade agreements have been fully implemented the 6.1 per cent most-favoured nation tariff will be brought down to zero for virtually all of the vehicles currently being sold in Canada.
Trade agreements provide clear benefits for Canadian consumers, and when you consider that Canada now has Canada-EU Comprehensive and Economic Trade Agreement (CETA) and now a CP-TPP with Asia providing unparalleled access to both Europe and Asia, that the U.S. does not have — it provides Canadian business with a significant opportunity to grow their businesses internationally at a time when our trade relations with our neighbour to the south are becoming increasingly strained.
Oddly, the newly negotiated USMCA has put a time limit (16 years) on the terms of the agreement while requiring vehicle manufacturers to make Herculean efforts to significantly alter their global supply chains to meet the increased Rule of Origin requirements under the agreement.
That fact and other provisions built into the agreement such as the provisions to have 40 per cent of the vehicle built in jurisdictions with an average wage of $16 USD per hour, means that the USMCA will become one of the few trade agreements where consumers actually pay more for their vehicles as a result.
And what of the tariffs on steel and aluminum that were implemented earlier this year on both Canada and Mexico as a “national security” measure? Will these be eliminated? Who knows? And if they are eliminated will they be replaced by quotas?
Neither tariffs nor quotas make any sense under a free trade agreement. That said, it is much fairer description to call the USMCA a “managed” trade agreement as opposed to a “free” trade agreement.
