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July 04, 2025 | 13:18
CUSMA Turns Five
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Fixed Income Strategy
Economics
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Fixed Income Strategy
CUSMA Turns FiveHow the “joint review” of CUSMA will unfold in the year ahead hinges on what happens in the weeks ahead amid current negotiations on a Canada-U.S. economic and security deal. |
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In addition to Canada Day, July 1 marked the fifth anniversary of the Canada-United States-Mexico Agreement (CUSMA) coming into effect. The Agreement calls for a ‘joint review’ on the sixth anniversary, but speculation is mounting that the review could commence much sooner against the background of U.S. tariffs and other trade tensions. Meanwhile, it’s unclear how the forthcoming joint review—let alone the fate of CUSMA itself—will be influenced by current Canada-U.S. negotiations on an economic and security deal. The self-imposed deadline for a deal is July 21. The ‘joint review’CUSMA was signed on November 30, 2018, by the three heads of government, amid the G20 meeting in Buenos Aires [1]. It was ratified first by Mexico in July 2019. The Agreement was then amended on December 10, 2019, to facilitate ratification by the U.S. Congress, which occurred in January 2020. It was ratified last by Canada in March 2020. CUSMA came into effect on July 1, 2020. Unlike its predecessor, NAFTA (North American Free Trade Agreement), CUSMA came with an expiry date. The Agreement lasts for 16 years (until 2036) but it can be extended for a new 16-year interval (until 2042) should the three heads of government confirm their desire to do so during the 2026 joint review. In the event, there would be another joint review set for 2032 with the potential to reset another new 16-year period, and this sequence could continue indefinitely. Note that a joint review and extension decision can occur sooner than six years. While the joint review would be the occasion for making major changes to CUSMA, in addition to addressing its longevity, the Agreement is administered and managed by the Free Trade Commission (FTC), which is composed of ministerial-level representatives from the three governments. It oversees a slew of subsidiary bodies (chapter committees, subcommittees, and working groups), in addition to making minor changes to the Agreement. The FTC formally meets twice a year (at the start and around the middle of the year) but isn’t meeting this year in the run-up to the (early?) joint review. If at least one party does not confirm its desire to extend CUSMA in the joint review, then a process of annual joint reviews will begin and run for the rest of the Agreement’s term. Should these annual reviews, and the FTC’s work behind the scenes, address the concerns of the not-confirming party, a subsequent decision to extend the Agreement can be made at any time. Finally, like NAFTA, countries can withdraw from CUSMA by providing six months’ notice. On the agendaCanada’s current bilateral negotiations with the U.S. over an economic and security deal are increasing uncertainty surrounding CUSMA’s upcoming (trilateral) joint review. The details of the negotiations are being tightly guarded. But given the Administration’s ‘deals’ with the UK and Vietnam, it’s unclear whether Canada can achieve an outcome that is free from tariffs and/or tariff-rate quotas. It’s also unclear how this deal will affect forthcoming CUSMA talks. Below, in the absence of clarity, we list four specific issues (among many more) that will probably be brought up during the joint review (if not sooner during the deal discussions). 1) In CUSMA, Canada committed to providing the U.S. greater access to its supply-managed dairy, poultry, and egg industries, particularly for dairy (tariff-free quota equivalent to roughly 3.5% of domestic consumption). However, U.S. producers have repeatedly taken issue with the way Canada has implemented its market access commitments. They have argued that by allocating quota only to domestic dairy processors and distributors, and not to retailers, Canada has prioritized imports of lower-value dairy ingredients rather than (higher-value) finished consumer products. In November 2023, a CUSMA trade dispute panel sided with Canada after an initial panel in December 2021 sided with the U.S. (the initial ruling caused Canada to tweak its quota allocation process). In the joint review, the U.S. might seek a consumer-product-focused dairy quota, if not increased overall allocations (currently U.S. dairy exports to Canada fall short of their quota). 2) In CUSMA, for the automotive sector, there is a specific method for calculating the 75% regional value content (RVC) for final products and their core parts (e.g., once a core part was deemed to have at least 75% RVC, it was rounded up to 100% in determining the RVC of the final product). The U.S. argued there was an implied stricter calculation (no rounding up). Canada and Mexico argued the agreed-upon RVC was less strict and a CUSMA panel ruled in their favour in December 2022. In the joint review, the U.S. will likely be seeking a stricter RVC calculation. 3) In May, President Trump threatened to put tariffs on foreign-made films, asserting that the production incentives offered by Canada and other countries was a “national security threat”. However, no trade investigation was ordered, and the incentives offered by American states were ignored. In the joint review, the U.S. could take aim at Canada’s film production incentives, along with the Online Streaming Act. The Act requires large online streaming services to contribute 5% of their Canadian revenues to certain funds that promote domestic production. Last month this was challenged in court by the likes of Amazon, Apple, and Netflix (among others) with a ruling expected this summer. (Note this is a separate Act to the digital services tax, which was recently dropped to resume negotiations for a deal with the U.S.) 4) In CUSMA, the U.S. signed side letters committing that if Section 232 ‘national security’ tariffs were imposed on any good, Canada and Mexico would be given a 60-day reprieve to negotiate workarounds (such as tariff-rate quotas). This commitment was not honoured with the recent imposition of tariffs on steel and aluminum along with automobiles and parts. Furthermore, the U.S. also signed side letters committing that if Section 232 tariffs were imposed specifically on automobiles and parts, tariff rate quotas (at elevated levels) for Canada and Mexico would kick in. For Canada, the limit was set at 2.6 million passenger vehicles and |
Indeed, America’s ‘national security’ tariffs are likely to become an even larger trade irritant towards the end of the year. Currently, there are seven separate investigations underway, with the first reports due no later than December (Table 1). For example, Canada’s softwood lumber industry is already dealing with onerous U.S. antidumping and countervailing duties; and if Section 232 tariffs are recommended, they would be stacked upon these duties. Canada has export exposure in all seven sectors, and taken together, they have a significant direct and indirect economic impact. Bottom Line: In a matter of weeks, we’ll presumably see what is being packed into an economic and security deal with the U.S. The contents will likely dictate how the upcoming ‘joint review’ of CUSMA will develop. |
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[1] CUSMA is also known as USMCA (United States-Mexico-Canada Agreement), T-MEC (Tratado entre México, Estados Unidos y Canadá) and ACEUM (Accord Canada–États-Unis–Mexique). The three heads of government were President Donald Trump (now back in office), Prime Minister Justin Trudeau, and President Enrique Peña Nieto (on his last day in office). [^] |