October 2018

With rising economic uncertainty around Brexit, increased sparring over trade between the US and China, and much concern about the fate of a NAFTA-less world, Canada recently had the opportunity to appreciate a genuinely satisfying moment: the sound of an important piece clicking into place.

The recently devised USMCA (United States–Mexico–Canada Agreement) trade agreement will begin making its impact in 2020, assuming it passes through the approval and signing process without incident. But one of its most important functions is essentially complete already: the very existence of the trade agreement significantly eases worries around the business community, which had feared the possibility of the kind of no-deal outcome that the UK is currently on course to encounter.

As a substitute for NAFTA, the USMCA seems, in general terms, fairly practical and modest in the types of changes it imposes. New rules surrounding automobiles will require that 30% of the work on vehicles must be performed by employees making at least $16 per hour – otherwise tariffs will apply to the vehicle. The percentage rises to 40% by 2023, which is welcome news for auto workers in the US and Canada, but the effect on car prices remains to be seen.

Canada’s protectionist rules surrounding dairy farms will also be relaxed somewhat, as the country will allow more foreign milk and milk products into its markets under the new trade agreement. This new arrangement will be seen as a compromise, as Canada will also keep many of its original dairy-related rules in place.

Intellectual property rights will be strengthened under the USMCA, allowing US drug companies to enjoy 10 years – up from eight under NAFTA – of market protection for new drugs before generic medicines are allowed to be introduced as competition.

Other disputed issues, such as the 25% tariffs on Canadian steel imposed by the US, have not resulted in a change to the status quo under the new trade agreement. As with any such agreement, however, additional refinements may be made before it is officially signed, and all businesses in the region with international supply chains are advised to read the final text closely in order to plan accurately for a future under the USMCA.

The agreement is scheduled to run for 16 years, with an option to continue for another 16 years after the initial run expires. It also has a review period baked in after the first six years are completed, so that Canada, the US and Mexico can make revisions as necessary.

Canada welcomes legal marijuana

The aforementioned trade agreement will need more than a year before taking effect, but a new law legalizing marijuana in Canada is rolling out this month.

Estimates put the economic impact of marijuana at $8 billion per year, although caution is warranted before assuming that the Canadian economy will actually grow by this amount due to legalization. The marijuana economy in Canada has been underway for a long time, and legalization may only mean that the revenue will now be on the books, instead of in the shadows.

Nevertheless, Toronto-Dominion Bank revised its 4th-quarter economic growth forecast upward as a result of this month’s marijuana legalization, from 2% to 2.9%.

With new trade measures on the horizon and an entirely new business model now available with the legalization of marijuana, Canada seems to be on the verge of some exciting times ahead.

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