Lack of USMCA ratification a nail biter for Canadian businesses

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A lot has happened since Canada and its neighbours reached a deal for the new United States-Mexico-Canada Agreement (USMCA) on trade, but one thing has not happened – no country has ratified the agreement yet. And Canadian companies with cross-border interests have had to live with the uncertainty that creates.

“There’s definitely some concern that it won’t get ratified,” says Matthew Stewart, director of economics for the Conference Board of Canada.

“There are a bunch of moving parts to this, and they’re all interrelated,” says Jesse Goldman, partner in international trade and investment at Borden Ladner Gervais (BLG) law firm in Toronto.

USMCA was agreed to informally on Sept. 30, 2018, after tough and often acrimonious negotiations that began in mid-2017. The agreement was signed last November by all three countries, but it does not take effect until it is ratified, which none has done.

Experts say it is still likely that the agreement will be ratified eventually, but there are political and economic stumbling blocks. Each country has its reasons for taking its time.

The biggest impediment is the continuation of tariffs imposed by U.S. President Donald Trump on steel and aluminum imports to the United States.

The President used a controversial clause dealing with national security, commonly called Section 232, to slap tariffs of 25 per cent on steel and 10 per cent on aluminum from Canada and Mexico. Canada and Mexico say these tariffs are illegal.

Mexico’s new government under socialist reformer Andres Manuel Lopez Obrador has indicated that it will not even look at ratifying USMCA until its congress reconvenes Sept. 1. Even then, Mexico says it will not ratify until the steel and aluminum tariffs have been lifted.

Canada is equally unhappy, with Foreign Minister Chrystia Freeland saying on March 25 after meeting with U.S. Trade Representative Robert Lighthizer, “The existence of these tariffs for many Canadians raises some serious questions” about ratification. Transport Minister Marc Garneau has said that the tariffs are “a serious impediment to us moving forward on what is the best trade deal in the world.”

The U.S. Congress is not in much of a hurry to ratify, either. “There are hurdles to overcome,” says Brian Kingston, vice-president, policy, international and fiscal at the Business Council of Canada.

Mr. Kingston, who recently visited legislators on Capitol Hill, says that, in addition to the tariffs holding up ratification in Mexico and possibly Canada, there are obstacles in Washington, too.

The most high-profile roadblock is concern among members of the new Democratic-majority House of Representatives that the labour and environmental provisions in USMCA are not strong enough to bring about the change they seek.

“They want Mexico to implement labour reforms and they want more enforceability on the environmental commitments [in the agreement],” he says.

“They also have concern with biologics. The U.S. got Mexico and Canada to agree to a higher level of data protection than under NAFTA.” The North American free-trade agreement, which precedes the USMCA, is still in force, until the new deal is ratified.

USMCA shields new biologic drugs from competing cheaper generic drugs for at least 10 years, up from the current protection of eight years in Canada and five in Mexico. But some Democrats in Congress want to lower the threshold to seven years, so cheaper generics can get to market faster.

There is also the general idea in Congress that there’s no need to rush. “I think the Democrats don’t want to just hand Trump a victory,” Mr. Stewart says.

This go-slow approach might be exacerbated now that the report by special counsel Robert Mueller has been tabled and appears to remove the allegation that Mr. Trump colluded with the Russians before his 2016 presidential election. The Mueller report’s conclusions and the President’s statement that he has been “completely exonerated” puts the Democrats in a position where it might be even more difficult to hand the Trump administration a win.

Tariffs are a drag on the Canadian economy because the United States is our largest export market for steel, and our steel represents nearly 17 per cent of U.S. steel imports, Mr. Stewart says. Canada also provides the United States with about half of its annual aluminum needs.

The U.S. economy is roaring, so Canadian exports there continue to be strong. A stumbling block is that the United States has proposed to end tariffs by replacing them with quotas limiting the amount of steel and aluminum Canada can export there.

“You can’t agree to that in a business, limiting how much business you can do,” Mr. Kingston says.

While NAFTA remains in effect until USMCA is ratified, Mr. Trump has threatened to “tear up” the earlier agreement, which would have North American trade revert to bilateral and other trade rules that existed before a continent-wide deal.

Tariffs and the question of which trade rules are operative are less a problem than the lingering uncertainty over when and if USMCA will get ratified, says David Detomasi, associate professor of international business at Queen’s University’s Smith School of Business in Kingston.

“The actual impact of tariffs themselves is not the worst. It’s the symbolism, the idea that trade relations might be getting worse,” Dr. Detomasi says.

“They may not sign until the stars are all aligned,” Dr. Detomasi warns. But that’s not the end of the world either, he says.

“My guess is that for now it will be business as usual under the old agreement. One thing people tend to not notice about trade is that it’s often made out to be a bigger deal than it really is,” he says.

“People think free trade is some kind of magic elixir but it’s not true. Free trade makes life easier in a lot of ways, but there are still tariffs on a lot of goods and services and the world’s not going to end.”