New trade deal increases American sway over Canada

The great vociferous North American trade negotiations are finally over, and while the deal could still be derailed by the coming November mid-term elections in the United States, it’s very likely that the United States-Mexico-Canada Agreement (USMCA) will be the new framework for conducting trade on the continent.

There has been a lot of ink spilled as to whether this was a good deal or not. But anyone who expected Canada would somehow emerge with a better deal than what we had is unaware of reality.

Canada needed a deal much more than the Americans given our trade dependency. It’s good that we now have a deal with a longer-term sunset clause (potential abrogation within 16 years) and a dispute settlement mechanism. Destructive tariffs on the auto sector have been avoided and the agreement is trilateral. In the end, Canada made some minor concessions on supply management and the de minimis cross border retail threshold and everyone was all smiles. But behind the smiling we must take a realistic assessment of our trade relationship with the U.S. because there has been a major ground shift.

The old agreement (NAFTA) was a vision of North American trade that despite having “free trade” in its name was never really unfettered free trade but a trade management framework. Nevertheless, names are important and the fact that it was presented as a free trade agreement (and North American) indicated a big picture view that superseded the interests of the three countries. While American interests dominated NAFTA, the U.S. was diplomatic enough to publicly view it as a partnership to help grow economies in a cooperative framework.

The name switch to the USMCA is quite significant, first because it eliminates the term free trade and second because it emphasizes specific national interests by listing the three countries—with the U.S. being first. This is clearly an “America First” agreement. Essentially, the purpose of the USMCA is to first promote the economic and trade interests of the U.S. within the North American and global trade environment and place the economic interests of its partners in second place.

Even with an agreement, the Americans have already signalled they may still impose tariffs on Canada when it suits their purposes—the maintenance of tariffs on steel and aluminum is the clearest indication of this. While a dispute settlement mechanism remains in place, it’s difficult to see how effective it will be given any tariff measures justified in the name of national security.

The Chinese reaction, that this agreement is a “hegemonic action” by the U.S., is pretty close to the mark given that the new agreement makes some interesting institutional changes designed to enhance America’s already strong influence with its North American trade partners.

First, 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 it remains to be seen if this will be a diplomatic courtesy or evolve into a right of veto by the Americans.

Second, there’s 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. Of course, one immediately wonders how long it will be before the Americans hint that our market set exchange rate is too low and favours our exports and provide direction on what we should do. 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.

So, this agreement preserves much of what was in NAFTA and also creates several new dimensions to the playing field. There has been a major shift in the American view of what a trade agreement means and the extent to which the U.S. is willing to play hardball to get what it wants as recent negotiations so clearly illustrate. How much of this shift is a function of the Trump administration, and how much reflects a permanent change, will be crucial to Canada’s economic future.