Whether you call it USMCA, CUSMA, or NAFTA 2.0, North America’s new international trade agreement came into effect on Canada Day - amid a global pandemic that has caused significant disruption to trade across this continent and around the world. While the borders between Canada, the United States and Mexico have been closed to non-essential travel, trade has continued to flow - albeit slower than usual, where total trade over the 49th parallel fell by $23.4 billion in the month of April alonei.
While the pandemic has impacted almost every business across the country, it wasn’t COVID-19 alone that put Canada’s economy on its back foot. According to HSBC Bank Canada’s Chief Economist David Watt, Canada was already facing stiff economic headwinds, from declining oil prices and rising levels of household debt (now the highest in the G7) before the pandemic hit.
So, will a new trade deal help breathe much needed life into the three economies? And what does it mean for Canadian SMEs looking to grow their international trade footprint? Here are few major changes that will impact the way business is done in the North American corridor.
New chapter dedicated to supporting SMEs
SMEs are the backbone of the Canadian economy, employing 10.5 million people (90% of the private sector workforce). In 2017, 81% of Canadian businesses exported their goods to the US, with SMEs making up 97% of those businesses. In total that accounted for $149.5 billion in exportsii.
Under CUSMA, Chapter 25 is dedicated specifically to supporting SMEs throughout the agreement. This includes co-operation to increase trade and investment opportunities, such as a focus on promoting Canadian SMEs owned by under-represented groups, including woman and Indigenous people. Additionally, the agreement calls for ongoing SME dialogue which is open to SMEs from all countries to participate and provide their input to elected officials to help better implement and modernize the trade deal over time.
Lastly, the agreement creates a committee comprised of government officials from each country that focuses on SME issues. The committee will help Canadian SMEs identify opportunities in CUSMA so they can take full advantage of new provisions in the agreement, and to help exporters develop enhanced partnerships across the continent through seminars, workshops and webinars.
Greater competition for Canadian e-commerce businesses
In order to help facilitate trade of goods into Canada, CUSMA makes changes to the current de minimis. As of July 1, the de minimis exception for express courier shipments rises to $150 for duties and $40 for taxes and applies to goods from all countries, not just the US or Mexico.
In the past, Canadian consumers might think twice about buying outside of Canada to avoid fees and taxes, but this new rule will increase competition for Canadian e-commerce businesses selling domestically.
US farmers granted more access to Canadian dairy market
Canada’s dairy industry employs over 24,000 people and contributes $18 billion to the country’s economy annually. American farmers now have access to 3.6% of the Canadian dairy market that was previously only available to domestic farmers - a move many in the industry see as a potential job-killing maneuver. Some producers estimate the increased access to American competition could see the sector lose $240 million from its bottom lineiii
Recognizing concerns from the industry, the Canadian government has signalled it will offer some form of compensation to dairy farmers - but what this will exactly look like is yet to be determined.
What the new deal means for Canada’s auto sector
According to HSBC Bank’s Automotive Sector Head, Matti Suomalainen, the trilateral trade agreement will see more auto parts being manufactured in North America, tightening up the continent’s supply chain. For example, under CUSMA, 75% of the value of content used to build cars must be from North America – a large increase from the 62.5% required under NAFTA. This will likely result in a decrease in reliance on Asian and European supply chains for auto parts.
One provision in particular could prove favourable to Canadian auto part manufacturers. Under CUSMA at least 30% of a vehicle must be made by employees who earn more than $16 USD per hour, which will shift some manufacturing away from Mexico. While many say this clause will help keep auto parts jobs in Canada, this could spark a rise in vehicle prices.
Dispute mechanisms under the trilateral agreement and a sunset clause
Chapter 19, which allows Canada, US and Mexico to challenge each other's anti-dumping and countervailing duties in front of a panel, remains in place under CUSMA. Anti-dumping cases are when a country blocks the imports from another based on accusations of unfair trading practices. The US had sought to have this removed, which would have made it more difficult for Canadian organizations to mount their challenges in US courts.
The new sunset clause stipulates the agreement will expire after 16 years, and is subject to review every six years at which point the three nations will decide to extend it or not.
While CUSMA may not entirely rewrite the rules of Canadian international trade, it does bring with it new considerations and a refreshed need to understand their impact on cross-border business.Contact HSBC to find out more about how your business can prepare for and benefit from these new opportunities in the North American corridor.
iCBC.ca, June 4 2020, Canada's trade deficit doubled to $3.3B in April as COVID-19 walloped imports and exports
iiGovernment of Canada, Small and medium-sized enterprises
iiiCBC.ca, April 28 2020, Canada's dairy processors stand to lose $100M if USMCA takes effect July 1: senator
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