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From NAFTA
to CUSMA
The changes, the additions, and what
remains—executive summary
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full report
Key findings
The ratification of CUSMA, the new North American trade agreement, by all three parties would provide a sense of economic stability in the region. However, it will also have implications for Canada’s trade relations with countries outside the region.
The election of Donald Trump in the 2016 U.S. presidential election rattled Canadian exporters—not surprising given his attacks on the North American Free Trade Agreement (NAFTA) during the campaign. But in April 2017, after a near-constant stream of threats by him to tear up NAFTA, President Trump said that he was willing to renegotiate the deal.
The agreement, referred to in Canada as the Canada–United States–Mexico Agreement (CUSMA), is not yet in place, as it needs to be ratified by all three parties. A key step toward full adoption will be approval by the U.S. House of Representatives, which is not a sure thing. This is resulting in some lingering uncertainty, as Trump continues to threaten to pull the U.S. out of NAFTA if CUSMA is not ratified by the U.S. Congress.
If the deal is ratified by all three parties, this would provide a sense of economic stability in the region for at least six years, when it must be reviewed. However, the implementation of the deal would likely affect Canada’s trade relations, not only with the U.S. and Mexico, but also with other countries, and would influence Canada’s trade prospects for years to come.
A shaky deal
Given how heavily Canada’s export industries rely on the U.S. market, the stakes were high. In contrast with the negotiations that led to the Canada–United States Free Trade Agreement (FTA) in 1987, Canada’s focus this time around was not on the potential gains it could reap from the new deal. Rather, the primary goal was to safeguard existing NAFTA provisions.
On September 30, 2018, after 13 months of tough negotiations, Canada, the U.S., and Mexico agreed on a new North American free trade agreement. The deal was signed by the three countries on November 30.
Key elements of
NAFTA that stay
the same
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What stays the same?
What changes?
What’s new?
Canada managed to keep NAFTA’s dispute resolution mechanism for anti-dumping and countervailing duties (AD/CVD) and thus remains entitled to send final anti-dumping or countervailing duty determinations by the United States to a binational panel for review.
The preservation of cultural exemptions will allow the federal and provincial governments to maintain and adopt policies and programs supporting the creation and distribution of Canadian cultural content. While the cultural exemption was also applied to digital trade, the definition of cultural industries was not updated in the new agreement. The joint review of the deal, scheduled for six years from its entry into force, will provide an opportunity for the Canadian government to modernize this definition.
Trade dispute resolution mechanism
Cultural exemptions
Changes to key
NAFTA chapters
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The dairy,
poultry, and egg industries
Canada had to make some concessions on market access for products that fall under its supply management system. Under the new deal, U.S. exporters get greater access to the Canadian dairy, poultry, and egg markets through new tariff rate quotas (a mechanism that allows a set amount of specific products to be imported at a low or no duty). Soon after CUSMA was reached, the Canadian government pledged to compensate Canadian dairy farmers for losses they suffer as a result of the new accord.
The auto
industry
The new deal protects the North American auto industry—as NAFTA did, but with even stricter rules of origin. Those stricter rules will likely lead to increased input costs and auto prices. That could shrink the North American auto industry’s share of the global market as some production moves overseas to Asia or Europe. President Trump’s ongoing threat to impose a 25 per cent tariff on any vehicles imported into the U.S. may discourage auto companies from shifting production outside North America if they want to maintain their access to the large U.S. market.
Intellectual property
As Canada is a net importer of ideas, the Canadian government took a defensive stance in negotiations on intellectual property (IP). The U.S. administration sought, successfully, to obtain stronger IP protection under CUSMA. Meanwhile, Canada still managed to maintain key elements of its IP regime, such as its “notice and notice” approach to Internet service provider (ISP) liability. The impact of the CUSMA chapter on IP is debatable, and its effects may be felt only in the longer term.
New elements added
to CUSMA
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Indigenous
peoples
CUSMA does not include a separate chapter dedicated to Indigenous peoples, as Foreign Affairs Minister Chrystia Freeland originally proposed. However, the environment chapter recognizes the important role that Indigenous peoples play in the long-term conservation of the environment, sustainable fisheries and forestry management, and biodiversity conservation. In addition, the chapter takes into account the constitutional rights of Canada’s Indigenous peoples and includes a carve-out related to Indigenous harvesting of natural resources. The parties also agreed to include an exception in Chapter 32 (“Exceptions and General Provisions”) to adopt and maintain measures necessary to fulfill their “legal obligations to Indigenous peoples,” as long as the measures do not constitute “arbitrary or unjustified discrimination or a disguised restriction on trade.”
Gender non-discrimination and the environment
CUSMA includes new provisions on gender non-discrimination, and it converted NAFTA’s side letter on the environment into a full chapter. But the impact of the gender-non-discrimination provision will likely be limited. In particular, the “non-discrimination” statement included in Chapter 23 of the original deal reached at the end of September had been watered down by the time the agreement was signed on November 30. This watered-down version suggests that each party can choose whatever policies it considers appropriate to protect workers’ rights and is not obligated to conform to any supranational standards. On the environment side, the environment chapter does not include measurable pollution or greenhouse gas emission targets but does set out environmental protection and governance commitments.
Grace period
and exemption
for section 232 measures
The U.S. agreed to grant Canada a grace period of at least 60 days after it imposes any future measure under Section 232 (national security) of the U.S. Trade Act. Furthermore, a specified annual quantity of Canadian auto and auto parts exports would still be exempt from such actions should the U.S. decide to implement the Section 232 measure at the end of the 60 days. And light trucks would be fully exempt from any future 232 measures. This new provision provides some predictability in Canada’s trade relations with the U.S., as the specified quantity of autos that would be exempted is well above current levels of Canadian auto exports to the United States.
Article 32.10 (non-market economy clause)
Article 32.10 (also referred to in the media as the “anti-China” clause) states that “entry by a Party into a[n FTA] with a non-market country will allow the other Parties to terminate this Agreement on six month’s notice.” Prime Minister Justin Trudeau insists that his government is still committed to reaching some sort of freer trade agreement with China as part of its efforts to diversify Canada’s foreign trade. But this clause will likely pressure the Canadian government to avoid confrontation with the U.S. by pursuing free trade with China. In any case, recent frictions between Canada and China suggest that a free trade deal between the two countries is unlikely any time soon.
Review and term extension (sunset clause)
Under the clause, CUSMA will automatically terminate 16 years after its entry into force unless each party confirms that it wishes to continue the accord for another 16-year term. The joint reviews every six years will provide an opportunity for the three parties to modernize the agreement. But, if the review process does not allow for a renewed commitment by the three countries to extend the agreement beyond 16 years (or eliminate the sunset clause altogether), then uncertainty about the future of the agreement will increase as we get closer to the 16-year mark. This rising uncertainty would discourage long-term investments in Canada.
The investor dispute
settlement mechanism
The elimination of the Investor–State Dispute Settlement (ISDS) will allow Canada to operate without the risk of being sued through a system that was often seen by some as too favourable to the interests of foreign private investors. The removal of the ISDS mechanism also means that Canadian firms will no longer have access to an ISDS mechanism in any dispute with the U.S. government, while Canadian firms in Mexico will have to resort to the ISDS mechanism included in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Digital trade
The inclusion in CUSMA of a chapter on digital trade is meant to address some of the new economic realities emerging with the growing role of the Internet and digital technologies in the global economy. The chapter is based in large part on the CPTPP and its “Electronic Commerce” chapter. Among other things, the agreement indicates that any measure Canada takes on data or privacy must not be arbitrary, nor be unjustifiable discrimination or a disguised restriction on trade, and must be considered necessary to achieve the policy objective. Articles written by experts in information law and Internet and ecommerce law suggest that commitments under the agreement could limit the Canadian government’s options in the development of its national data strategy. Canada will need to work on, among other things, reconciling its need for the free flow and economies of scale of data along with the important privacy and security considerations if it is to be a leader in the digital economy.
by the Democrats. If the deal is ratified, the joint reviews scheduled every six years will provide an opportunity to make adjustments in line with Canada’s national priorities. Overall, the uncertainty about the future of the deal and the difficult circumstances of the negotiations both point to the need for Canada to diversify its trade and work on improving its global competitiveness.
While the core of CUSMA’s content was built on NAFTA, the new agreement includes a range of changes and additions, which, in many cases, meant concessions on the part of Canada. Given the circumstances under which the deal was negotiated, the fact that a deal was reached at all is a win; it signals more certainty ahead for Canada, and thus a more stable environment for business investment.
But the deal still needs to be ratified by all three parties before it can come into force. As such, there is some uncertainty about the future of the agreement, particularly with respect to its ratification by the U.S. House of Representatives, which is now controlled
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Canada succeeded in maintaining the cultural exemption included in NAFTA,
as well as the right to send any final
anti-dumping and countervailing duty determinations by the U.S. to a binational panel for review.
CUSMA includes new elements that did not exist under NAFTA, including a sunset clause, a non-market economy clause that could make it difficult for Canada to sign a trade deal with China, and a chapter on digital trade.
The new agreement maintains core components of NAFTA related to the auto industry, Canada’s supply management system, and intellectual property, although with some changes and additions.
Ratification
What Stays the Same?
What Changes?
What's New?
1 Barlow, “Liberals Should Consistently Fight Trade Deals That Let Corporations Sue Canada.”
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In many cases, the changes and additions reflect concessions by Canada—not surprising given the tense environment in which the renegotiations took place and the potentially high costs of a NAFTA breakup.
Joint reviews of CUSMA are scheduled for every six years. These will provide an opportunity for Canada to push for adjustments in line with its national priorities. But they will also increase economic uncertainty.
The uncertainty regarding the future of the deal and the difficult circumstances of the negotiations point to the need for Canada to diversify its trade and improve its global competitiveness.
1 The Trump administration’s threat to pull out of NAFTA continued during the negotiations and continues today as part of the ratification process in the United States.
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2 Government of Canada, “Canada–United States–Mexico Agreement (CUSMA): Exceptions and General Provisions.”
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4 Teresa Scassa, “The USMCA Locks Canada in on Digital Trade—and at a Worrying Time,” Maclean’s, October 3, 2018; Michael Geist, Data Rules in Modern Trade Agreements: Toward Reconciling an Open Internet With Privacy and Security Safeguards (Waterloo, Ont.: Centre for International Governance Innovation, 2018).
3 Government of Canada, “Canada–United States–Mexico Agreement (CUSMA): Exceptions and General Provisions.”
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1 The Trump administration’s threat to pull out of NAFTA continued during the negotiations and continues today as part of the ratification process in the United States.