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New North American trade deal launches amid tariff threats

Trudeau praises new CUSMA trade agreement, coming into force on Wednesday
ABOCE: Trudeau praises new CUSMA trade agreement, coming into force on Wednesday.

The revamped trade pact between the United States, Canada and Mexico taking effect on Wednesday was meant to create a kind of fortress North America, boosting the region’s competitiveness — but cracks are already starting to show in the foundation.

As the deal kicks in, the Trump administration is threatening Canada with new aluminum tariffs, and a prominent Mexican labor activist has been jailed, underscoring concerns about crucial labour reforms in the replacement for the 26-year-old North American Free Trade Agreement. The risk of disputes among the three trading partners is growing, analysts say.

Read more: Trudeau says U.S. tariffs on Canadian aluminum would hurt both economies

The Canada-U.S.-Mexico (CUSMA) includes tighter North American content rules for autos, new protections for intellectual property, prohibitions against currency manipulation and new rules on digital commerce that did not exist when NAFTA launched in 1994, an agreement U.S. President Donald Trump has lambasted as the “worst trade deal ever made.”

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In statement released Wednesday afternoon, Trump Trump claimed he’d fulfilled his promise to end the “job-killing failure called the North American Free Trade Agreement.”

“Today, with NAFTA ending forever and the United States-Mexico-Canada Agreement (CUSMA) entering into full force, our grateful nation pays tribute to America’s workers and celebrates their ability to overcome decades of bad deals and failed policies,” he said.

“The United States appreciates the efforts of our partners in Mexico and Canada to ensure that North America is strengthening its economic ties while working to combat the coronavirus pandemic.”

The coronavirus has all three countries mired in a deep recession, cutting their April goods trade flows – normally about US$1.2 trillion annually – to the lowest monthly level in a decade.

“The champagne isn’t quite as fizzy as we might have expected – even under the best of circumstances – and there’s trouble coming from all sides,” said Mary Lovely, a Syracuse University economics professor and senior fellow at the Peterson Institute for International Economics in Washington. “This could be a trade agreement that quickly ends up in dispute and higher trade barriers.”

State of the Union 2020: Trump praises CUSMA, says it replaces a ‘disastrous NAFTA’
State of the Union 2020: Trump praises CUSMA, says it replaces a ‘disastrous NAFTA’

Issues dogging CUSMA include hundreds of legal challenges to Mexico’s new labour law championed by President Andres Manuel Lopez Obrador to ensure that workers can freely organize and unions are granted full collective bargaining rights.

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A ruling against it would harm Mexico’s ability to deliver on provisions aimed at ending labour contracts agreed without worker consent that are stacked in favor of companies and have kept wages chronically low in Mexico.

Democrats in the U.S. Congress had insisted on the stronger labour provisions last year before granting approval, prompting a substantial renegotiation of terms first agreed in October 2018. The arrest of Mexican labour lawyer Susana Prieto in early June has fueled U.S. unions’ arguments that Mexican workers’ rights are not being sufficiently protected.

Read more: U.S. trade rep reignites tariff threats as CUSMA set to come into effect

“I remain very concerned that Mexico is falling short of its commitments to implement the legislative reforms that are the foundation in Mexico for effectively protecting labour rights,” U.S. Representative Richard Neal, chairman of the House Ways and Means Committee, said on Tuesday, adding that CUSMA’s success “truly hinges” on its new labour enforcement mechanism.

U.S. Trade Representative Robert Lighthizer has said he will file dispute cases “early and often” to enforce CUSMA provisions, citing Mexico’s failure to approve U.S. biotech products.

That could lead to increased tariffs on offending goods, such as products from individual factories where labour violations are found.

Carlos Vejar, a former Mexican trade negotiator, said it was in the country’s interest to uphold pledges made to strengthen unions and end child labour.

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“If Mexico isn’t mindful of this, there will be cases against Mexico, and Mexico will lose them,” Vejar said.

Trudeau says CUSMA deal an “improvement” for Canadian aluminum workers
Trudeau says CUSMA deal an “improvement” for Canadian aluminum workers

Aluminum tariffs redux, automotive burdens

U.S. national security tariffs on imported steel and aluminum — including from Canada and Mexico — were a major irritant during CUSMA negotiations until a deal for exemptions was reached last year. But now, USTR is considering domestic producers’ request to restore the 10 per cent duty on Canadian aluminum to combat a “surge” of imports across the northern border.

Canadian Prime Minister Justin Trudeau on Monday told reporters that these would hurt both countries and raise materials costs for U.S. manufacturers.

Another source of disputes could be the energy sector, where the main U.S. oil and gas lobby has already complained that recent actions by Mexico favoring state oil company Pemex violate protections for private investors carried over from NAFTA.

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READ MORE: Ottawa mum on report Trump administration eyeing more aluminum tariffs for Canada

Canada has also complained about new Mexican rules formally threatening investment in renewable energy.

USMCA will put new compliance burdens on the region’s automotive manufacturers as the coronavirus craters consumer spending and auto production. Within three to five years, vehicles’ minimum North American content rises to 75 per cent from 62.5 per cent. Automakers must also produce 40 per cent of their vehicles’ content in “high wage” areas — effectively the United States and Canada.

A U.S. International Trade Commission study found this would draw more auto parts production to the United States, but may curb U.S. vehicle assembly and raise prices, limiting consumer choice in cars. The same panel found that after 15 years, the deal would add $68.5 billion annually to U.S. economic output and create 176,000 jobs compared with a NAFTA baseline.