In somewhat dramatic fashion, Canada and the United States agreed to a revised trade agreement at the stroke of midnight on the final day of the deadline set by the United States. This allows Canada to jointly sign the agreement with the United States and Mexico, should it be adopted by the U.S. House of Representatives.

There are few substantial changes for Canada from either the previous agreement or the proposed terms of trade outlined in the Trans-Pacific Partnership (TPP), which the U.S. administration withdrew from shortly after coming into office.

For Canada, the most important feature of the new agreement is that it lifts the uncertainty surrounding our relationship with our largest trading partner, allowing a return to business within a framework that allows for capital investment and longer-term planning.  This should benefit the machinery, industrial, engineering and transportation sectors.

The new agreement will remain in place for 16 years, with a review period after six years.  If the agreement is not extended at the review period, the parties will have 10 years to negotiate a new agreement.

Canada will not be subject to a threatened 25% tariff on autos and auto parts. Many of the other changes made to the automotive section (higher wage jurisdiction content and higher North American content) benefit Canada over Mexico.

The Chapter 19 dispute resolution system will remain in place, while the Chapter 11 investor-state settlement mechanism (which proved disastrous for Canada) will be eliminated between Canada and the U.S.

Previous protections for Canadian cultural industries are retained.

Canada will allow access to 3.5% of Canada’s protected dairy market (up from the 3.25% proposed under the TPP) and will eliminate the Class 6 and Class 7 (Powders, concentrates and ultra-filtered milk) categories, where it was accused of dumping.

Canada will extend the patent protection for certain prescription drugs from eight to 10 years.

The minimum threshold value of imported goods purchased online for duty-free access increases from $20 to $150.

While this removes a great deal of uncertainty around Canada’s economic future in the short and medium term, it also removes any hesitation on the part of the Bank of Canada from resuming its normalization of interest rates.  This may prove negative for housing and other interest-sensitive sectors.  Economists are increasing their expectations for both the timing and frequency of rate hikes in Canada and are expecting these to be accompanied by a gradual strengthening of the Canadian dollar.

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