While CUSMA or USCMA has been extensively covered in news since 2018, there is still a lack of clarity about what it means, and how exactly it differs from the NAFTA agreement. The NAFTA (North American Free Trade Agreement) was, until recently, the trade deal agreed upon by Canada, Mexico and the United States. However, the demand to renegotiate took precedence based on various concerns and doubts raised by the economists, trade specialists and the public.
The switch to the current agreement, called CUSMA or USCMA (Canada–United States–Mexico Agreement), was formally initiated by President Donald Trump. After months of highly publicized negotiations, the three countries signed the agreement at the Buenos Aires G20 Summit in 2018. With terms agreed upon, each country has to ratify the trade deal.
The three countries now need to start implementing the deal within their own markets. In June 2019, Mexico has officially ratified CUSMA. Canada and the U.S are still in the process, with the United States Government facing inner conflicts and the Canadian Government requiring a lengthier tabling process than the other two countries.
Where does this leave Canadian businesses now? The short answer is that CUSMA has not yet been implemented in Canada. NAFTA is still being enforced while the ratification processes from the remaining countries continue. However, there are a few basics about the upcoming agreement that all Canadians should be aware of.
CUSMA or USMCA?
Depending on the country of your residence, the agreement will be referred to differently. The C (for Canada) comes first in Canadian English, while USMCA is used in the United States, as it puts U.S first. Earlier press releases by the Canadian officials may have led to some confusion by referring to the agreement as USCMA. To make it even more confusing, the deal is referred to as T-MEC in Mexico, though less frequently. Canada now officially uses CUSMA because Canada must come first in any treaty names, as per the Canadian law. However, informally the agreement is often being called “the new NAFTA” or “NAFTA 2.0”.
What CUSMA means for Canadians
A trade deal between two or more parties allows them to agree on a common framework for import laws, duties, taxes, and tariffs on the goods that are sold between them. Deals like CUSMA inevitably have benefits and drawbacks for each country involved. We’ll break down what CUSMA will mean for you.
Automotive industry: Many Canadians were troubled when the United States Government proposed a 25% tariff on Canadian made cars. This huge tariff would have spelt disaster for the Canadian economy. Thankfully, this was avoided during CUSMA negotiations.
Instead, there will be zero tariffs on cars made with 75% North American parts. Additionally, 30% of the manufacturing must pay at least $16 USD to workers, and increase to 40% by 2023.
Increasing the qualifications for zero tariffs from 62% to 75% North American parts is meant to stimulate the economy. More parts will be manufactured and sold within North America, to avoid spending in the foreign markets. Paying car manufacturers a minimum of $16 USD per hour will stimulate middle class spending and thereby the economy. Additionally, the increased cost of labour will move some manufacturing from Mexico to Canada, creating new jobs.
Drawbacks: Car prices may increase. Sourcing 75% of automobile pieces from within North America will force companies to reduce their cost-cutting practice of ordering foreign parts. Logistically, it could also be very complicated to find all the parts needed in one market. This could backfire if companies decide the 2.5% penalty tariff on non-qualifying cars is worth it.
Steel and Aluminum: In May 2018, the U.S announced a tariff of 25% on Canadian steel and 10% on Canadian aluminum. During the heated exchanges between the two countries the U.S cited national security threats as their reason for the tariff. Canada rejected the justification, and then put their own retaliatory tariffs in place.
Canada purchases 49% of the steel that the U.S produces. Canada also exports 76% of the steel it produces to the U.S. These unprecedented tariffs limited the growth of the steel industry. Under CUSMA, this tariff has been lifted.
Benefits: The elimination of the steel tariff will bring an end to the damaging effects on the Canadian economy, and channelize growth.
Drawbacks: As part of the tariff act, the U.S cited that the amount of foreign steel that passes through Canada as Canadian steel was unacceptably high. While in favour of removing the tariff, some steelwork professionals in Canada actually agree. They worry that the elimination of the tariff will sweep the larger issue under the rug.
Dairy: The CUSMA agreement finally settled the dairy dispute between the US and Canada. The specifics of the disagreement are a little complicated. Put simply, the U.S produces a kind of dairy product called ultrafiltered milk which is largely used only in Canada. Most dairy imports to Canada face a high tariff, but ultrafiltered milk was not yet developed during the original NAFTA agreement so it entered Canada duty-free.
In 2016 the Canadian Government developed a new class of dairy called Class 7 which included the ultrafiltered milk and other high protein dairy products. Canada uses a supply management system, so they were able to place a lower price on Class 7 products. This encouraged Canadian dairies to produce their own high protein products, as they could now offer them more cheaply than the U.S dairies to dairy processors. The U.S dairy exports to Canada sharply declined. Under CUSMA, Class 7 has been eliminated allowing dairy producers in the US to have unimpeded access to 3.29% of the Canadian dairy market.
Benefits: This deal was vital in avoiding a steep auto tariff and steel tariff. Additionally, Canada currently is not producing enough butter so a reintroduction of American dairy could help fill the gap in supply. You might find better deals when doing your groceries.
Drawbacks: The intended development of high protein dairy processing plants in Canada may slow down. If you, like many Canadians, make a point of purchasing Canadian only dairy, you will notice more U.S dairy in products like cheese, powdered milk and baby formula. This will mean less profit for Canadian dairy farmers.
Digital Trade: When NAFTA was negotiated in 1994, businesses and consumers did not rely on the internet nearly as much as they do today. NAFTA was never intended to deal with the implications of digital trade. Today, digital trade is an important factor in our economy and a daily part of most North American lives. Online shopping, streaming services, and social networks like Instagram and Twitter are all part of digital trade.
Under CUSMA, there are several new and major provisions for this sector. For example, internet companies cannot be held liable for the content their users create. Extra duties beyond sales tax are prohibited on music, e-books, videos and other digital products that are transferred across borders. New data localization laws mean businesses cannot be required to store data domestically.
Benefits: Canadians will not have to pay any extra fees on digital products. If you buy a song on itunes, for example, you will only pay the price of the song and your local sales tax. Additionally, there is now a precedent for major streaming companies like Netflix to pay a sales tax, contributing to the Canadian economy.
Drawbacks: A major drawback for some Canadians are the data localization changes. For example, British Columbia and Nova Scotia both use data localization to ensure that local laws are being applied to the data of their citizens. CUSMA prohibits this, meaning companies will no longer be required to keep sensitive data like health information within Canada.
Intellectual Property: Copyright laws are different in Canada, the U.S and Mexico, and this will continue to be the case. However there are several new provisions that the three countries will now conform to.
The copyright on an author’s intellectual property has been extended from 50 years after their demise to 70 years, meaning a work will be protected for an additional 20 years after the creator has passed. In the drug field, protection on patents has been extended to 10 years. Once a new drug or medication has been developed, generic versions of the drug can’t be produced until the protection period has finished.
Benefits: Content creators and authors may find this in their favour, as their works will stay out of the public domain for even longer past their death.
Drawbacks: Works will be restricted from the public domain for even longer than before. This could increase educational costs by millions of dollars and force the academic institutions to pay for access to vital materials. The increased patent on drugs and medications also means that cheaper generic alternatives won’t be available to Canadians for a full decade after the drug has been developed.
The terms can seem daunting, but the CUSMA trade deal has not changed most parts of NAFTA that Canada was comfortable with. Some feel that CUSMA does not do enough to improve on NAFTA, but tabling and tweaking from all parties involved continues. There is also a 16 year Sunset Clause — meaning that after 16 years the terms of the trade deal expire and new ones will be made. Additionally, the deal will be reviewed every six years. These clauses ensure that Canada can renegotiate based on the needs of the country. Tariffs on major parts of the Canadian economy will be lifted and trade relations with the U.S and Mexico have improved. While not everything in CUSMA is a win, many parts of it will directly benefit Canadians.