USMCA deal preserves healthy free-trade relations, yet unresolved tariff issues loom

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Negotiators from Canada and the U.S. emerged from more than a year of often-acrimonious talks with a proposed trade deal that largely preserves the free flow of commerce between the continent’s major trading partners.

For Canada, the negotiation was largely about mitigating damage from the protectionist agenda of U.S. President Donald Trump, who campaigned on a threat to rip up the quarter-century-old North American free-trade agreement.

In the end, Canada rebuffed Mr. Trump’s attempts to create new continental trade barriers by making some significant concessions in agriculture and other areas in order to ensure the automotive sector and other key industries maintain free access to the all-important U.S. market.

The tentative United-States-Mexico-Canada Agreement (USMCA) preserves a key dispute-resolution provision, access by Canadian companies to U.S. government contracts and contains no American-content requirement on Canadian-made vehicles. It also guarantees that Mr. Trump will not hit Canadian vehicles with tariffs for the foreseeable future.

And Canada’s concessions are narrow and targeted: 3.6 per cent of its protected dairy market opened to American farmers; stricter pharmaceutical patent rules that could raise the price of prescription drugs; and a higher threshold for duty-free online purchases.

“Today, we are securing a higher standard of living, long into the future, for the people of Canada,” Prime Minister Justin Trudeau told reporters in Ottawa on Monday.

One major issue remains unresolved: U.S. tariffs are still in place on Canadian and Mexican steel and aluminium, with no indication when negotiations to lift them will conclude.

And stricter rules on the auto industry will disadvantage the third USMCA partner, Mexico, while potentially making it harder for the continental sector to compete internationally.

But the consensus on the day after the proposed deal was that North American trade had avoided the worst outcome, with most of Mr. Trump’s protectionist demands either watered down or dropped entirely.

The agreement capped a dramatic 13-month negotiation, in which Mr. Trump hammered Canada with tariffs, assailed Mr. Trudeau in personal terms and repeatedly threatened to end free trade between the two countries entirely – pushing bilateral relations to a nadir.

In the end, it came down to an intense weekend in which a bevy of Canadian officials – Foreign Minister Chrystia Freeland, Ambassador to the U.S. David MacNaughton, chief negotiator Steve Verheul, along with Mr. Trudeau’s top advisors, Katie Telford and Gerald Butts – were holed up in Mr. Trudeau’s office across from Parliament Hill.

Via video link and telephone, they negotiated with U.S. Trade Representative Robert Lighthizer; Jared Kushner, Mr. Trump’s son-in-law; and other American officials gathered in Mr. Lighthizer’s office near the White House.

As late as Saturday night, the Americans continued to insist that to keep Chapter 19 – the dispute-resolution system that the Canadians had long marked as their must-have in talks – Ottawa had to agree to water it down, said a senior official with knowledge of the talks. Canada refused, and by Sunday morning, Mr. Lighthizer had conceded to keep Chapter 19 intact.

Talks moved rapidly after that, with a shirt-sleeved Mr. Trudeau arriving in person at the office Sunday evening – and later summoning his cabinet to the building – to sign off on a deal.

On Monday, Mr. Trump credited the pressure he applied on Canada through steel and aluminium tariffs, and the threat of levies on autos, for getting an agreement. And he confirmed that he would keep metals tariffs in place.

“Without tariffs, we wouldn’t be talking about a deal. Just for those babies out there that keep talking about tariffs,” Mr. Trump said at a news conference in the White House Rose Garden on Monday.

And he said Canada and Mexico would have to agree to quotas to get the metals levies lifted.

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Three U.S. sources in government and industry said that there have been discussions on the tariffs between Canada and the United States, but no conclusion.

People involved in and briefed on the closed-door talks pointed to several key moments over the past year that ultimately led to the deal.

One was a major change of strategy that Canada made in January. Up until then, Ottawa had adopted a policy of fighting back on principle against all of Mr. Trump’s protectionist demands. But at the Montreal round of talks, government and industry sources in both countries have said, Canada tried to break a logjam over automotive content rules with a proposal of its own.

Instead of a requirement that all autos made in Canada and Mexico contain 50 per cent U.S. parts, Ottawa suggested, the rules could mandate that a certain percentage of the cars’ components be made in factories paying a specific wage threshold. Such a measure would still achieve Mr. Trump’s aim – driving auto jobs away from low-paying Mexico – but without damaging Canada with a U.S. content requirement.

The Americans were intrigued by the idea and soon adopted it, dropping their 50-per-cent content demand, the sources said. Mexico, meanwhile, was unhappy with the idea, and resisted it for the next seven months.

Another key moment came over the summer, when Mexico and the United States cut a deal to overhaul NAFTA and threatened to proceed without Canada if there was no deal. It was there that Mexico made its key concessions – agreeing to the tougher content rules for both autos and textiles.

Mexican Economy Minister Ildefonso Guajardo conceded in a television interview on Monday that the tough vehicle content rules could be seen as a reversal for his country. But he said he hoped that economic growth would compensate for these losses.

Mexico also agreed to a watered-down form of another protectionist American demand: A requirement that all three countries review a new trade deal in six years’ time and decide whether to renew it for another 16 years, make changes or terminate the deal 10 years later.

It wasn’t ideal, but it was an improvement over Mr. Trump’s original demand: A sunset clause that would have ended the deal in five years unless all three countries agreed to preserve it.

A senior Canadian official identified a third turning point. On Sept. 5, during a visit to Edmonton, Mr. Trudeau made an unusually pointed comment during an interview with CHED radio: Chapter 19 was his red line because Canada needed protection from Mr. Trump’s caprice: “We know we have a President who doesn’t always follow the rules as they’re laid out,” he said.

It was also a risky move. Mr. Trump had previously erupted after the Prime Minister told a Group of Seven news conference in June that Canada would not be pushed around by the United States.

But the Canadian official said that, up until the Edmonton interview, the Americans had seemed unpersuaded that Canada was really serious about defending the provision. But Mr. Trudeau’s words – at odds with his usual practice of avoiding direct criticism of Mr. Trump – sent a message to Washington that Ottawa would not budge on that point.

For a month, the two countries negotiated almost continuously. Mr. Trump repeated his threat to bring in auto tariffs. And he set a deadline of Monday to send text of a deal to the U.S. Congress.

Now, it is up to Congress to pass the proposed deal. This is not expected to happen until sometime next year, after mid-term elections that could radically change Congress’s composition and decisively swing it to the Democrats. The outcome of that vote is far from certain.

But Mr. Trump signalled, at least, that his wrath with Canada was done – at least for the moment.

“The only problem with Justin is that he loves his people and he’s fighting hard for his people,” he said. “It got a little bit testy in the last couple of months … but I think Justin’s a good person who’s doing a good job.”