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Posted Tuesday June 30, 2020


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Uncertainty Further Muddies CUSMA Waters

The new North American trade deal takes effect on July 1 amid heightened uncertainty about its likely impacts. The effect of the COVID-19 crisis on supply chains, the digital transformation of the economy, and the possibility of the US reimposing aluminum and steel tariffs all cloud the potential effects of the Canada-US-Mexico Agreement (CUSMA) on the economies of the signatory countries, according to a new report from the C.D. Howe Institute.

Any of these three big unknowns could alter the projected impacts of the deal in four major studies, which themselves vary in their projections. In “The Trade and Economic Impact of the CUSMA: Making Sense of the Alternative Estimates,” Dan Ciuriak (photo) reconciles inconsistent estimates in the four studies, including the official studies released by governments of Canada and the United States. In doing so, he notes that emerging developments could muddy the waters further.

The CUSMA is taking effect in a very different context than when the negotiations were finally concluded. With much of the world plunged into the deepest downturn since the 1930s, the impacts of demand, supply and supply-chain shocks on the behaviour of governments, corporations and households will have longer-term impacts on the economy. Canada’s trade with the United States and Mexico, as well as with the rest of the world, will be affected by the shape of the macroeconomic recovery, by strategic decisions that countries and firms are considering regarding supply chains of essential products, and by the acceleration of the digital transformation of the economy as business and households adapt to the new realities. The economies that emerge from the pandemic crisis will not be the same as the economies for which the new agreement was negotiated.

Notably, the acceleration of the transition to a digital economy will provide an as-yet-unquantified boost in importance of the data provisions in the pact. In addition, the US is considering re-imposing aluminum and steel tariffs on Canada on national security grounds under Section 232 of the US Trade Act of 1974. Section 232, the use of which was not effectively curbed by the CUSMA, “hangs over Canada like the sword of Damocles” says Ciuriak.

The report compares and contrasts the methodology of the four major reports, by the International Monetary Fund (IMF); The United States International Trade Commission (USITC); Global Affairs Canada (GAC); and Ciuriak’s own report published by the C.D. Howe Institute. The estimates feature headline figures that vary from negative impacts to major gains. These apparent inconsistencies reflect differences across the studies in terms of the factors taken into account and how they report their impacts, says Ciuriak.

The author reports some major takeaways from an analysis of CUSMA’s impact relative to a scenario in which NAFTA lapses and US Section 232 tariffs are in place. The impact of CUSMA on Canada’s real GDP is -0.396 percent. However, the impact of NAFTA lapsing without a new deal is -0.494 percent, while the impact of the Section 232 tariffs is -0.109 percent.

“In effect,” says Ciuriak, “even though the CUSMA digs a hole for Canada relative to the old NAFTA, NAFTA lapsing combined with US tariffs on aluminum and steel would dig a deeper hole.”

Ciuriak adds: “Bottom line: on the basis of what can be evaluated as regards the traditional industrial/services economy, the new NAFTA is likely a better outcome for the parties than no NAFTA, but not clearly better than the existing NAFTA.”

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