CUSMA one year in

CUSMA, the Canada-United States-Mexico Agreement, also known as USMCA (United States-Mexico-Canada Agreement) in the U.S. and TMEC (Tratato Mexico-Estados Unidos-Canada) in Mexico, turned one year old on July 1, 2021.

A year ago it replaced the venerable NAFTA (North American Free Trade Agreement), which had been in effect since 1994, and needed to be modernized. Changes included new chapters on the environment and e-commerce; new provisions on labour; some changes for copyright; tougher rules of origin for the automobile industry; increased access for dairy; a new origin certification process; and, an expiry date.

Canadian businesses welcomed its implementation, as we all recall the relationship with our biggest trading partner was at times tumultuous under the 45th president of the United States.

Business as usual?

With no huge changes, it’s pretty well business as usual. So what can be observed after one year?

The impact on the trade of goods, if any, is not easy to gauge as so many other factors came into play thanks to the pandemic. Many sectors, like hospitality, tourism, textiles and traditional retail have been badly hit, while others like food, construction, personal care and e-commerce have been booming.

With more time, and as the economy recovers, we will be able to see if CUSMA was an improvement over NAFTA or not, and which industries were most affected. In particular, it will be very interesting to see the impact of the new rules of origin on the North American automobile industry.

The big picture

Looking at the big picture, some issues stand out, with some positives and some negatives. Regarding labour, a complaint by the U.S. Trade Representative against Mexico about potential violations of worker protections in the automobile industry tested the new rules. It was resolved quickly, as the first trial of the rapid-response mechanism created under CUSMA to quickly investigate and resolve labour complaints raised by any of the three nations. It’s generally felt that such complaints may target Mexico more than Canada.

U.S. tariffs

Looking at Canadian issues, U.S. tariffs on Canadian steel and aluminum have been lifted, but the softwood lumber dispute is still there, with no solution in sight.

A significant squabble is building around dairy. American producers complained that we are denying them fair access to the Canadian market.

The dispute is about how Canada allocates access to its supply-managed dairy market. Import quotas are issued every to producers, processors and retailers.

The U.S. is complaining that a large number of these quotas are allocated  to processors, and that access is denied to U.S. farmers. During the CETA negotiations with the European Union, E.U. negotiators had complained about this too, but Canada held its own and no change was made to the allocation system.

The U.S. has asked for a panel to look into this issue and this could put dairy alongside softwood lumber as the most prominent trade-related sore spots in the Canada-U.S. relationship.

Car clash

Another potential disagreement is brewing on automobiles. It has been reported that the U.S. is clashing with Canada and Mexico over rules of origin and how to calculate the regional value content (RVC). These new rules of origin increased the RVC for assembled vehicles from 62.5 percent to 75 percent and are being phased in over several years.

The U.S. insists on a stricter way of counting the origin of some core parts in the overall calculation, which makes it harder to qualify. Canada and Mexico are considering filing a formal complaint, which would create a CUSMA dispute panel to settle the issue.

Buy America(n)

Then ‘Buy America’ and ‘Buy American’ potentially stand in the way of Canadian companies benefitting from the upcoming huge U.S. infrastructure bill. They sound so much alike that it’s easy to confuse them, but they are different and have specific requirements.

‘Buy American’ applies to direct purchases by U.S. federal government agencies valued over US$10,000. ‘Buy America’ applies to purchases of iron, steel and other manufactured products permanently incorporated into infrastructure projects. These projects must be undertaken by U.S. States and municipalities with funds granted by American government entities.

Our diplomats are trying to convince their American counterparts to change this to Buy North America instead, but they still have a long way to go