Quantifying CUSMA: The Economic Consequences of the New North American Trade Regime

The Canada-United States-Mexico Agreement (CUSMA), as amended by the Protocol of Amendment signed December 10, 2019, represents a major overhaul of the now-dated 1994 North American Free Trade Agreement (NAFTA). However, it is unusual in that it has little traditional tariff liberalization, introducing only minor changes to market access compared to the NAFTA, and limited improvements in trade facilitation, while at the same time introducing a number of features that promise to be more restrictive of trade.

The liberalizing elements include expanding US access to Canada’s dairy and poultry markets; raising the threshold for tax and duty-free entry into Canada and Mexico of low-value goods imports; and easing some barriers to services trade.

However, the most quantitatively significant effects are the more stringent rules of origin that must be met for products to qualify for duty-free market access under the CUSMA. These new rules achieve the immediate objectives of the Trump administration to shift industrial activity – especially in the automotive sector – into the United States, but by increasing trade diversion, they impact negatively on economic welfare and efficiency. In addition, more stringent border enforcement promises some border thickening, especially for goods entering the United States.

Compared to NAFTA, the CUSMA results in lower real GDP and welfare for all three parties, with Mexico being hardest hit and the United States the least. Canada’s real GDP stands to shrink by -0.4 percent and economic welfare to fall by over US$10 billion. However, the three parties are marginally better off than under a scenario in which NAFTA lapses altogether. The major caveat to these results is the extent to which the longer-run investment climate in Canada (and Mexico) has been affected by the changes to the NAFTA institutional framework.

While Canada managed to preserve the binational panel review of anti-dumping and countervailing duties, and the Protocol of Amendment improved the state-to-state dispute settlement mechanism by removing a procedural blockage to panel formation which limited its usage, the introduction of a sunset clause for the agreement, the elimination of investor state dispute settlement, and perhaps most importantly, the failure of the new agreement to eliminate the application of US section 232 national security tariffs on imports from its North American partners signals future risk concerning assured access to the US market.