The Canada-United States-Mexico Agreement (CUSMA) has a number of liberalizing elements, including expanding US access to Canada’s dairy and poultry markets; raising the threshold for tax and duty-free entry into Canada and Mexico of low-value goods imports; and easing some barriers to services trade.
More controversially, the CUSMA increases intellectual property protection, which promises to generate some net benefit for the United States at Canada’s expense, and introduces new disciplines relative to NAFTA on cross-border data flows and data localization, the impact of which cannot as yet be quantified.
By far the most quantitatively significant effects, however, are the more stringent rules of origin that must be met for products to qualify for duty-free market access under the CUSMA. These new rules achieve the immediate objectives of the Trump administration to shift industrial activity – especially in the automotive sector – into the United States, but by increasing trade diversion, they impact negatively on economic welfare and efficiency.
There are only very limited gains in trade facilitation. Meanwhile, more stringent border enforcement promises some border thickening, especially for goods entering the United States.
The negative elements outweigh the positives and the CUSMA results in lower real GDP and welfare for all three parties, with Mexico being hardest hit and the United States the least. Canada’s real GDP stands to shrink by -0.4 percent and economic welfare to fall by over US$10 billion.
The major caveat to these results is the extent to which the longer-run investment climate in Canada (and Mexico) has been damaged by the weakening of the North American Free Trade Agreement (NAFTA) institutional framework through the introduction of a sunset clause; the elimination of investor state dispute settlement; the grudging way the United States accepted retention of the NAFTA Chapter 19 binational panel review of trade remedy cases; and, perhaps most importantly, the failure of the new agreement to eliminate the application of US section 232 national security tariffs on imports from its North American partners.
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