A busy year in trade: CUSMA, CPTPP and Tariffs

Author(s): Riyaz Dattu, Gajan Sathananthan

Dec 18, 2018

Canada’s international trade regime underwent a large number of developments in 2018. Much of this was driven by U.S. President Donald Trump, whose emphasis on advancing his trade agenda seemed to increase in 2018. Canadian businesses had to contend with difficult challenges, including the unpredictable, and often volatile, renegotiation of the North American Free Trade Agreement (NAFTA) and the reciprocal application of duties on goods traded between Canada and the U.S. However, as this year concludes, we see greater opportunities ahead for companies engaged in trade and investment abroad, as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) will be brought into effect in Canada by the end of this year, and the Canada-United States-Mexico Agreement (CUSMA) begins the ratification process that could ultimately lead to NAFTA being replaced by the new trade deal.

CUSMA – Not quite a done deal

The renegotiation of NAFTA, which was slated to conclude in 2017, continued all the way to the fall of 2018. As negotiations became prolonged, there was much hand-wringing as talks frequently stalled or hit major roadblocks.However, on September 30, 2018, the three countries announced a new deal, referred to as the CUSMA in Canada and the USMCA in the U.S., that they propose as a replacement for NAFTA.

There are numerous substantial changes in the CUSMA as compared to NAFTA. The table below outlines some of the key differences:

* For more information, please refer to our Osler Update entitled  “A need-to-know guide on IP in the U.S.-Mexico-Canada Agreement” on osler.com.

The CUSMA was signed by the three countries on November 30, 2018 at the G20 Meeting in Argentina. The agreement will now proceed through the treaty ratification process of the three countries.

Though it is unlikely to face major stumbling blocks in Canada and Mexico, the ratification of the CUSMA in the U.S. will require passage through both chambers of Congress. As the Democratic Party now controls the House of Representatives, it could raise issues to delay or prevent ratification, particularly if it is not satisfied with the negotiated outcome reflected in the CUSMA, or is not inclined to give President Trump a political ‘win’ in the form of the new trade agreement. Therefore, though much of the heavy lifting has been completed, quite a bit of work remains before the CUSMA can supersede NAFTA and govern trade between Canada, the U.S. and Mexico.

Surcharges and safeguards on steel and aluminum

Beyond the difficult NAFTA renegotiations, Canadian businesses engaged in cross-border trade had to cope with the application of measures by the U.S., and countermeasures by Canada, which increased the cost of goods that were previously duty-free. These measures were particularly targeted at steel and aluminum. Both were subjected to global tariffs by the U.S. after the U.S. conducted a rarely used national security review of imports of these goods and determined that these imports posed a risk to U.S. national security. Despite initially exempting Canadian imports from the application of these duties, the U.S. subsequently implemented a 25% surcharge on most steel products and a 10% surcharge on most aluminum products imported from Canada.

Canada responded to the U.S. measures with its own surcharges on steel and aluminum imports from the U.S., as well as a wide variety of other U.S. imports, including grocery items and appliances.

More recently, Canada has applied provisional safeguards on global imports of steel based on concerns of trade diversion of steel goods to Canada that would have been exported to the U.S, charging a 25% surtax until May of next year on certain steel goods that are being imported at levels above historic norms. Simultaneously, Canada launched an inquiry into the application of more long-term safeguards to determine whether they are needed and what form they should take. The hearing for this inquiry will take place early in the new year, and a recommendation will be issued in April.

All of these measures have made this year difficult for importers of steel and downstream consumers, who were required to grapple with increased costs and unpredictability.

Implementation of the CPTPP

The CPTPP will be implemented in Canada on December 30, 2018. This agreement evolved from the Trans-Pacific Partnership (TPP), which was a comprehensive regional trade agreement negotiated between 12 countries bordering the Pacific Ocean, including the U.S. However, on the heels of his inauguration in January 2017, President Trump issued an executive order unilaterally pulling the U.S. out of the deal. As the TPP required ratification by at least six states that together accounted for more than 85% of the GDP of all signatories, the TPP could not proceed without the involvement of the U.S.

The remaining 11 countries revived the deal, undertaking additional negotiations, and signed a new agreement on March 8, 2018, renamed as the CPTPP. The CPTPP incorporates, by reference, the provisions of the TPP agreement, with the exception of some provisions relating to intellectual property and investor-state dispute settlement, which were previously important issues for the U.S. participation in the TPP.

The CPTPP will be in force in Canada, Australia, New Zealand, Japan, Singapore and Mexico by the end of 2018. The CPTPP will come into force with Vietnam in mid-January, following its ratification of the agreement on November 12, 2018. The ratification processes for Brunei, Chile, Malaysia and Peru are still underway.

Under the CPTPP, 99% of Canada’s current exports to the CPTPP markets will be tariff-free. It will allow for the expansion of global supply chains and increase sourcing options for Canadian businesses, but also open up the Canadian market to more competition. In this way, the CPTPP presents both increased opportunities and challenges to Canadian businesses.