16 October 2018

US-Mexico-Canada Agreement creates opportunities and challenges

The recently signed US Mexico Canada Agreement (USMCA) to replace NAFTA removes a source of uncertainty for business investment heading into 2019 according to David Watt, Chief Economist, Canada at HSBC Canada. However, Canadian exporters hoping to initiate or expand trade in light of USMCA should also consider taking into account the ever-evolving global trading environment.

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"There are both more opportunities and more challenges," says Mr. Watt. "Canada has a free trade deal with the EU [Comprehensive Economic and Trade Agreement], is in the process of approving free trade with many Asian nations and now has USMCA as well. Canadian firms have many opportunities to benefit from lower trade barriers. However, they must step up and take advantage. There are still lingering competitive challenges to overcome."

Mr. Watt points out Canada and Mexico will still have a resolution framework for an investor-state dispute settlement mechanism through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the replacement for the Trans-Pacific Partnership after the US pulled out of the agreement.

However, he believes NAFTA worked better for Mexico compared to USMCA given concessions in some sectors, such as for the automotive industry, under the new rules of origin.

"Nonetheless, reduced trade uncertainty fits well with our view that an investment recovery is likely to contribute positively to overall GDP growth in the remainder of 2018 and 2019, following a contraction in 2017," adds Mr. Watt.

For the US, he says, the newly agreed rules of origin for the auto sector will only start to be phased in from 2020 onwards. As a result, they are not likely to have much impact on production in the near term and will only gradually begin to affect investment decisions as auto manufacturers plan for the future.

In addition, Mr. Watt adds, many of the USMCA intellectual property provisions are closely aligned with CPTPP, such as the extended pharmaceutical patents and longer copyrights which hew closely to CPTPP and the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union.

According to the Canadian government USMCA will reinforce the strong economic ties between the three countries and support well-paying middle-class jobs for Canadians.1

Canada's federal government says the agreement provides key outcomes for Canadian businesses, workers and communities in areas such as labour, environment, automotive trade, dispute resolution, culture, energy, and agriculture and agri-food. It also recognizes the importance of progressive and inclusive trade and includes language on gender and Indigenous peoples' rights. Key points identified by the Canadian government include:2

Facilitating trade in goods

The original NAFTA eliminated virtually all tariffs between Canada, the US and Mexico with very a few exceptions. USMCA maintains these benefits and ensures the vast majority of USMCA trade will continue to be duty-free.

Dispute settlement

When it comes to disagreements, USMCA continues to offer Canada legal avenues for recourse that are the same as NAFTA including:

  • Preserving the use of binational panels to resolve disputes on countervailing and anti-dumping duty matters, which is critically important to preserving market access outcomes and defending Canada's interests in trade remedy cases.
  • Preserving the state-to-state dispute settlement process of the original agreement, and to improve elements of this process including with respect transparency and expediency.

Autos

The revised automotive rules of origin require higher levels of North American content to incentivize production and sourcing in North America. Specifically:

  • An increase in the USMCA regional value content threshold for cars from 62.5 per cent to 75 per cent;
  • Stronger content requirements for core car parts, such as engines and transmissions;
  • A 70 per cent North American steel and aluminum requirement; and
  • A new labour value content provision requiring that 40 per cent to 45 per cent of a car producer's activities – i.e., costs of manufacturing, assembly, R&D and information technology – be carried out by workers who earn at least US$16 an hour.

The Canadian government believesthe new agreement has the potential to generate increased automotive production in North America, including in Canada, as well as additional sourcing opportunities for Canadian parts producers.3

Labour

USMCA includes a robust chapter on labour, which will be subject to dispute settlement. It aims to level the playing field on labour standards and working conditions in the USMCA region and contains commitments to ensure national laws and policies provide protection for fundamental principles and rights at work.

Environment

A comprehensive environment chapter, subject to dispute settlement, aims to level the playing field by ensuring parties do not lower their levels of protection to attract trade or investment. It also introduces new commitments to address global environmental challenges such as illegal wildlife trade, illegal fishing and the depletion of fish stocks, species at risk, conservation of biological diversity, ozone-depleting substances and marine pollution.

Government procurement

Canada and the US will retain access to each other's procurement markets, including at the sub-federal level, through their obligations under the WTO Agreement on Government Procurement (GPA).

Intellectual property

Parties agreed to an updated, comprehensive chapter on intellectual property, with obligations on copyright and related rights, trademarks, geographical indications, industrial designs, patents, data protection for pharmaceutical and agricultural chemical products, trade secrets, and intellectual property rights enforcement.

Agriculture

USMCA will preserve existing agriculture commitments between Canada, the US and Mexico, and help bring together an already highly integrated industry. While securing several beneficial outcomes for agriculture Canada agreed to some concessions on dairy.

While Mr. Watt says the impact of the USMCA agreement won't likely be felt until 2019, he adds, "We must watch measures of business confidence closely in coming months."

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  1. Summary Backgrounder: United States-Mexico-Canada Agreement ­ http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/usmca-aeumc/summary-sommaire.aspx?lang=eng
  2. Summary Backgrounder: United States-Mexico-Canada Agreement ­ http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/usmca-aeumc/summary-sommaire.aspx?lang=eng
  3. Summary Backgrounder: United States-Mexico-Canada Agreement ­ http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/usmca-aeumc/summary-sommaire.aspx?lang=eng

Disclaimers

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

Certain of the products and services offered by HSBC and its subsidiaries and affiliates are subject to credit adjudication and approval. This document does not constitute an offer to provide the services and products described and the provision of such services and products remains subject to contract.

Issued by HSBC Bank Canada ("HSBC")

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