Canada agreed to a revised trade deal with the United States and Mexico on Sept. 30, 2018, ending months of uncertainty. The agreement—now called the United States-Mexico-Canada Agreement (USMCA)—was reached only a few hours before a deadline imposed by the U.S.
“While Canada made some concessions, the U.S. did agree to some of our country's demands,” says Dean Elliott, managing partner for BDO's Central group. “Nonetheless, the deal will have implications across many Canadian businesses.”
Industry impact
Here's an overview of the changes and some of the industries that are affected:
Canada has opened up a part of its agricultural market to the United States. American dairy farmers will be given market access of 3.59% to the domestic dairy market. Also, Class 6 and Class 7 milk categories will be eliminated six months after USMCA is. “Farmers who recently expanded will face some challenges. This isn't positive for the industry,” says Francois Bourgeois, BDO's National Crop & Livestock Leader. Canada will also provide new access for American-produced chicken, turkey, and eggs.
Canada won't be subject to tariffs on autos or parts as long as they stay below specified quotas. The quota of 2.6 million passenger vehicles annually far exceeds the current production level of about 1.8 million vehicles. Also, Canada agreed to increasing North American content requirements of 75% (up from 62.5%), and that 40% to 45% of a vehicle is made by workers earning at least US$16 an hour. Canadian auto and parts makers may benefit from these provisions.
The tariffs on Canadian aluminum and steel will remain in place as they weren't part of the NAFTA renegotiation.
The ceiling for not having to pay duties on goods purchased online or through mail order will increase to $150 from the current $20. This is good for small businesses and consumers, but not for retailers. Also, imported goods valued at less than $40 will be exempt from Canadian sales taxes, up from the current $20. Canada also agreed to end a policy that allows grocery stores in British Columbia to stock only B.C. wines.
Economic impact
News of a deal was well received by U.S. and Canadian investors. On Monday, the Dow Jones Industrial Average jumped 0.7% while the S&P/TSX Composite Index gained 0.2%. The Canadian dollar hit a four-month high, rising above 78 cents. The dollar was also helped by expectations of additional rate hikes due to less trade uncertainty. Both BMO and TD now expect the Bank of Canada to raise rates three times in 2019 instead of twice.
Other changes
There were some other concessions made by Canada and the United States:
The Americans initially wanted NAFTA to end every five years unless all three countries wanted an extension. Instead, the period will be 16 years if it isn't renewed or renegotiated. A review is required every six years, with the option to renew the deal for another 16 years or start renegotiations with a decade to reach a new agreement.
Chapter 19, the dispute resolution mechanism for countervailing and anti-dumping duties that Canada wanted to keep, will continue to exist. Chapter 20, the government dispute resolution mechanism, was also kept. Chapter 11, which allows companies from one country to sue a government if they think they've been mistreated, will be phased out.
Canada has agreed to extend the patent protection for biologic drugs to 10 years from eight. This will likely lead to higher costs for insurers and consumers. Canada also agreed to extend the term of copyright to 70 years after the creator's death, up from 50 years.
There's an added provision regarding trade agreements with non-market economies (those that don't operate under free-market principles), such as China. Essentially, one country will have the ability to influence another country's trade talks with non-market economies.
What's next
Prime Minister Justin Trudeau, U.S. President Donald Trump, and Mexican President Enrique Pena Nieto are expected to sign the agreement by the end of November. The deal also needs approval by the Canadian, U.S., and Mexican governments, which is likely to occur. USMCA is expected to go into effect at the beginning of 2020.
BDO is committed to helping inform and guide our clients through these monumental events. Throughout the negotiations, we will be providing regular updates on possible ramifications for your business.