Trump's CUSMA tactics could make employers act as if it 'never existed'

WASHINGTON — The July 1 deadline came and went without a renewal of the Canada-U.S.-Mexico Agreement, as Washington opted instead for the annual review process . President Donald Trump wants to renegotiate the deal to address what he sees as persistent U.S. trade deficits with Canada and Mexico. To understand where CUSMA (aka USMCA) is headed and what it means for Canadian businesses and the U.S. states most exposed to cross-border trade, National Post spoke with trade policy and tariffs specialist Gary Clyde Hufbauer, who previously served with the U.S. Treasury Department, and is now at the Peterson Institute for International Economics in Washington.

Your latest analysis noted that no agreement to renew USMCA would create “a cloud over North American trade and investment and deprive the USMCA of a key attribute: business certainty.” Now that USMCA is effectively in annual-negotiation mode, what changes economically, compared with a normal long-term trade agreement?

Hufbauer : As you know, Trump is famous for reversing course. His threat not to renew may be just another bargaining ploy. Once he gets concessions from Canada and Mexico, Trump may decide that the smarter move — for domestic political reasons — is to renew the USMCA.

But for now, non-renewal is the White House decision. Business firms considering major investments in Canada or Mexico have to accept that reality. If their investment depends on assured access to the U.S. market, firms will want to pause and see how the political landscape shakes out before making a commitment. If the end result of USMCA review is a series of annual negotiations, that’s a new world for the North American economy. Firms will be right to fear that Washington will put endless demands on Ottawa and Mexico City. Those demands will undercut the certainty that business firms rely on.

Does the annual review process create the same kind of uncertainty as a termination threat, or is it more manageable for businesses and governments?

Well, outright termination would shock Canadian business firms, since up to now they have discounted Trump’s hostile rhetoric. But an annual review will create a different kind of water torture. Firms will be right to fear that, each year, Washington will put fresh demands on Ottawa and Mexico City. Indeed, some firms might prefer to cut the cord now and make their plans as if USMCA never existed.

The prospect of 10 years of annual reviews spells 10 years of guessing whether the U.S. market will remain fully open, partially open, or closed. In turn, Canadian firms will have to adjust their contracts, both with their buyers and their own suppliers. This is at least a hassle and possibly a nightmare.

What leverage does the U.S. gain by keeping the agreement under annual review, and what leverage does Canada lose or retain?

In Washington’s eyes, the beauty of annual reviews is that they enable the discovery of weak links among Canadian firms and provinces — in other words, the parts of the Canadian economy susceptible to pressure from targeted tariffs or other barriers. Pressure can force those firms or provinces to cut their prices or reduce their sales to the U.S. market. But sauce for the goose is sauce for the gander. Canada can find susceptible U.S. firms and pressure them to relocate in Canada or simply withdraw from the Canadian market.

Which states and sectors remain most exposed if the agreement is repeatedly reopened every year?

Geography tells the story. The northern border and heartland industrial states are most exposed. Many of those states now support Trump’s protectionist policies. But they may reconsider if the dislocation of annual reviews becomes a way of life. U.S. firms engaged in automotive products, for example, or reliant on Canadian lumber or oil and gas, will experience economic anxiety every year.

Are the risks now more about delayed investment and planning rather than immediate tariff shock? What knock-on effects should readers understand?

The way I see the outlook, delayed investment is the biggest worry. Canadian exporters that have long sold into the U.S. market will need to find new buyers in Asia, Europe, and elsewhere to justify future expansion. But Trump’s agenda also foretells an interruption of existing trade flows. Especially if a cycle of new barriers and retaliation accompanies the annual reviews.

What do annual reviews do to supply chains that depend on predictability, especially autos, machinery, agriculture, and chemicals?

Predictability goes out the door in a world of annual reviews. How will business react? Experience teaches that firms will need to raise prices to cover interruption risk. That’s why prices for nearly everything are high in chaotic economies like Argentina or Turkey. The economic gains from smooth and reliable supply chains may become a thing of the past for North America.

Will Trump-voting states respond more to economic losses, or to protectionism?

The political question ahead is whether Trump-voting states pay attention to pocketbook losses or remain committed to the ideology of protection. My guess is that the pocketbook issues win out, but I may underestimate ideological devotion. The prospect of intense lobbying around annual reviews has got to be unsettling.

You’ve written that Trump-voting states are among the most vulnerable to export losses. Do you expect it to become a campaign issue ahead of the U.S. midterms in states most exposed to Canadian trade?

The crystal ball is always cloudy. But Trump’s confrontation with Canada may not come to a boil in time to affect the midterm election. Come September and October, negotiations may still be ongoing in indecisive and confusing ways. The big domestic impact of Trump’s aggressive trade policies may not be felt until the 2028 presidential election.

National Post

tmoran@postmedia.com

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