USMCA: My brief thoughts and opinions

Source: https://www.iisd.org/blog/usmca-nafta-environment

As one the big headlines from the last week (The other, which ended up taking backstage was the subsequent announcement of a $40 billion dollar LNG pipeline and processing facility in northern BC ... for a province with an annual GDP of about $260 billion ... this is huge!) I feel that it is needed to discuss (briefly) USMCA including my thoughts and opinions as to how it will all shake out.

First, let me start off by saying I was surprised by the announcement. I had the opinion that the Canadian team was trying to stall negotiations till the US midterms in order to see how this would influence their negotiating position. I was wrong.  

From what I have seen there are the following notable outcomes from USMCA:

1. Increasing rules of origin for automobiles from 62.5 to 70%
2. 40-45% of auto must be produced by workers earning at least US $16/hr
3. Opening the dairy markets (allowing American Farmers access to 3.6% of Canadian markets)
4. Increasing drug patent lengths (longer time till generics can hit)
5. Increasing copyright lengths.

Let's start off by talking about the benefits:

Business confidence will (has) increased through this deal being struck. that is firms have greater certainty in the future dealings, especially as it relates to cross-border trade. 

Even talking generally with individuals, the view is this is a good thing ... all this seems to point to me that confidence across the board is up, but perhaps my sampling is biased. 

Across the board, I would say the agreement reached on the USMCA is a good thing. With this finalized, I will now be jumping on the band-wagon with the expectation of an interest rate hike on October 24th (especially with unemployment so low and inflation creeping high). 

What about the details. the notable outcomes listed above.

Increasing the rules of origin has been a sore spot for the Americans for a while, so in this case, I am not surprised by this outcome. I can then infer that the reason this is an issue is that we have been skirting around the lower threshold of the rules of origin, meaning that auto-parts are able to be produced cheaper in other parts than they could in the USMCA zone. If this is the case, higher rules of origin mean higher cost parts, means some of these higher costs will be passed on to the consumer (higher price of autos). 

The second attachment to this is that 40-45% of the vehicle must be manufactured with a wage of at least US $16 an hour. Again, not an expert in what the average hourly wage is in this industry, but one of two outcomes exist: 

(A) This is put into place as lip service, but in reality, this threshold has already been easily met or the more likely scenario. IMO.

(B) This is mentioned because, again, most of the production is being done in lower wage areas, and this is an attempt to shift production back to higher wage areas. Again in this sense, the impact of this will be higher costs, passed on to the consumer (higher price of autos).

Longer copyright and longer drug patents mean longer time periods for material to hit the public domain and generic drugs to become available. Again this translates into higher rent for those holding the copyright or patent and thus higher costs for Canadians. 

Finally the dairy industry - the big news item here (or so it seems). American dairy producer will be allowed access to 3.6% of the Canadian market, not a huge proportion, but not trivial either. 

On one side, this entrance (slight as it is) will erode (a tiny bit) of the supply management system and may begin to translate into lower costs of dairy products (although I find this unlikely). 

The caveat to all this though is that the federal government has promised to subsidize dairy farmers (who already earn higher than market prices due to the supply management system) as they had done following the CETA agreement which similarly caused a slight erosion of the supply management system. 

While I find it unlikely that we will be seeing dropping dairy prices, what we do know is that when the government spends (billions?) in subsidies, these have to come from somewhere, that is ultimately a drop in other social services or higher taxes.

Although I have not read the actual USMCA document (nor will I likely to be honest) I have come across several articles which point to a special clause that will prohibit any USMCA member from negotiating future Free Trade Agreements (FTA's) with "Non-Market Economies", IE China. 

If this is the case it is an interesting loss of sovereignty for Canada. Especially as it seems that Washington is the one who decides which economies would be classified as "Market" Vs "Non-Market" 

What are your thoughts on the new USMCA (personally NAFTA was easier to say)? feel free to comment below.