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What the new NAFTA (actually, USMCA) deal means for Canadians

Donald Trump and Justin Trudeau
Donald Trump and Justin Trudeau

After more than a year of often-contentious negotiations, which included concerns that a new deal wouldn’t be reached at all, Canada has secured a free trade agreement with with the United States and Mexico.

So now that a deal is done, what does that mean for the average Canadian?

With a new United States-Mexico-Canada Agreement (USMCA) deal in place, Canadians should expect interests rates to go up, more duty-free online shopping, and increased economic stability that comes with lifting the uncertainty that has been weighing on the Canadian economy since the U.S. pulled the trigger on NAFTA negotiations more than a year ago.

“Canada has made concessions, but is coming out quite clean considering the array of potentially negative options or threats that were on the table,” Bank of Montreal’s chief economist Douglas Porter wrote in a research note on Monday.

One of the first immediate effects of this new deal may come later this month during the Bank of Canada’s next policy announcement on October 24. Economists agree that reaching a conclusion on NAFTA negotiations all but guarantees that Bank of Canada governor Stephen Poloz will look to hike interest rates.

“With the (trade) risk removed, a rate hike later this month looks virtually cemented, while we see the balance of risk shifting towards three additional hikes in 2019 (from two),” TD Deputy Chief Economist Derek Burleton wrote Monday, adding that the deal could open the door to “a faster pace” of increases in Canada next year.

“By removing a significant cloud of uncertainty around trade, it is very likely to be growth positive, especially for Canada and Mexico.”

Online benefits

As well, online shoppers that have been frustrated having to pay customs fees when purchasing goods from U.S. stores will be pleased with at least one aspect of the deal.

The USMCA will see the de minimis threshold on imported goods purchased online – the limit on the amount of goods that can be imported duty-free – lifted from $20 to $150.

The new threshold will benefit consumers and businesses, Porter said, but may come at a cost to some Canadian retailers who will lose out due to competitiveness.

“Canadian consumers will enjoy lower prices and faster delivery times due to less customs processing,” Porter said. “Small and medium-sized businesses that buy U.S. supplies online will save on administration cost and face fewer delivery delays, reducing uncertainty in their supply chain.”

Dairy supply chain

Canada’s dairy supply management system had been a consistent point of contention – particularly for U.S. President Donald Trump – throughout the negotiations, and Canada seems to have relented to demands that the market be opened up more to competition.

While supply management has not ended, the deal gives U.S. dairy farmers access to 3.5 per cent of Canada’s protected market. But whether that will lead to cheaper milk or eggs remains to be seen.

“I don’t think it’s going to cause immediate changes in pricing in dairy or poultry,” said Scotiabank deputy chief economist Brett House in an interview.

“It may provide a little more variety, but that’s probably going to be limited to. It’s by no means a revolution in that area.”

Porter agreed, and said changes to dairy prices for consumers will be limited.

“I wouldn’t expect a big change, but it might slightly change pricing, especially for something like cheese. Consumers might mildly benefit, but we’ll have to see,” Porter said.

Prescription drugs

At the same time, the cost of some prescription drugs may increase for some Canadians.

Under the new agreement, Canada has agreed to extend patent protection for certain drugs from eight to 10 years, something Porter said “is the one portion of the deal that is a clear negative for Canada, since it will add to drug costs with precious little upside in return.”

What is means for pricing will depend on the drug.

American wine

The USMCA also means that wine drinkers in B.C. will be able to purchase their favourite California wine at the grocery store as of November 1 of next year. The new deal eases restrictions that prevented U.S. wines from being sold in B.C. grocery stores, a policy that is at the centre of a WTO complaints filed by the U.S. last year.

Michael Kaiser, vice president of WineAmerica, an organization advocating for the U.S. wine industry, expects that WTO complaint to disappear once the restrictions are lifted.

While Kaiser said he would have wanted to see grocery store restrictions lifted in Quebec as well, he said his organization is satisfied that the issue in B.C. – a significant market for the west-coast wine industry – is resolved.

“Keeping the Canadian market open was our main priority,” Kaiser said. “Quebec is still allowed to continue with their grocery store restrictions, but quite frankly it’s not as large of a market for us as B.C., so we’re pretty happy with the fact that this settles that one particular issue.”

Lifting uncertainty

Despite the changes to de minimis thresholds, dairy market access and prescription drugs, Porter said the most significant change for consumers is the easing of economic uncertainty.

“The Canadian dollar is up, stocks are a little bit up, business confidence and consumer confidence might also go up, and it also means interest rates are probably going higher,” he said.

“We knew from Day 1 based on the demands the U.S. was making that Canada was going to be on the defensive here. While I think Canada did make some meaningful concessions, I will say the negotiators did a very good job in keeping a lid on the concessions we had to make.”

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