USMCA: An agreement between friends?

Trudeau and Trump, not on the best of terms.

Manufacturers may be inclined to join politicians, other business leaders and Mexico in a collective sigh of relief that Canada and the US have agreed to terms on a revised North American trade deal. Don’t get too comfortable.

The NAFTA renegotiation, which became a US attack on its continental allies, has ended up as a flawed peace. As a result, we know who our friends are, and US President Donald Trump isn’t one of them. He may be satiated for the time being, but having a protectionist administration in the White House means there will likely be more disruption and trouble to come, even with an agreement. Note that the contentious tariffs on steel and aluminium, levied by executive order because of a trumped up (excuse the pun) national security issue (via Section 232) were still in place as of Oct. 1. They’ll be dealt with on a separate track and there’s no timeline. We should not underestimate Trump’s potential for creative application of the security play elsewhere.

There were few details at this writing, but one thing we do know is the United States-Mexico-Canada Agreement (USMCA) isn’t so different from NAFTA in structure, which is puzzling. Trump declared NAFTA to be the worst deal ever made. But it will be up for review after six years. If it passes muster, the agreement will be good for 16 years, then another review.

This is a compromise from a five-year sunset clause, something the Trudeau government resisted because of the uncertainty that would directly impact investment in Canada. Nonetheless, this review process still suggests some lingering uncertainty. It could conceivably impact the shorter-term plans of Canadian companies and those who would otherwise consider Canada as a place to locate manufacturing operations. Trump will be gone or on the way out by the time the first review comes up. Except the next administration may be protectionist and inclined to bullying. Who knows? And that is surely the point.

Canada has taken the trade relationship with the US for granted. Thank you, Mr. Trump, for the wake-up call. He has demonstrated how fast a friend and ally can become an adversary. We will not soon forget his threat of a 25% auto tariff and a promise of ruination falling upon the Canadian economy for failing to arrive at a deal by his arbitrary deadlines. That’s some negotiating tactic, and an interesting way to treat a friend and ally. Another lesson learned.

The US accounts for about 75% of Canada’s exports. Manufacturers have been advised, cajoled and warned to look beyond Canada and the US to new markets. Surely the time has come to do so. As important as the US may be, manufacturers can no longer rely so exclusively on our neighbours to the south for economic prosperity, and let’s just say any friendship that exists should be guarded.

But let us also be mindful that business is changing beyond trade and Canadian companies must adapt.

A Deloitte study shows many companies on the TSX and TSXV (including manufacturers) are falling short when it comes to putting money into products and services that won’t come to market for at least a year; having processes in place to test and scale innovations; investing in the people and technology they need for the future; heavily investing resources in developing talent; and investing heavily in the technology they believe will help them get ahead. The advisory firm warns this makes these companies vulnerable to economic shocks and technological disruptions.

There is no advantage to being complacent. With trade peace more or less restored on the continent, manufacturers must embrace technology and the trade opportunities that exist beyond North America. Think of it as protection against the protectionist forces assailing global trade.