USMCA Review Scary to Canada; Stakeholders Say Canada Should Comply in Dairy Case

Canadian leaders with an interest in trading with the U.S. are looking South with trepidation, realizing that President Donald Trump could be back in office in 2026, when all three countries will have to agree to continue the NAFTA successor.

Business Council of Canada CEO Goldy Hyder, speaking at a program about CUSMA, as it's called in Canada, asked: "In this scenario [of Trump's return], do you really want to open it up, when you can’t have a good rational conversation about how to modernize? That’s a thread you're going to pull on, with a tremendous risk it could unravel." According to the Brookings Institution, 87% of Canadian exports are to the U.S. The Canadian Global Affairs Institute and Brookings co-hosted the program Sept. 26 in Canada.

Aaron Fowler, Canada's assistant deputy minister for trade policy and negotiations, said even three years since entry into force, the countries are "very much still implementing." Fowler said, "We’re conscious of the fact that the decisions we take now, and the actions we take now will create the environment for the review in 2026."

Fowler said committees that were established during negotiations for what became CUSMA are "exceptionally robust," and that some issues may be solved before 2026 in those fora. He said he expects the three countries will talk about what U.S. "trade policies and preoccupations" are at that point, but he wouldn't be surprised if trade policies to reduce greenhouse gas emissions, trade in critical minerals and friendshoring are on the table.

All that is well and good, but, he said, Canada should not ask for things it wanted in the NAFTA renegotiation that it didn't get. "If we focus on relitigating the negotiations we already went through, then this moment of opportunity will be a moment of jeopardy for the countries and the industries that depend on it," he said.

"Our view is: this is an opportunity," he said.

Hyder criticized the Canadian government as being too optimistic last time, seeing re-opening NAFTA as an opportunity. "When we went through the last exercise, hoping to have a discussion about modernizing the agreement, instead we just ended up trying to save the furniture," he said.

Meredith Lilly, an international economic policy professor at Carleton University and a former trade adviser in the Canadian government, said, "I think it’s great to hope it’s an opportunity, and prepare for this to be a complete and total disaster."

"When I think about the six-year review, I actually am quite concerned. I see no path through which it does not become politicized," she said. "How do we set things up now so that everyone wants to check the box, 'yes, we want to extend'?"

She said Canadian stakeholders need to talk about the "good stories" of North American trade. "I do not think this is a great time for businesses to go to their politicians [saying] 'here's the list I’m mad about the United States for.'"

She, and others, criticized all three member countries for ignoring panel decisions that didn't go their way. "We have these dispute mechanisms? They’re not being honored," Hyder said, which undermines certainty for businesses. "You’re going to win some and lose some. You lost the case? You can’t just ignore it and set it aside."

He said if Canada, the U.S. and Mexico adhered to panel decisions, it would be helpful. He also said the Business Council disagrees with Canada's government about a digital services tax, a proposal that angers the U.S.

Lilly said although there is no state-to-state dispute panel blocking any more, "we do have a real compliance issue."

"Canada has to stand down on the [dairy] TRQ implementation case. We have lost two identical cases in dairy.

"The Americans need to implement [auto] rules of origin." She said the Mexicans have been better than the U.S., as they've been quite cooperative with rapid response mechanism complaints, but added, "they need to stand down on energy pieces and corn biotech.

"If we aren’t showing that dispute settlement works ... that we have ways to settle our arguments, we play into a very negative argument that will surely crop up in the [Canadian] federal election."

Although Lilly said Canada has lost two TRQ cases in dairy, the result of the second case has not yet been made public.

Steve Verheul, the retired lead negotiator for Canada during the CUSMA negotiations, disagreed that Canada didn't implement the first dairy panel decision, saying the panel "didn't hit all the right targets," and there was no roadmap to implement in that case. He said, "We'll see what it says" when it comes to the second panel ruling. It is scheduled to be published later this month. However, he said he fully expects if Canada loses, it will comply. "It would be very hard politically, but there are always different ways to implement any kind of panel outcome."

He disagreed with Lilly and Hyder that the U.S. honoring the auto rules of origin is critical for the pact's health.

Although he declared the auto panel decision as a "clean win" for Canada and Mexico, he still said, "I have my doubts they will ever be implemented. We have to be careful how hard we push with compliance. My fear is, if the U.S. did end up complying with rules of origin issue, I fear it would have the effect of undermining support for the agreement in the U.S."

Vehicle parts and aerospace parts are the second-largest category of exports from Canada to the U.S.; mineral goods are No. 1 and base metals, such as aluminum and steel, are third.

Verheul said Canada has to be cautious not to let "issues become too contentious" because of the sunset clause review in three years.

He complained about a different set of dispute panels that take up antidumping and countervailing duty rulings. He said in the case of softwood lumber, the U.S. keeps "putting forward panelists who are clearly conflicted." He called the AD/CVD dispute settlement "a clear disappointment."

Sarah Goldfelder, a government affairs executive with General Motors Canada, said the UAW strike in the U.S. is a sign that discontent among autoworkers that drove Trump to declare that NAFTA was an unfair trade agreement continues to be a factor. She criticized the national minimum wage -- $7.25 per hour -- in the U.S., and said "until we solve [treatment of workers], I think we're going to struggle with these conversations every six years."

Several speakers pointed to the Inflation Reduction Act as perilous to Canadian business, but Goldfelder said the way it's structured provides a huge opportunity for Canadian mining. "We have to be really careful that we don’t go down the same road on critical minerals that we did with oil and gas," she said, only exporting the raw material instead of capturing processing, which provides more jobs.

Canadian Manufacturers and Exporters President Dennis Darby agreed, saying, "We have to make sure we don’t slip back into being hewers of wood and drawers of water."

He said that Canadian stakeholders were all surprised by the IRA, and said the U.S. policymakers didn't "even think we would care."

Darby said his group just had a North American manufacturers' conference to talk about CUSMA review and the need to get the message out. He said he recently talked to American government officials, including from the Office of the U.S. Trade Representative, and several brought up a regulatory action Canada took when it ordered Chinese companies with minority stakes in lithium mines in Canada to sell those stakes, and limited state-owned enterprises' involvement in the critical mineral mining sector.

"That’s the kind of partner we want to trade with," he said they said.