Canada sidelined in USMCA renegotiations as domestic economy dips

The administration of United States President Donald Trump wants to increase the percentage of regionally produced content in North American-built vehicles to qualify for preferential treatment under the US-Mexico-Canada Agreement (USMCA) on trade to 82 percent, with 50 percent of that value produced in the US.

The new proposal, which was first reported by the Reuters news agency, citing four unnamed sources familiar with the matter, emerged amid negotiations to revise the USMCA in Mexico City. Canada was not present at the negotiations.

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The shift, if accepted, would be a major break from the current USMCA, which requires that 40 percent of the “core parts” value of North American passenger vehicles be produced in high-wage jurisdictions, effectively the US or Canada.

That threshold is now 45 percent for pick-up trucks. Overall, vehicles built in North America currently must have 75 percent regional content to qualify for preferential treatment under the USMCA.

Auto sector officials told the outlet that US Trade Representative Jamieson Greer will negotiate with Mexico and present Canada with a take-it-or-leave-it proposition.

Canada’s exclusion from the negotiations for the USMCA, which is up for review in July, comes amid growing tensions between Washington, DC and Ottawa.

The USMCA, which was launched in 2020 to replace the decades-old North American Free Trade Agreement, maintained a duty-free trade zone that underpins nearly $1.6 trillion in annual trilateral trade. But Trump last year imposed 25 percent tariffs on Canadian and Mexican vehicles and components, with 50 percent duties on steel, aluminium and copper from those countries.

Greer has said that he intends to keep some level of tariffs on key Mexican and Canadian goods in the revised trade pact. But the two partners may get some preferential tariff rates. Currently, vehicles from Japan, South Korea, the European Union and the United Kingdom can be imported at lower rates than from Canada or Mexico.

Economic shifts

The Canadian economy contracted in the first quarter compared to last year, marking the second straight quarter of declines amid tariff-driven uncertainty.

Canada’s gross domestic product (GDP) declined, unexpectedly, at an annualised rate of 0.1 percent in the first quarter, Statistics Canada said on Friday, compared with a downwardly revised contraction of 1 percent in the fourth quarter of last year. However, on a quarterly basis, first-quarter GDP was unchanged against a decline in the fourth quarter of last year.

“Our forecast for growth to ramp up in H2 and through 2027 depends on a favourable USMCA renegotiation, an early end to the Middle East war, and resumption of normal commerce through the Strait of Hormuz,” said Tony Stillo, director of Canada economics at Oxford Economics, in a note, adding that “the economy faces a potentially bumpy ride ahead.”

The Canadian economy has been buffeted by, among other things, tariffs from Trump, who has threatened to annex the country and make it the 51st state of the US. Prime Minister Mark Carney was elected on the platform that he would strengthen and diversify the Canadian economy away from the US.

As part of that effort, Canada is in the middle of strengthening economic ties with China, its second-largest trading partner and with which relations had been frozen for years until recently.

China’s Minister of Foreign Affairs Wang Yi, during a meeting with Canada’s Foreign Minister Anita Anand on Friday, said that Canada could surpass its goal of increasing exports to China by 50 percent by 2030.

Wang is on a three-day visit to Canada, marking the first state visit by a Chinese foreign minister in a decade. He thought Canada’s exports to China could increase by 100 percent, building on the momentum between the countries.

Canada and China struck an initial trade deal in January to slash tariffs on electric vehicles.

“Canada is focused on growing our economy and diversifying our trading relationships,” Anand said during the meeting.

Canada has continued to push for a strong relationship with the US despite the tension.

On Thursday, in a speech at the Economic Club of New York, Carney called for a new partnership with the US as the two countries decide on renewing the agreement.

Carney says there should be a “true partnership” that reimagines cooperation in specific sectors deeply challenged by global competition. He warned, “We live in a world where integration has been weaponised,” and noted that is why Canada is diversifying away from the US and signing trade deals with countries around the world.

“Our core objective across these partnerships is to increase our strategic autonomy. Because we live in a world where integration has been weaponised. Because a country that cannot feed, fuel or defend itself is not truly sovereign,” Carney said.