USMCA helps to calm North America’s pandemic qualms

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Two years ago, when the new North American free trade agreement was signed, no one could have foreseen a global pandemic and the toll it would take on the global economy.

But when the U.S.-Mexico-Canada Agreement came into effect on July 1, it was already playing one of its key roles in the Canadian economy: bringing stability to what is arguably one of the most open and intertwined exporting and trade relationships in the world.

“Our economic stamp is really a stable Canada in a stable North America,” says Drew Fagan, a professor of policy implementation at the Munk School of Global Affairs at the University of Toronto. “The pandemic has made all countries' economies less stable. The fact that we have that as a basis is helpful to us.”

The USMCA agreement may not have pushed free trade with our North American neighbours to the extent some might have liked, “but it didn’t push it backwards,” says Mr. Fagan, who is also a senior adviser at McMillan Vantage Policy Group and a senior fellow at the Canadian think tank Public Policy Forum.

“There is no major industrialized country as tied in with a single other market for trade as Canada is with the United States,” he says. “Canada looks to one foreign market as a share of its GDP [gross domestic product] for its products to a greater extent than any other major industrialized country.”

There has been much talk of diversifying into markets off the continent, Mr. Fagan says, and Canada has made inroads with the Trans-Pacific Partnership and trade agreements within the European Union.

But the United States, right next door, remains the “mother lode,” he says.

“As all countries grapple with the pandemic, for Canada its continued access to the United States was key to stabilizing things in the wake of the pandemic and maintaining as much normality as possible,” he says.

For Canadian exports, what’s normal means a heavy reliance on two key sectors: oil and energy and the auto sector.

Although the automotive sector took a massive hit from the pandemic closures, it is poised to benefit greatly from USMCA, says Flavio Volpe, president of the Automotive Parts Manufacturers' Association.

The automotive rules of origin measures under USMCA represent the first increase in local content required for tariff-free movement of goods for Canadian automotive in 25 years. It is expected to drive an incremental annual order of $6-billion to $8-billion in Canadian-made automotive parts and systems, from battery technology to stamped metal parts to complex plastic assemblies, Mr. Volpe says.

Canadian supplier firms with North American vehicle-assembly customers also operate 270 factories in the U.S. and Mexico, Mr. Volpe says.

Those Canadian-owned facilities south of the border stand to benefit from the increase in local content requirements for automobiles produced in those countries, which increased to 75 per cent under USMCA, up from 62.5 per cent under NAFTA, he says.

“The new export opportunity in the USMCA for suppliers is unprecedented in the 110-year history of the industry,” Mr. Volpe says.

The new rules of origin represent one of several areas of potential growth under the new agreement, says Trevor Kennedy, policy director at the Business Council of Canada.

There is also great potential to expand trade in agriculture and digital services, he says. Digital services, in particular, were not even part of previous agreements.

Service exports overall, including digital, have been growing at a pace of 5.7 per cent a year on average, compared to 4.4 per cent for merchandise. Service exports are comprised of any services offered by a Canadian firm or individual to clients in another country.

Digital services, offered to foreign customers in everything from online financial services to software platforms, are a rapidly growing sector in Canada.

“It really is a fast-growing area of our trade relationship,” Mr. Kennedy says.

Mexico as a whole represents an under-utilized market, he adds.

“When we talk about North America, usually we’re talking about Canada-U.S.,” he says. “We hope that as this agreement is fully implemented that Canadian companies can also take advantage of the Mexican market.”

Even before the pandemic, building North America as a globally competitive and resilient trade bloc was a priority, he says. Now it has greater urgency for all three countries.

“We’re just so integrated, and to achieve some of that security and resiliency we want, we’ll have to work together, and fortunately, there is a foundation for that in the agreement,” Mr. Kennedy says.

Another area that stands for improvement under USMCA is the potential for small- and medium-sized enterprises, which are under-represented in trade with the U.S., the largest economy in the world and our closest neighbour, he says.

A relatively small number of large Canadian businesses are responsible for the lion’s share of Canada’s trade, but there is a big push within the federal Trade Commissioner Service and Economic Development Canada to increase participation in North American and global trade.

“That would be a success story here – if we can bring our SMEs along with us to take full advantage of the agreement,” Mr. Kennedy says.

There is a host of resources and expertise available to help enterprises both large and small benefit from the new trade deal, he says.

Indeed, having access to markets is not the same thing as taking maximum advantage of those markets, notes Mr. Fagan.

“The challenge really for Canada isn’t so much the terms of USMCA as our competitiveness in the North American marketplace more generally, I think,” he says.

If the first era of free trade saw the rise of the auto sector and the second saw the rise of oil and energy, this next era is about services, Mr. Fagan says. Canada must take full advantage of the opportunities for growth in service-provision as the country transitions from a natural-resource-based economy to a more modern, balanced one, he says.

The list of Canadians enterprises exporting to the U.S. “is not as broad and deep as it should be,” he says. “There’s work to be done there.”