Out with NAFTA, in with USMCA: Canada inks new trade deal with U.S., Mexico

By James McCarten

WASHINGTON — A new era in North American free trade dawned in the dead of night Sunday as a 14-month NAFTA modernization effort between Canada, the U.S. and Mexico finally came to fruition with just hours to spare before an end-of-weekend deadline.

What began as a marathon in the summer of 2017 ended in a flat-out sprint as negotiators in Ottawa and Washington worked around the clock to put the finishing touches on language adding Canada to the deal reached over the summer between the U.S. and Mexico.

“It’s a good day for Canada,” was all Prime Minister Justin Trudeau would say as he left a late-night cabinet meeting in Ottawa that capped several days of frenetic long-distance talks that included Foreign Affairs Minister Chrystia Freeland and U.S. Ambassador David MacNaughton.

Details remained sparse, but U.S. administration officials say the deal — newly christened the U.S.-Mexico-Canada Trade Agreement, or USMCA — provides increased access to Canada’s dairy market for U.S. producers and limits the American impact of Canada’s controversial supply management system for dairy and poultry products, long a thorn in the side of President Donald Trump.

It also appears to preserve the key dispute-resolution provisions — Chapter 19 — which allow for independent panels to resolve disputes involving companies and governments, as well as Chapter 20, the government-to-government dispute settlement mechanism.

Canada fought hard to retain Chapter 19, a holdover from NAFTA that U.S. trade ambassador Robert Lighthizer worked tooth and nail to eliminate.

“USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” Freeland and Lighthizer said in a joint statement.

“It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”

On the matter of Section 232 tariffs, Trump’s trade weapon of choice, U.S. officials told a late-night conference call with reporters that the two sides had “reached an accommodation” on the issue.

A side letter published along with the main text of the agreement exempts a percentage of eligible auto exports from the tariffs. A similar agreement between Mexico and the U.S. preserves duty-free access to the U.S. market for vehicles that comply with the agreement’s rules of origin.

Those rules require that a certain percentage of an imported vehicle’s components be manufactured in the United States.

Some have characterized the side letter as effectively establishing a quota on the number of autos that can be exported to the U.S. — anathema to the very principles of free trade. But Dan Ujczo, an international trade lawyer with the U.S. firm Dickinson Wright, said it would only apply to a very small percentage of vehicles that don’t comply with the origin rules.

“When people are saying there’s a cap on auto exports, it’s only in the limited situation where the goods are non-conforming with the rules of origin. So if you comply with the rules of origin, there’s no way you are subject to 232 tariffs,” Ujczo said.

“This objection is largely more philosophical than practical — the idea of having quotas as a side letter to a free trade agreement. The practical consequences are limited, if any.”

Despite the fact that Ottawa had long pushed back hard against allowing the deal to be periodically revisited, officials in the U.S. briefing said the new language includes a provision that will indeed see the deal reviewed every six years.

“This is going to be one of the most enforceable trade agreements we’ve ever had,” one official said. “This gives us a significant new form of leverage in terms of encouraging people to come up to the mark and really fully comply with all of their obligations.

“This administration is committed to strong and effective enforcement of this agreement, just like all of our other agreements. We will be watching very carefully to see and to make sure that all of the things that have been pledged and promised in the agreement do come about.”

Insiders got wind of a breakthrough after 14 months of tumultuous talks and just hours before U.S. and Mexican trade authorities were set to publish their own trade agreement without Canada as a signatory.

Federal cabinet ministers were summoned to a late Sunday meeting at the Prime Minister’s Office near Parliament Hill, while the White House convened its own late-night trade briefing conference call just an hour before the midnight deadline.

“In short, we think this is a fantastic agreement for the U.S., but also for Canada and Mexico,” said the American officials, who cheered the fact that U.S. dairy ranchers would soon have “substantial” expanded access to lucrative markets north of the border.

They described the central elements of the deal as a “template” that would become the “playbook” for all of the Trump administration’s future trade deals, including new and stronger rules of origin on autos and mechanisms to ensure agreements don’t become “stale and outdated.”

“It’s a great win for the president and a validation of his strategy in the area of international trade.”

In Ottawa, PMO officials said there would be another cabinet meeting Monday and a news conference likely as well.

Meantime, congratulations were being offered among key stakeholders who have been on the edge of their seats waiting to see if Canada and the United States would find common ground.

An agreement on how to treat the auto sector, reached this summer between the United States and Mexico, was central to a revamped NAFTA going ahead.

But the U.S. and Canada had trouble dealing with other areas in the pact, including Canada’s dairy industry, its insistence on a strong dispute settlement mechanism and concerns about intellectual property and culture.

The Canadian Chamber of Commerce said it was relieved that an agreement in principle had been reached. But President Perrin Beatty said the details of the text needed a closer look before a final verdict could be rendered.

“Specifically, we will seek clarity on how the agreement addresses the existing tariffs on Canadian steel and aluminium, as well as how it will ensure that tariffs and quotas upon Canada’s auto sector exports will be avoided,” Beatty said in a statement.

Trudeau has promised repeatedly to keep the country’s supply management system intact, despite pressure from Trump. The issue has also figured prominently in Quebec, where voters go to the polls in a provincial election on Monday.

— With files from Mike Blanchfield and Terry Pedwell in Ottawa