Pros and cons of the USMCA

With the new United States-Mexico-Canada Agreement (USMCA) likely to be signed at the end of November and take the place of NAFTA by 2020, it’s worth looking at how the trade agreement will affect mining companies and suppliers.

PROS: The USMCA will provide 16 years of stability for businesses in North America. After that time, the agreement will expire, unless the parties decide to renew it. That’s a good thing for Canadian business compared to the uncertainty of the past two years under a protectionist U.S. President Donald Trump.

And the USMCA itself is not that big a departure from NAFTA.

“The changes aren’t radical.” says Clifford Sosnow, a partner and co-chair of Fasken’s international trade and investment group, although he calls some elements of the deal “troubling.”

Sosnow added: “Would I call it a major shift? No. Would I call it a scaling back in terms of greater integration of the three economies? Yes.”

Dalton Albrecht a partner at EY Law specializing in international trade law, notes that the agreement keeps a lot of positive things from the old agreement, such as business employee mobility provisions and Chapter 19 dispute resolution, which allows independent panels to solve disputes between companies and governments.

CONS: The biggest issue for miners and mining supply companies is that the agreement did not deal with the 10% tariffs on aluminum and the 25% tariffs on steel imposed by the Trump administration at the end of May under Section 232 of the Trade Expansion Act. Those tariffs have the potential to affect the cost of equipment and mining infrastructure. Albrecht notes that the retaliatory 10-25% surtaxes that the Canadian government imposed soon after have compounded the issue.

For example, as things stand, a manufacturer could face double tariffs on an input, raising the price of the final good.

While the Canadian government has announced relief from those surtaxes for Canadian manufacturers in the form of drawbacks and remissions, it’s very time consuming and difficult for companies to deal with, Albrecht says.

It’s not necessarily possible for companies to get the type of steel and aluminum product they want from within Canada to avoid the tariffs, he adds.

“The Canadian steel industry is not subject to the surtaxes on inputs but the problem is certain types of steel and aluminum are made in the U.S. and certain types in Canada – production was rationalized under NAFTA because it’s a free trade area with a frictionless border, so you can’t get all the products you need within Canada for that reason.”

U.S. officials had floated the possibility that the USMCA deal would mean the end of the 232 tariffs. That hasn’t been the case to date, but a deal involving tariff rate quotas below which Canadian steel and aluminum would be exempt from the U.S. tariffs could be struck after the USMCA is ratified.

“There has been discussion of quotas along the lines of the national security issue, which has been incorporated into the USMCA as it deals with autos,” Sosnow says, although Canada is officially opposed to the idea.

Energy sector fragmentation

Another issue is that under the USMCA, the energy space in North America will be less integrated than was previously the case, Sosnow says.

Under NAFTA, governments were prohibited from discriminating against other NAFTA party coal, uranium or petro- chemical products with import or export taxes other than duties, he explains. NAFTA parties also had to consult with respect to any new restrictions or taxes that other party believed would be a violation of the energy rules.

“So there were consultation mechanisms, there were prohibitions on discriminating, there were prohibitions on import and export restrictions and export taxes,” Sosnow says. “That’s been removed.”

Sosnow adds: “This is perfectly in line with what the president wants to do, which is a gathering in of investments that have otherwise been in Canada and Mexico and refocusing them back in to the United States.”

Investment chapter

Under NAFTA, companies could invoke an arbitration mechanism when they felt their rights under the agreement had been breached, but the USMCA removes that mechanism, Sosnow says.

“Now if there are any disputes for example, Canadian investors feel that they’re being discriminated against in terms of obtaining licences or prospecting licences or consessions, they’re forced to resort to U.S.

Courts as U.S. investors in Canada are forced to resort to Canadian courts. That’s always a longer process, it’s a more detailed process, and it’s typically not something that business favours. They like the arbitration process that was contained in the NAFTA because it’s quicker and the results tend to be a little bit more in line with what businesses expect.”

Sosnow adds: “Interestingly enough, Canada’s probably been the source of more disputes against it than the United States or Mexico, so in some sense, it’s a bit of a relief to the Canadian government that those rules are no longer there.”

Other takeaways

The introduction of the 232 tariffs mean companies need to review their supply chains from end to end, Albrecht says.

“Talk to your supply chain partners and say ‘please confirm for me that you meet the rules under USMCA’ because that’s important, and you should know that now in advance of implementation.”

For both miners and suppliers, there could be opportunities under other trade agreements, such as the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes 11 countries.

For suppliers, Albrecht says this means that basically any manufacturing input or industrial product originating in Europe is now duty free, so companies can look to sources there.

“The rules of origin are somewhat less restrictive under CETA than NAFTA/USMCA,” Albrecht adds. “If you have fifty per cent Canadian content or even lower, depending on the product, you can generally qualify your product for most CETA rules of origin and same with the CPTPP.”

---