Abstract: USMCA is a pending free trade agreement between Canada, Mexico, and the United States. Premier Scott Moe is positive for the USMCA deal as Saskatchewan needs access to the No. 1 trading partner. Compared to NAFTA, the agreement gives the U.S. more access to Canada's $19 billion dairy market, incentivizes more US production of cars and trucks, increases environmental and labor regulations, and introduces updated intellectual property protections. The Trump administration had built on the previous work done on the Trans-Pacific Partnership, a comprehensive, 12-country trade agreement representing roughly 40% of the value of goods and services produced worldwide, which US President Trump pulled out from. The pact was designed to boost exports, remove tariffs and non-tariff barriers, open access to more markets and bring forward transparency in trade rules. Canada would have given American farmers access to roughly 3.25% of its dairy industry, instead of 3.6% under USMCA, while enjoying the increased market access to the US, as in the free trade agreement with EU (which 100% is allowed). There’s also the formal new requirement that Canada notifies the U.S. and Mexico of any intent to negotiate with non-market economies (i.e. China and India) 3 months before it can sign a free trade agreement with China or India. In addition, a committee will be set up to monitor the macroeconomic and exchange rate policies of the three countries to deter competitive devaluation. Impact on SK Line Pipe exports will be about C$26.4 million, yet according to MP Melanie Joly, USMCA means continued market access security for $15.3 billion in Saskatchewan’s exports to the U.S. and stability for workers. The Canada West Foundation modelled the economic impact of the agreement without the U.S., and surprisingly, found that Canada did better with the Americans out of the agreement. Saskatchewan can seek pro-Canadian lobbyists to change certain clauses. It should also actively explore trading with other countries, esp. within the CPTPP framework. In short, USMCA provides certain confidence and certainty and reduces transaction costs. With CPTPP ratified, Saskatchewan may enjoy wider and deeper benefits, and it should be ready for both the coming challenges and the new opportunities.
Key Words: USMCA, Saskatchewan, trade, CPTPP
Many people may have heard of USMCA, especially around October 1, 2018. USMCA is a pending free trade agreement between Canada, Mexico, and the United States. It is also referred to as "NAFTA 2.0", in order to distinguish it from its intended current predecessor North American Free Trade Agreement (NAFTA), which came into effect on January 1, 1994.. It is the result of the 2017–2018 renegotiation of NAFTA including threats of tariffs by the United States against Canada in addition to the possibility of separate bilateral deals instead. The member states informally agreed to the terms on September 30, 2018, and formally on October 1, with the final ratification and implementation pending. The present agreement was the result of more than a year of negotiations Withdrawing from the Paris Agreement, ceasing to be part of negotiations for the Trans-Pacific Partnership, and significantly increasing tariffs with China, President Trump reinforced that he was serious about seeking changes to NAFTA[i].
As 55% of exports from SK and 85% imports into SK are with the US, “preserving that kind of trading environment with that kind of partner is of crucial importance,” Premier Moe said[ii]. With the above in mind, this is absolutely true.
II. General Situation
Some of the highlights of this agreement include the U.S. getting more access to Canada’s protected dairy market; no U.S. tariffs on cars Canadian and Mexico export unless it exceeds 2.6 million units a year; Canada and Mexico are both raising their duty-free levels with the former going from $20 to $150 and the latter from $50 to $100; and Canada will extend the patent protection for an important class of prescription drugs called biologics from 8 to 10 years, a move some have criticized could result in increased health-care costs by delaying the cheaper generic copies into the market. Canada was also able to keep the dispute resolution mechanism Chapter 19 intact, which allows companies to request arbitration when they feel their products have been unfairly hit with anti-dumping or undo duties[iii].
Someone commented that this agreement is in every respect worse for Canada than the status quo, which is reiterated by the Wall Street Journal. “If you look at the details on this, we made new concessions,” Garnett Genuis, MP of Fort Saskatchewan, said. “There were major outstanding issues for Canada that were not addressed. It is worse than the status quo but better than no deal at all.” [iv]
According to Premier Scott Moe, he was positive for the USMCA deal as Saskatchewan needs access to the No. 1 trading partner. However, he was concerned about the non-market clause as he was in China for a week and he cherished trade with China as export to China tripled in the last decade. He is also heading for India, which is included in the clause as well. Nevertheless, he said it depended on how you would interpret a free trade country as we in Canada could not even have a free market across the country[v].
III. Comparison to Other Trade Agreements
Compared to NAFTA, the agreement gives the U.S. more access to Canada's $19 billion dairy market, incentivizes more US production of cars and trucks, increases environmental and labor regulations, and introduces updated intellectual property protections.
NAFTA took effect in 1994 and was designed to last indefinitely; USMCA will take effect in 2020, be reviewed every six years and could expire in 2036, or be extended to 2052.
Starting in 2020, 30% of vehicle production must be done by workers earning an average production wage of at least $16 per hour. That’s about three times the pay of the average Mexican autoworker. In 2023, the production percentage rises to 40%. This could result in job production moving from Mexico to the U.S. 70% of the steel and aluminum used in vehicles will have to come from the U.S., Canada or Mexico, and automakers can qualify for zero tariffs if 75% of their vehicles’ components are manufactured in the three countries (under NAFTA it was 62.5%)[vi].
With USMCA, Canada will give away to the US $560 million worth of dairy products or 3.5% of Canada’s total diary market.
If the U.S. imposes new auto tariffs, Mexico and Canada would be able to export up to 2.6 million passenger vehicles to the U.S. annually without any tariffs. Exports above that amount could be subject to tariffs. Pickup trucks built in both countries would be completely exempt from the tariffs.
For the first time, law enforcement officials can stop suspected counterfeit or pirated goods in any of the three countries. Harsher punishments will be added for pirated movies online and civil/criminal penalties for satellite/cable signal theft.
U.S. Trade Representative Robert Lighthizer acknowledged that, in negotiating the new deal with Canada and Mexico, the Trump administration had built on the previous work done on the Trans-Pacific Partnership. The Trans-Pacific Partnership was a comprehensive, 12-country trade agreement that Obama signed in 2016 after seven years of negotiation. The pact was designed to boost exports, remove tariffs and non-tariff barriers, open access to more markets and bring forward transparency in trade rules.
Countries in the agreement included Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore and New Zealand – all representing roughly 40% of the value of goods and services produced worldwide. Trump discarded TPP on his third day in office. However, while the packaging may be different, roughly two-thirds[vii] of the United States-Mexico-Canada Agreement, or USMCA, can be traced back to language in the now-discarded Trans-Pacific Partnership, a trade deal negotiated by Trump’s predecessor.
Under USMCA, Canada would give away 3.5% of Canada’s total $16 billion dairy market, while under Trans-Pacific Partnership Canada would have given American farmers access to roughly 3.25% of its dairy industry. Some parts of the new agreement were not in the TPP. Among them are provisions dictating the percentage of an automobile that must be built from parts made in North America and mandating that that up to 45% of an auto must be made by workers earning at least $16 an hour[viii].
“The original TPP…was fairly location-neutral in terms of investment, the idea was to let companies invest in whichever of the TPP countries made the most sense for them,” Edward Alden, a senior fellow at the Council on Foreign Relations in the US, said. Alden also says. “If your goal was to build strong relations with allies, and particularly the allies the US is going to need as competition with China intensifies, this probably wasn’t a good strategy. The US has broken a lot of crockery here, and left a lot of bad feelings in Canada, in Mexico, South Korea, we’ll see about Europe.”[ix]
One material difference between the TPP and USMCA appears to be this latter term which under the TPP was 70 years from publication, and USMCA appears to have rejected a provision that was included in the TPP about language interpretation to make a balance. USMCA nevertheless not only recites the language of existing free trade agreements on Section 512 of the DMCA, but adds a new provision pressed by the Internet Association and others to reflect the kind of protection against liability found under Section 230 of the CDA, which maintains an unaccountable status quo and makes addressing internet harms infinitely more difficult[x].
Under TPP, that timeline for biologic drugs to enjoy exclusive data rights was five to eight years, matching current US law, while the one under USMCA is extended to 10 years, regarded a great thing for US pharmaceutical innovators, leaving Americans, Canadians and Mexicans to face higher prices at the drug counter as the clause delays the generic cheaper copies into the market.
1. Dispute Resolution Mechanism
Though Canada is fortunate in keeping the dispute resolution mechanism in Chapter 19, it’s difficult to see how effective it will be given any tariff measures justified in the name of national security.
2. Non-market Economy Clause
There’s the formal requirement that Canada and Mexico notify the U.S. of any intent to negotiate with non-market economies (i.e. China and India) and notify them three months before it can sign a free trade agreement with China or India. Also, when one country signs an agreement with a non-market economy, the other two countries can choose to remain in the agreement or they can withdraw with a 6-month notice[xi]. While this may put Canada and Mexico into an awkward situation, the US can take advantage of it.
3. Exchange Rate Monitoring
There’s also the section that establishes a committee to monitor the macroeconomic and exchange rate policies of the three countries ostensibly to maintain market-oriented exchange rates and refrain from competitive devaluation. While there are no doubt fiscal and monetary policy links between Canada and the U.S. already, this more formal process raises questions about the independence of our fiscal and monetary policy and the role of the Bank of Canada. With the US dollar a popular international exchange medium, should Canada follow the US monetary policy while the Canadian dollar is not so popular and widely used?
4. Sunset Clause
As thousands of businesses would plan their affairs around the new trade patterns with zero tariffs, the impact is so huge that leaving the agreement would be too damaging and disruptive to imagine, especially for small economies like Canada and Mexico. Article 34.6 of the new deal still provides for withdrawal on six months’ notice, with the agreement continuing for parties that don’t withdraw. The new Article 34.7 says in addition that the agreement expires after 16 years (note why 16 is not certain yet) unless each country agrees to extend it. There’s also a compulsory review after six years, at which point countries will indicate if they want to extend for another 16 years. If they don’t agree to this, there will be a review every year, after each of which they shall have the opportunity to renew again for another 16 years. There’s the obvious possibility that in years seven to 15 of the new deal’s life an equally mercantilist and combative U.S. president will hold off on extending the agreement’s life, thus recreating the uncertainty—such as we have seen in the last two years—that will persuade many businesses that in North America the U.S. is the only sure place to invest.[xii]
V. Possible Effects
1. Positive Effects
As SK relies heavily on trade with the US, a deal to maintain certainty in conducting trade is important, as stressed by Steve McLellan, CEO of the Saskatchewan Chamber of Commerce. Secondly, Chapter 19, which has protected Canada’s interests for many times, is kept intact.
There are also some changes regarding online purchases and biological pharmaceutical drugs. While the new $150 duty-free limit for online purchases and $40 sales tax exemption[xiii] may put small Canadian retailers at a competitive disadvantage, the writer believes this is good news for online consumers, and this clause is not to blame if it is treated the same way in the US as it is in Canada. This may be also applied to the case of patent protection of biological pharmaceutical drugs form 8 years to 10 years as more money may be spent on pharmaceutical drugs research, though this may also mean more expensive drugs for Canadians[xiv]. The data-exclusivity extension included in the USMCA essentially means American drug companies will be able to sell their biologics in Canada for a full decade, delaying the entry of cheaper generics by two years, and this could cost taxpayers "tens of millions" annually. Nevertheless, Patented Medicine Prices Review Board policy changes would likely be rolling out simultaneously with the USMCA extension, which could take "a lot of bite”[xv]
2. Negative Effects
First, the deal doesn’t remove the US tariffs on steel and aluminum, which was used by Trump as a negotiating tool, but Mr Lukiwski said Trudeau broke his promise on this. United Steel Workers of America local 5890 (USW) president Mike Day said this is disappointing news for the 2,000 members working at Regina Evraz steel mill[xvi]. Also, there is going to be three burdens for SK: the US tariff, the carbon tax and the compensation from the federal government, which has to be recouped. Premier Moe said that Section 232 of the Trade Expansion Act of 1962 needs to be addressed, and with pipelines and other business included, this means more than Evraz.
Secondly, the new trade deal will shrink the dairy product industry and hurt 165 dairy producers in Saskatchewan. On top of other trade agreements, SaskMilk General Manager Peter Brown said the United States has about 9% market access. Once the system is entrenched, Brown anticipates $200 million of Canada’s dairy industry will flow to the United States annually. Taking over Canada's industry wouldn’t even solve their problem. So it’s going to be a very tiny impact for them, but a large impact for Canada as a smaller country. While the U.S dairy farmers have more access to the Canadian dairy market (note that the Americans have opened up 3% of the dairy market while the Canadians opened up 10%)[xvii], the Canadian market and Canadian dairy farmers have absolutely no increased access to the US. 3.6% of the dairy market was offered up and Canada has vowed to compensate dairy farmers for any losses they might incur. “When the Harper government negotiated the free trade agreement with the European Union, we gave the European Union access to about three percent of Canada’s dairy market, primarily in Québec,” said Tom Lukiwski, the Conservative Member of Parliament for Moose Jaw-Lake Centre-Lanigan. “In return, Canadian dairy farmers had access to the entire European Union.”[xviii]. Many politicians claim to support free trade, but are opposed to Canadian consumers having more access to goods produced abroad. While the federal government – again, is doling out tax dollars as corporate welfare to domestic dairy farmers to compensate them for the marginal loss in market share they will experience, Canadians have to pay the dairy farmers, through higher taxes, in order to achieve just slightly freer trade in the dairy sector.
Thirdly, there are the non-market economy clause and the sunset clause which may deter Saskatchewan from furthering trade with China (especially to reach a free trade agreement) and India and make the future uncertain so that Saskatchewan businesses dare not engage themselves in a longer term.
Fourthly, the exchange rate monitoring clause makes Canada and Saskatchewan more in line with the US in monetary policy, which may trigger higher mortgage payments and higher rents following higher interest rates in the US.
VI. Estimate of Net Benefit/Loss on Saskatchewan
The United States was the primary export destination for Saskatchewan in 2017 with 55% ($16 billion) of all merchandise exports. Exports to Asia represented 28% ($8 billion) of all merchandise exports, which slightly dropped from 32% ($8.4 billion) in 2016[xix].
The writer has calculated the following with the data mostly from 2017 unless otherwise mentioned[xx]:
l Impact on Line Pipe exports with the assumption that a 25% tariff on steel will cause a 12.5% decrease of US imports: 211479*0.125 = C$26,434,875
l Impact on dairy products assuming the decrease of dairy exports to the US will be 5%[xxi] based the percentage of exports similar to the percentage of dairy cows with the latter not so different from that of 2015: 378876271*(27.1/959.6)*0.05 = C$534,990.98
l Impact of the potential price rise after a retaliatory tariff of 10% on the retail goods imported from the US assuming a price rise of 5%:
1750 million*0.05 = C$87.5 million
It can be said briefly that the US tariff on steel will have more impacts on Saskatchewan directly. Nevertheless, according to MP Melanie Joly, USMCA means continued market access security for $15.3 billion in Saskatchewan’s exports to the U.S. and stability for workers[xxii]. As Canada ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnerships (CPTPP), Canada will be positioned to take market share from places like Japan and Malaysia[xxiii]. Therefore, it seems that the final net result will be promising, and this will be strengthened if SK and China can engage more in their future trade deals.
VII. Adoptable Measures
There are basically things Saskatchewan can do.
First, Saskatchewan can seek pro-Canadian lobbyists to change certain clauses. With the Democrats in charge of the Congress, this may be easier to achieve. Secondly, Saskatchewan should actively participate in trading with other countries, esp. within the CPTPP framework.
The CPTPP is about opening new and growing markets, and using better ways to increase and diversify trade with the possibility of encompassing China, South Korea, Columbia and Japan, and it is not in confliction with USMCA as it is neither a bilateral trade negotiation nor a new negotiation. The Canada West Foundation modelled the economic impact of the agreement without the U.S., and surprisingly, found that Canada did better with the Americans out of the agreement[xxiv].
For Saskatchewan, where trade with Asia is important, the CPTPP gives exporters preferential access in 10 markets that rim the Pacific Ocean, six of them in Asia, including Japan, Vietnam and Malaysia, with China reportedly suddenly showing interest in joining the CPTPP. Given that Canada has only one trade agreement in Asia, gaining the equivalent of six new agreements at once is in itself a huge win. Also, Canada’s Finance Minister Bill Morneau and the Trade Minister Jim Carr will be visiting China on December 11[xxv]. According to Trudeau, nothing in the agreement can prevent Canada from developing its trade relationship with China. With 3/4 of GDP exporting to the US, the federal government has realized that diversity is very important, and enhancing trade with China will be done in the future in a open, practical and thoughtful way. CPTPP represents hundreds of millions in potential tariff savings alone. And thanks to the Americans having been part of the original negotiations, there was more market share on the table as countries made concessions with the Americans at the table.
Benefits of the CPTPP go beyond tariff reduction. The trade facilitation rules, rules of origin, and transparency provisions will also help reduce the cost of doing business with member countries. Given the current climate and the rising trend towards protectionist trade policies around the world, the ratification of the CPTPP will be a welcome opportunity for Saskatchewan’s agriculture sector and an important factor in reaching the targets in the Saskatchewan Plan for Growth[xxvi].
USMCA may be worse than NAFTA, but it is better than nothing achieved. The impacts of USMCA on Saskatchewan are yet to determine. However, with CPTPP ratified, Saskatchewan may enjoy wider and deeper benefits, and it should be ready for both the coming challenges and the new opportunities.
[i] United States–Mexico–Canada Agreement, as shown by https://en.wikipedia.org/wiki/United_States%E2%80%93Mexico%E2%80%93Canada_Agreement.
[ii] David Baxter: Steel tariffs, American dairy and cheaper online shopping; what USMCA means for Sask., Global News, Oct 1, 2018, please click the following link to read the interesting article: https://globalnews.ca/news/4504520/sask-steelworkers-disappointed-tariffs-remain-despite-new-trade-deal/.
[iii] Conservative MP calls USMCA “a bad deal” for Saskatchewan and Canada, 620 CKRM, Oct 6, 2018, please take time to click the following link to read the interesting article: https://www.620ckrm.com/2018/10/06/saskatchewan-conservative-mp-not-a-fan-of-the-usmca/.
[iv] David Boles: Conservative MP calls USMCA “a bad deal” for Saskatchewan and Canada, 620 CKRM The Source, Oct 6, 2018, please take time to click the following link to read the article: https://www.620ckrm.com/2018/10/06/saskatchewan-conservative-mp-not-a-fan-of-the-usmca/.
[v] John Gormley: The Impact of the USMCA on Saskatchewan, CJME/CKOM, Oct 3, 2018, https://soundcloud.com/980cjme_650ckom/gormley-the-impact-of-the-usmca-on-saskatchewan-october-3rd.
[vi] George Petras: From NAFTA to USMCA: Key changes on trilateral trade pact, USA TODAY, https://www.usatoday.com/story/news/2018/10/01/comparison-nafta-and-usmca-trade-agreements/1487163002/.
[vii] Michael Collins: New trade deal with Canada, Mexico borrows heavily from pact that Trump abandoned, USA Today, Oct 3, 2018, please click the following link to read the article: https://www.usatoday.com/story/news/politics/2018/10/03/usmca-new-trade-deal-canada-borrows-pact-trump-abandoned/1498224002/.
[viii] Michael Collins: New trade deal with Canada, Mexico borrows heavily from pact that Trump abandoned, USA Today, Oct 3, 2018, please click the following link to read the article: https://www.usatoday.com/story/news/politics/2018/10/03/usmca-new-trade-deal-canada-borrows-pact-trump-abandoned/1498224002/.
[ix] Tim Fernholz: Donald Trump’s new NAFTA is the blueprint for his trade war with China, Quartz, Oct 1, 2018, https://qz.com/1409072/trumps-new-nafta-and-the-anti-china-tpp/.
[x] Neil Terkewitz: The TPP and USMCA: The Good, the Bad & the Ugly, Medium, Oct 3, 2018, https://medium.com/@nturkewitz_56674/the-tpp-and-usmca-the-good-the-bad-the-ugly-well-actually-only-the-good-the-ugly-729dade68a8a.
[xi] Livio Di Matteo: New trade deal increases American sway over Canada, Fraser Institute, Oct 13, 2018, please take time to click the following link to read the interesting article: https://www.fraserinstitute.org/article/new-trade-deal-increases-american-sway-over-canada.
[xii] William Watson: “Six months’ notice” and The Art of the Squeeze, Fraser Institute, October 5, 2018, https://www.fraserinstitute.org/blogs/six-months-notice-and-the-art-of-the-squeeze.
[xiii] Carol Thomson: What The Proposed Trade Deal Means For Saskatchewan, Country 600 CJWW, Oct 1, 2018, please take time to click the following link to read the interesting article: https://www.cjwwradio.com/2018/10/01/what-the-proposed-trade-deal-means-for-saskatchewan/?from=groupmessage&isappinstalled=0.
[xiv] David Baxter: Steel tariffs, American dairy and cheaper online shopping; what USMCA means for Sask., Global News, Oct 1, 2018, please click the following link to read the interesting article: https://globalnews.ca/news/4504520/sask-steelworkers-disappointed-tariffs-remain-despite-new-trade-deal/.
[xv] Amy Husser: Will USMCA affect Canada's drug prices? Depends on what happens next, experts say, CBC News, Oct 2, 2018, please click the following link to read the interesting article: https://www.cbc.ca/news/health/usmca-pharma-drugs-prices-cost-1.4846421.
[xvi] David Baxter: Steel tariffs, American dairy and cheaper online shopping; what USMCA means for Sask., Global News, Oct 1, 2018, please click the following link to read the interesting article: https://globalnews.ca/news/4504520/sask-steelworkers-disappointed-tariffs-remain-despite-new-trade-deal/.
[xvii] Report: Retaliatory tariffs will negate USMCA export gains, Fruit Growers News, OCT 31, 2018
[xviii] David Baxter: Steel tariffs, American dairy and cheaper online shopping; what USMCA means for Sask., Global News, Oct 1, 2018, please click the following link to read the interesting article: https://globalnews.ca/news/4504520/sask-steelworkers-disappointed-tariffs-remain-despite-new-trade-deal/; David Boles: Conservative MP calls USMCA “a bad deal” for Saskatchewan and Canada, 620 CKRM The Source, Oct 6, 2018, please click the following link to read the article: https://www.620ckrm.com/2018/10/06/saskatchewan-conservative-mp-not-a-fan-of-the-usmca/.
[xx] Total Saskatchewan Exports to the U.S. by Product - 2017 (CAD Thousands), please check https://www.sasktrade.com/pages/appendix_a_b__c; Snapshot of Canadian Dairy Industry, 2015, https://en.wikipedia.org/wiki/Dairy_farming_in_Canada#Snapshot_of_Canadian_Dairy_Industry,_2015%5B3%5D.
[xxi] Saskatchewan dairy farmers caught in the middle of turbulent NAFTA talks, Global News, Aug 19, 2018, https://globalnews.ca/video/4417730/sask-dairy-exports.
[xxiii] Carlo Dade: Canada’s steel and aluminum industry, and the impact of U.S. tariffs, Canada West Foundation, June 1, 2018, please take time to view the article by clicking the link: http://cwf.ca/news/blog/blog-canadas-steel-and-aluminum-industry-and-the-impact-of-u-s-tariffs/.
[xxiv] Carlo Dade: CPTPP ratification a win for West, Winnipeg Free Press, Nov 5, 2018, https://www.winnipegfreepress.com/opinion/analysis/cptpp-ratification-a-win-for-west-499607091.html.
[xxv] Two Canadian Ministers Will Visit China Next Month to Promote Sino-Canada Trade, Global Times, Oct 18, 2018.
[xxvi] Jayme Gramlich: Comprehensive and Progressive Agreement for a Trans-Pacific Partnership presents opportunity for Saskatchewan, Sept 20, 2018, please take time to read by clicking https://www.saskatchewan.ca/business/agriculture-natural-resources-and-industry/agribusiness-farmers-and-ranchers/sask-ag-now/policy-trade-and-market-development/trans-pacific-partnership-agreement.