By now you’ve probably heard that Canada, Mexico and the United States have signed a deal. Goodbye NAFTA and hello USMCA—well, almost. The USMCA, which stands for the United States-Mexico-Canada Agreement, is better known by Canadians as CUSMA. This new trade deal has yet to be ratified, which may have something to do with what’s missing from the acronym: free trade.
With steel and aluminum tariffs still in place between the United States and Canada, CUSMA has received much scrutiny from Parliament.
When Trump’s 25.0% tariff on steel imports and 10.0% tariff on aluminum imports took action in June, Canada’s steel exports to the United States fell dramatically. Exports of steel products decreased 36.8% and aluminum exports fell 7.0%, according to Statistics Canada. In response to these tariffs, Canada imposed $16.6 billion in retaliatory tariffs, thereby joining the trade war. Fraught trade relations between the two countries have been impacting industries across several sectors of the economy. For Canadian businesses in the construction, automotive and healthcare sectors, CUSMA and the remaining trade barriers threaten to challenge procurement departments. In this report, we take a closer look at the dangers to businesses in these three sectors.
Construction in Canada
Included in Canada’s $16.6 billion in retaliatory tariffs are steel and aluminum tariffs that match those imposed by the United States. In August 2018, just a month after the imposition of these tariffs, the chairman of the Canadian Coalition for Construction Steel (CCCS) reported a significant increase in the price of steel rebar. According to the CCCS report, steel rebar exhibited a price increase that was 58.0% higher than the increase seen in 2017.
With many of the affected materials being used in the construction of condos and industrial warehouses—as well as for the restoration of Parliament buildings—it’s easy to see why Canadians were hoping for CUSMA to eliminate trade tariffs. Since the introduction of import tariffs in Canada, construction firms have faced difficulty sourcing from their usual providers of construction materials. As acquisition costs rise for construction firms, they will pass the added materials costs to their customers. As a result, procurement departments at construction firms, as well as the developers seeking services from construction firms, will face more difficulty securing attractive deals with providers.
Canadian Automotive Trade
The CUSMA terms surrounding automobile trade have largely been relieving for automakers in Canada because they remove the threat of tariffs on finished automobiles. However, purchase costs are still expected to rise at automobile plants as automakers face an obligation to source at least 70.0% of the steel, aluminum and glass for their automobiles within North America if they wish to qualify for free trade of the finished products. According to the International Trade Administration, Canada imported 10.4 million metric tons of steel in 2018 and the top countries it sought imports from were the United States and China.
The CUSMA deal will prohibit Canadian automakers from using Chinese steel if they intend to trade autos freely across North American borders. In addition, Canada’s retaliatory trade tariffs on US steel an aluminum will make it more difficult for automakers to source North American steel without paying high prices for the inputs. While procurement departments at automobile plants are expected to feel the pressure, buyers further down the line will also face trouble should they need to purchase automobiles for their businesses. Vehicle manufacturers are expected to lift their end prices in order to cover their expenses, giving buyers less room to score savings.
Canada's Healthcare Sector
In addition to impacting the automotive sector, CUSMA is expected to challenge Canada’s healthcare sector by supporting big pharma. A new extension of data protection on biologic drugs is expected to further raise drug prices in Canada. This extension, which raises protection from eight to 10 years, will enable producers of biologic drugs to keep prices elevated as they block out competition for two additional years. Drug prices have historically been a concern among Canadians due to the consistent rise in spending on medicines, which has been consuming more and more of total healthcare expenditure. With the exception of the United States, Canadians spend more per capita on medicines than any other country in the world.
While the government covers some of Canadians’ healthcare expenses, supplemental healthcare coverage is common in Canada. In fact, more than two-thirds of Canadians use supplemental coverage. In addition, more than 50.0% of prescription drug spending is reimbursed by a private payer. With CUSMA’s support of big pharma on the horizon, high-cost drugs could pose challenges to private insurance providers that cover prescription drug costs. In addition, employers seeking to offer benefits packages to their employees may face higher base prices for plans that include prescription coverage. Procuring such plans may require greater assistance from consultants or brokers, leading to additional costs.
Easily Compare Markets Across Countries
Leveraging the Canadian Spotlight Reports compared against our US Market Intelligence, understand the differences between US and Canadian markets for a variety of indirect products and services. For example, find out why market share concentration is high in Canada and low in the US and how you can take advantage of differences.
By Kim Bucci, Business Research Analyst
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