Key Takeaways
- The era of North American free trade is coming to an end, with the USMCA potentially being reworked or replaced with separate deals between the US, Canada, and Mexico.
- Canada should prepare for a significantly different trade relationship with the US, with potential changes to duties, tariffs, and trade agreements.
- The US is likely to make tough demands for concessions from Canada and Mexico, with the threat of US withdrawal from the agreement on six months’ notice.
- Canada must use its negotiating power to settle outstanding issues, including US tariffs on steel, aluminum, auto parts, and softwood lumber.
- The future of North American trade is uncertain, with potential implications for the financial markets and the economy.
Introduction to the End of North American Free Trade
The report on the United States-Mexico-Canada Agreement (USMCA) sent to Congress by the US Trade Representative has signaled the end of the era of North American free trade. The report and subsequent comments from the US Trade Representative, Jamieson Greer, indicate that even if the USMCA survives in some form, there will be significant demands for concessions from Canada and Mexico, backed by the threat of US withdrawal from the agreement. This shift in approach is largely driven by President Donald Trump’s hostility to the concept of North American free trade, which he has expressed on several occasions.
The Future of USMCA and its Implications
The future of USMCA is uncertain, with the possibility of it being reworked or replaced with separate deals between the US, Canada, and Mexico. The US is considering breaking up the three-way free-trade agreement and moving towards separate deals instead. This would have significant implications for Canada, which would need to navigate a new trade landscape. The Canadian government should prepare for a future with substantially reworked trading arrangements with the US, which could include managed trade with quotas in key sectors. The USMCA-compliant goods, such as auto parts, may still be able to enter the US duty-free, but duties on Canadian autos, steel, aluminum, copper, and other goods are unlikely to change while the talks continue.
Uncertainty and Volatility in Trade Relations
The volatility of President Trump’s trade agenda, with its ever-shifting priorities, makes it impossible to predict where the trade negotiations are heading. This uncertainty is likely to affect the financial markets, as investors and businesses struggle to navigate the changing trade landscape. The US Supreme Court’s decision on President Trump’s emergency tariffs under the International Emergency Economic Powers Act is also uncertain, but it is clear that President Trump will not agree to bind US duty rates under any deal with Canada or forego the use of tariffs for national security reasons.
Substantive Issues in US-Canada Trade Relations
There are several substantive issues that need to be addressed in the US-Canada trade relations, including US tariffs on steel, aluminum, auto parts, and softwood lumber. Dealing with cyber and border security, as well as supply-managed dairy products, are also key issues that are specific to Canada and the US. The Canada-US talks may also cover key defense issues, such as the North American Aerospace Defence Command, production sharing, and procurement. These are sensitive areas, but they are closely intertwined with trade. Canada must use every bit of muscle to settle these outstanding issues and develop clear, proactive ideas about what a future deal or deals should look like.
A New Era in North American Trade
The once-heralded North American free-trade ideal is history, and Canada-US relations will proceed mostly on a bilateral basis, consisting of managed trade with quotas in key sectors. The outcome could be an agreement of reduced scale, replaced by what is essentially a US-centric trading system, far different from the three-way partnership that has been in place since the North American Free Trade Agreement (NAFTA) came into effect over 30 years ago. It is critical that the Canadian side develops a clear understanding of what a future deal or deals should look like, rather than reacting to diktats from the US when trade negotiations resume. This will require significant skill and negotiation power from Canada to keep USMCA alive in some way and to secure a favorable trade agreement with the US.