U.S. President Donald Trump implemented a 25-per-cent tariff on most imports from Canada and Mexico in early March.Rebecca Cook/Reuters
With U.S. President Donald Trump waging trade wars against nearly every country on the planet, it was hoped Canada’s membership in the United States-Mexico-Canada Agreement would have its privileges.
The early evidence isn’t promising as far as Canada’s manufacturing sector is concerned.
When Mr. Trump implemented his 25-per-cent tariff on most imports from Canada and Mexico in early March, he provided an exemption for goods that are compliant with the USMCA trade deal.
Last year, fewer than 40 per cent of goods Canada shipped to the U.S. officially met USMCA rules-of-origin, though many Bay Street economists believe more than 80 per cent of exports could qualify if companies completed additional paperwork – which would give Canada the competitive advantage of a lower average tariff rate than non-USMCA countries.
Indeed, in April the USMCA compliance rate for Canadian exports surged to 60 per cent.
However the increase was overwhelmingly driven by energy exports becoming USMCA-compliant, according to a new report by Capital Economics. For many other manufacturing sectors, compliance rates held steady or even slipped compared with last year.
The lack of USMCA compliance seems to be hurting Canadian exporters more than Mexican exporters, with non-compliant shipments from Canada to the U.S. falling by almost half since the start of the year, economists Alexandra Brown and William Jackson wrote.
The result could mean Canada faces a higher tariff rate from the U.S., and hence lower economic growth, than many economists expect.
Opinion: In clinging to the dying era of free trade, Canada has lost its edge
“Lower compliance rates naturally raise the downside risks to activity,” they wrote.
In their forecasts, Capital Economics has assumed an 8-per-cent average tariff rate for U.S. imports from Canada, which would result in a hit of 1.6 per cent to GDP after three years.
But if USMCA compliance remains stuck at 60 per cent and the U.S. maintains its 50-per-cent tariffs on steel and aluminum imports from Canada, the average tariff rate would jump to 12 per cent, and the impact on GDP would be 0.8 percentage points larger.
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