The United States – Mexico – Canada Trade Agreement: Implications for Canada

Introduction

Trade relations between the key North American countries have been a priority for the region’s economic advancement for many decades. The USA, Canada, and Mexico had cooperated under several separate international trade agreements that favored the countries’ economic development, labor markets, and the overall level of standards of living of the North American population. In 1994, three North American countries, including Canada, the United States, and Mexico, signed the North American Free Trade Agreement (NAFTA). This document signified the creation of the largest free-trade region on a global scale that provided multiple economic and developmental benefits for the countries (Government of Canada 2020). In 2018, the three countries modified the provisions of NAFTA according to the requirements of time and new emerging sectors of the economy by signing a new United States – Mexico – Canada Trade Agreement (USMCA). The new agreement has been declared based on long-term negotiations between the countries that have led to the establishment of trilateral regulations of trade between the three countries. Since USMCA incorporates the interests of all parties, the current report reviews the agreement’s positive and negative implications for Canada.

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The Importance of USMCA to Canada

As a country with a well-developed international trade system, Canada is particularly interested in favorable and win-win relations with the countries of the North American region. While the USA remains one of the most influential partners in the economic realm, Canada prioritizes establishing deals with the USA on the most beneficial terms. Although NAFTA of 1994 met the main requirements and expectations of the three countries in terms of free trade regulations, there were new requirements imposed by the latest developments in the global economy. In particular, USMCA’s updates “seek to address 21st-century trade issues and promote opportunities” for the populations of the three countries (Government of Canada 2020, para. 2). Although NAFTA had provided a solid basis for Canada’s economic development, the new agreement is particularly important to maintain and improve the quality of economic cooperation with Mexico and the USA.

The regulations for free trade between the countries imply simplifying the rules of cooperation and improving the opportunities for the parties’ manufacturing, trade, investment, and intellectual property. In 2018, the establishment of a trilateral agreement with Mexico and the USA was crucial for Canada. This importance was validated by the need “to avoid the possibility of Mexico getting a better deal, and to avoid a hub-and-spoke pattern of investment, with the United States as the hub” (Condon 2018, 31). Thus, the clarification of the overall framework of international relations inside the trade region was pivotal for Canada’s continuous economic growth while maintaining long-term win-win relationships with the USA and Mexico.

In theory, the new USMCA trade agreement is aimed at significant improvement of the economy of Canada, its business, agriculture, and other sectors, as well as contributes to the growth of the quality of life of Canadians. The chapters of the USMCA trade agreement on intellectual property rights expand the regulations and provide more protection (International Trade Administration n.d.). In the agricultural sector, USMCA maintains zero-tariff treatment for Canada and enforces stricter regulations for agricultural production prices. More transparent financial regulations and easier cross-border financial services are also important provisions for Canada because they allow for more economic opportunities for businesses with fewer transition costs (International Trade Administration n.d.). Thus, theoretically, Canada significantly benefits from the modifications of NAFTA that have been outlined in the USMCA trade agreement.

Evidence demonstrates that some expectations have become a reality, and the current state of Canada’s economy has significantly improved. Indeed, as stated by the Government of Canada (2020), the previously obtained economic outcomes under NAFTA include total trilateral merchandise trade of approximately US$1.1 trillion. Furthermore, the current level of trade between Canada and the USA has increased twice in comparison to the rate of 1993; the trade rate between Canada and Mexico increase nine times within the same period (Government of Canada 2020). These indicators are expected to be maintained and even improved under the updated regulations of USMCA.

Overall, the Canadian government’s prioritization of the advancement in the sphere of small- and middle-size business validates the importance of the new trade agreement to the country. All the provisions in manufacturing, trade, and intellectual property rights protection sectors simplify cross-border transaction regulations and allow for Canadian business entities to freely grow and distribute their products to the North American countries. The strict standards and improved rules of cooperation provide growing small businesses and large economy sectors with an opportunity for sustainable and continuous growth. In such a manner, the population of Canada is expected to improve the standards of living and strive for prosperity and wellness.

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The Major differences Between USMCA and NAFTA for Canada

The requirements of time have imposed the need for modification of the regulations of NAFTA. The majority of the differences between USMCA and NAFTA apply to Canada due to the country’s active inclusion in the trade relations with Mexico and the United States of America. Firstly, as has been mentioned earlier in the report, the general establishment of inter-party relations has been modified. Indeed, the most significant organizational difference between NAFTA and USMCA is the type of relations between the countries. Under the provision of NAFTA, “the regional relationship consisted of two bilateral interactions on two very different borders, except those sectors in which supply chains have become integrated on a trilateral basis” (Condon 2018, 31). The new USMCA agreement was established based on trilateral cooperation, as proposed by Canada, to ensure fair distribution of the power of influences and economic opportunities for all parties.

Apart from the general relation-level difference, there are several other distinctive features related to specific sector regulations. Indeed, USMCA has successfully updated the provisions of NAFTA and introduced “new obligations for enhanced environmental policies and labor practices, curbing state-owned enterprises, and fostering digital trade” (Schott 2018, 1). Firstly, the exporting parties are not obligated to provide a formal certificate of origin, which was required under the regulations of NAFTA. USMCA allows for certifying origin using invoices or other informal documents that may be submitted by any party involved in the import-export procedure (International Trade Administration n.d.). Secondly, the level of de-minimis has increased, the cross-border service commitments, including “portfolio management, investment advice, electronic payment services,” expanded (International Trade Administration n.d, para. 2). Thirdly, within the realm of intellectual property, the period of copyrights has been prolonged from 50 years in NAFTA to 70 years in USMCA.

The changes in the sectors of the automobile industry and agriculture are the most significant. In particular, USMCA addresses the manufacturing of cars by restricting the opportunities for exporting resources from countries outside the North American region. The new USMCA agreement requires that “75 percent of a car or truck have content made in North America to qualify for tariff-free imports, up from the current level of 62.5 percent” (Schott 2018, 1). Moreover, 70 percent of the used aluminum and steel are required to be produced in North America. In addition, there is a new provision that demands that no less than 40 percent of automobiles are manufactured “by workers earning at least $16 per hour” (Schott 2018, 1). Finally, the differences in regulating dairy production and pricing for Canada are observed. Indeed, USMCA requires Canada to remove some pricing patterns and revise supply management. Thus, these differences imply both positive and negative effects on particular stakeholders within the economic system of Canada.

Winners and Losers in Trade Agreement Change in Canada

Since the new trade agreement is aimed at the improvement of the former regulations, the parties’ benefits are expected to outweigh the losses. However, since three countries are involved in the agreement, the interests of all of them are included, which might impede the prosperity and obtaining of growth opportunities by some stakeholders. As for Canada, multiple several other involved economic entities might be adversely impacted by USMCA. Some of the sectors that might be losing opportunities for advancement under the provisions of the new trade agreement are the automobile industry, agriculture, and digital trade. In particular, “the new content rules and minimum wage requirements will likely lead to a less competitive North American auto industry” (Schott 2018, 1). The increased costs of importing automobile products from Europe or Asia impose difficulties for alternative cooperation as well as minimizes the overall economic opportunities of Canada-China trade.

From the perspective of agriculture, there are some requirements set by USMCA that necessitate Canada to make changes to its supply chain management in some critical areas of agriculture. In particular, according to van Kooten (2020), the supply management procedures in the industries of producing peanuts, sugar, tobacco, and dairy must be reformed and industries compensated for complying with the USCMA requirements. Thus, the agricultural sector might be exposed to restrictions and significant changes under the new regulations. Such issues might impede the steady growth of Canada’s GDP, given the obstacles for agriculture and automobile industries.

As for the sector of intellectual property and digital trade, the benefit/loss outcomes are ambiguous. There is a vivid debate on the benefits and threats of the new trade agreement on the intellectual property sector in Canada. Many critics state that Canada has not achieved the anticipated results in the negotiations concerning intellectual property protection for Canadian businesses. It is claimed that under Chapter 20 of USMCA, the Canadian economy will be exposed to a significant increase in health care costs, limited creativity, and “and unfairly constrain online platforms” (Owens 2019, 4). However, the other side of the debate justifies the opposite, claiming that USMCA will ensure better intellectual property protection and will encourage more advanced development in the creativity area (Owens 2019). Thus, there is a positive implication for the intellectual property sphere implied by USMCA.

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Regardless of the possible losses outlined above, there are multiple beneficiaries of the newly created trade agreement. Primarily, the simplified trade regulations benefit small- and middle-size businesses. The workers of Canada will also win due to the improved labor regulations and the economic development in the majority of industries; similarly, Canadian consumers will benefit from price regulations (Zhao, Devadoss, and Luckstead 2020). The modernized trade agreement also outlooks the environmental issues, which is why the environment will also win, and the population of Canada will benefit in terms of health, increased standards of living, and sustainable wellbeing.

Conclusion

In summation, as the overview of the USMCA trade agreement demonstrates, the importance of free trade with the USA and Mexico for Canada is significant. Canada’s interest is validated by the need to ensure that the distribution of economic influence between Mexico and the USA is fair to the economy of North America. Moreover, as the differences between NAFTA and USMCA demonstrate, NAFTA provides more consistent regulations for specific sectors of the economy and boosts the economic growth of Canada by reducing cross-border transaction costs, improving investment terms, and strengthening digital trade. At the same time, there are several regulations under USMCA that jeopardize the GDP growth level for Canada and imply production and trade costs increase within the automobile, dairy, and some other sectors. Nonetheless, given the international trade improvements under the regulations of USMCA, many beneficiaries will obtain positive effects, which will exceed the increased production costs. In particular, the improved opportunities for small- and middle-size businesses, workers, entities involved in health care and digital trade, as well as the environmental protection sector will benefit from USMCA.

References

Condon, Bradly J. 2018. “From NAFTA to USMCA: Two’s Company, Three’s a Crowd.” Latin American Journal of Trade Policy, 1 (2): 30-48.

Government of Canada. 2020. “A New Canada-United States-Mexico Agreement.” 

International Trade Administration. n.d. “USMCA vs NAFTA Major Differences Between USMCA and NAFTA in Key Chapters.” 

Owens, Richard C. 2019. “Who’s Afraid of the USMCA? Why the Intellectual Property Provisions in the US Mexico Canada Agreement are Good for Canada and its Trading Partners.” Macdonald-Laurier Institute. 2019.

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Schott, Jeffrey J. (2018). “For Mexico, Canada, and the United States, a Step Backwards on Trade and Investment.” Peterson Institute for International Economics. 

van Kooten, G. Cornelis. 2020. “Reforming Canada’s Dairy Sector: USMCA and the Issue of Compensation.” Applied Economic Perspectives and Policy, 42 (3): 542-558.

Zhao, Xin, Stephen Devadoss, and Jeff Luckstead. 2020. “Impacts of US, Mexican, and Canadian Trade Agreement on Commodity and Labor Markets.” Journal of Agricultural and Applied Economics, 52 (1): 47-63.

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NerdyRoo. (2022, February 27). The United States – Mexico – Canada Trade Agreement: Implications for Canada. Retrieved from https://nerdyroo.com/the-united-states-mexico-canada-trade-agreement-implications-for-canada/

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NerdyRoo. "The United States – Mexico – Canada Trade Agreement: Implications for Canada." February 27, 2022. https://nerdyroo.com/the-united-states-mexico-canada-trade-agreement-implications-for-canada/.

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NerdyRoo. 2022. "The United States – Mexico – Canada Trade Agreement: Implications for Canada." February 27, 2022. https://nerdyroo.com/the-united-states-mexico-canada-trade-agreement-implications-for-canada/.

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NerdyRoo. (2022) 'The United States – Mexico – Canada Trade Agreement: Implications for Canada'. 27 February.

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