How to Embrace USMCA with Canadian Government Funding

The United States-Mexico-Canada Agreement (USMCA) offers many opportunities as well as some challenges for Canadian businesses. If ratified, the new agreement-in-principle will take effect on January 1, 2020 and significantly impact supply chain management, predominantly in the dairy, poultry, and automotive sectors. While there are many businesses across Canada that are concerned about these changes, the deal is expected to be a net positive for Canadians and the nation’s economy.

Replacing the 24-year-old North American Free Trade Agreement (NAFTA) will improve Canada’s trade relationships and open the market to more Canadian products and services.

Signing a new trade deal with the United States and Mexico is welcome news to most Canadian business leaders. Having a firm understanding of international trade relations is key when determining how to invest and expand operations. Many companies were worried pre-USMCA that their access to the US market would be stifled by tariffs and other protectionist measures. With a more open trade environment within North America, more investment will begin to flow across the continent.

To take full advantage of United States-Mexico-Canada Agreement provisions, Canadian businesses should use government funding programs. Grants and loans can help companies address key opportunities and threats that have arisen from USMCA, like enhancing competitiveness and reaching new markets.

Implications of the USMCA for Canadian Businesses

While reaching a deal represents a positive step forward, some concessions made to the United States have dampened early optimism for USMCA. Those who benefit from the new trade deal will look forward to new investment opportunities and expanded market access. Meanwhile, industries most at risk will need to adjust their business strategies to increase cost competitiveness.

Areas where USMCA impacts the Canadian business landscape most include:

Dairy and Poultry Production

Canada’s supply management system is a protection measure that helps regulate the cost of goods for both producers and consumers. It controls production to meet domestic demand, while limiting low-cost foreign entrants from under-cutting Canadian prices.

There are five supply-managed agricultural sectors in Canada: dairy, eggs, chicken, turkey, and broiler hatching chicks.

Through this system, Canadians have enjoyed greater access to Canadian-made products, and farmers have been able to sell their products at higher prices than the market would otherwise allow for. During USMCA negotiations, this practice received incredible pressure from American negotiators that wanted a greater share of the Canadian market. Now with a solid USMCA deal in place, Canada will provide American companies access to 3.5% of the market for these products. While some products are phased in, others will take effect immediately on January 1, 2020.

Agricultural producers that operate in these supply-managed sectors are anticipating that increased American competition will hurt profitability. One strategy to overcome this and improve competitiveness is through Canadian government funding programs. Government grants can help improve operational efficiency through purchasing new technology and supporting other key investments. Some of the top government grants and loans currently available include:

• Canadian Agricultural Partnership (CAP): CAP is the main government funding support system provided to Canadian agricultural producers and processors. There are several programs offered across Canada, including AgriMarketing and AgriInnovate (see below), in addition to provincially-exclusive funding opportunities. Funding varies based on project type; follow the CAP link above to explore its agriculture grant and loans programs.
• AgriMarketing: One of several programs provided under the CAP umbrella, AgriMarketing supports the development and expansion of international markets. The program offers applicants up to 50% of eligible expenses to a maximum $50,000 per year. Projects typically involve traveling to a foreign market to participate in trade shows and perform other activities that build new contacts in the region.
• AgriInnovate: Similarly, AgriInnovate is offered through CAP and is available to Canadian agricultural producers and processors. The program focuses on adopting and/or commercializing innovative products or technologies that provide a significant impact on operations. It offers up to 50% of eligible project expenses up to a maximum $10 million in repayable funding (government loans) to support the integration of advanced manufacturing systems (automation and robotics) and other competitiveness-improving technologies.
• Dairy Processing Investment Fund (DPIF): Although it’s not included in CAP, DPIF is still available across Canada and provides funding specifically to dairy processors that invest in equipment and infrastructure. It offers up to 50% of eligible project costs to a maximum $10 million to engage in projects that make better use of surplus skim milk. By developing new value-added products and processes, Canadian dairy farmers will become more globally competitive.

Automotive Manufacturing

Another USMCA provision that’s received considerable attention is the origination of automotive content. The North American automotive market is the most sought-after by global automotive manufacturers, but a flood of parts and vehicles that originate from low-cost jurisdictions reduces the ability for domestic manufacturers to compete. As a result, more investment has flowed to Mexico or out of North America entirely because the cost of labour is much cheaper.

Approximately 21 million automobiles are sold in North America each year. Sourcing more content from North American manufacturers will provide tremendous benefit to local economies.

Under NAFTA, regional content for automobiles was 62.5%. Under USMCA, this will surge to 75% – a 20% increase over current standards. In addition, a minimum of 40% of automotive content must be made by workers that earn at least $16 per hour. These two rules will work together to ensure that more overseas production is brought back to North America, but also to keep investment evenly distributed throughout the three countries. Foreign manufacturers will need to plan their investments more conscientiously instead of focusing all their resources into Mexico, which has more relaxed labour laws.

Canada and Mexico will also be subject to tariffs that surpass maximum import values, although it’s expected that these will not be a factor for another five to 10 years. Through the USMCA trade deal, Canada may ship 2.6 million vehicles and $32 Billion in automotive parts to the United States tariff-free each year.

Most automotive manufacturers in Canada are claiming USMCA is a success because it’s settled much of the tariff uncertainty that’s held back OEM investments. New investment will begin flowing on both sides of the border, and because of that, Canadian parts manufacturers will also benefit. Some government funding programs to help manufacturers invest and improve competitiveness include:

• Automotive Supplier Competitiveness Improvement Program (ASCIP): Exclusively for automotive manufacturers in Ontario, ASCIP supports technology (hardware and software) investments that lead to improved productivity and competitiveness. It provides grant funding worth up to 50% of eligible project costs to a maximum $100,000 per company. Projects often include Enterprise Resource Planning (ERP) system implementation and other projects that enhance supply chain management through real-time data tracking.
• CanExport: Automotive manufacturers across Canada can use CanExport to expand their sales in international markets, including the United States and Mexico. The Canadian government grant offers up to 50% support for eligible expenses to a maximum $50,000 per application. Companies often use the funds to travel to an export market for marketing and sales activities such as participating in trade shows and conducting market research.
• Southwestern Ontario Development Fund (SWODF): Also for Ontario automotive manufacturers, SWODF offers funding to support facility expansion and technology adoption. The program offers up to 10-15% of eligible project expenses to a maximum $1.5 million in Ontario government grants. For large investments incurring more than $10 million in eligible expenses, up to $5 million may be awarded as a government loan with $1.5 million of that amount eligible to be forgiven if the applicant achieves certain project milestones/impacts. Eastern Ontario businesses can also benefit from SWODF’s sister program, the Eastern Ontario Development Fund (EODF).
• Industrial Research Assistance Program (IRAP): The federal government also provides funding to support innovative research and development activities. NRC-IRAP grants provide a smart approach to technology commercialization projects that have technical risk or uncertainty. Automotive manufacturers can apply for up to 65-80% of project costs to a maximum $10 million in funding.

Other Impacts

USMCA has many other provisions that will impact Canadian businesses over the coming years. Many of the negative impacts that arise from them can also be supported through Canadian government grants and loans. Some include:

• Steel and Aluminum Tariffs: The tariffs imposed on Canadian aluminum and steel products entering the United States will remain in place as part of the US’ “Buy American” plan that focuses heavily on steel production. Canadian exports will continue to be flagged and taxed without any plans to wind-down or eliminate them. Since the tariffs came into effect, the Government of Canada has introduced measures to help those affected. Steel and aluminum producers should explore the Strategic Innovation Fund, which has a stream of funding devoted specifically to improving competitiveness and overcoming the hurdles caused by tariffs.
• Prescription Drugs: Canadians will experience increased costs for biologic medicines during the lifetime of USMCA since the “data protection” period on this class of drugs will increase from eight to 10 years. Previously, generic alternatives could be released to the mass market after eight years; however, Canada and Mexico will now adopt the United States’ minimum of 10 years, which puts additional strain on the healthcare sector and many Canadians that pay for these drugs on their own. Biologics, the fastest-growing cost segment of health spending, are pharmaceuticals derived from living organisms and provide significant benefits in treating many illnesses.

Respond to USMCA Implications with Government Funding

While there is still much to be learned about USMCA and how it will impact Canadian businesses, being proactive and developing an investment strategy can help companies succeed under the new deal. Consider how NAFTA 2.0 affects your business’ international competitiveness and start developing plans for how you will respond. In most cases, Canadian government grants and loans will help implement new projects that have an immediate and sustained boost to productivity, profitability, and export potential.

To learn more about the Canadian government funding landscape, including areas where government funding can support your business’ growth, please explore the Canadian Business Funding Guide.