Why this manufacturing industry insider thinks the U.S. will soon come around on CUSMA

Is it still possible to be optimistic about negotiations for the Canada-U.S.-Mexico Agreement after Washington passed on the July 1 deadline to renew? Falak Kothari is. And as managing director focused on the manufacturing and auto industries for risk consultant Marsh Risk Canada, he has an intimate view of what industry is seeing on big trade files. He spoke to National Post’s Tracy Moran about why he’s still bullish on the Canada-U.S. trade relationship. The interview has been edited and condensed for clarity.

Could you explain why you remain optimistic about CUSMA?

Falak Kothari: I feel like sometimes people are reading into the headlines far too literally. When we look at the North American trade agreement, or as we call it USMCA/CUSMA, in most aspects we’ve seen that this does work, and I think all three countries are pretty much aligned on why this agreement is important for the competitiveness of the North American trading bloc versus the rest of the world.

One key reason is that the North American manufacturing ecosystem is highly integrated. In the automotive sector, from the start of production all the way to finished vehicles, sometimes vehicles cross borders multiple times before they’re finished and shipped to the customer. That’s only possible because of the way the borders and the trade agreement have been set up currently.

There are several other factors when we take agricultural products, food and beverage, industrial equipment, and energy. A number of bordering U.S. states obviously use Canadian energy to function. So the three countries are significantly embedded, and Canada and the U.S. even more so.

When you look at the U.S. position that was more recently taken, people go too far ahead to think, “OK, this means the U.S. is walking away from the agreement,” which is not actually true because if they were just completely walking away from the agreement, they would have exercised the six-month termination clause. What it really signals is that the U.S. is actually looking to use this as trade and negotiating leverage when they come back to the table.

What signals are you seeing that others might be missing?

Canadian manufacturers in general have… already significantly invested in trying to get more resilient. So, resilience, which was once an option and where the focus was always on cost management, now has shifted to just being table stakes.

On top of that, when you look at some of the structural tailwinds, such as the Buy Canadian policy, a lot of manufacturers are now benefiting from it. You’re also looking at nation-building projects, with significant importance given to critical minerals now, which is also a big topic for the U.S. Having a reliable partner they can have access to in terms of critical minerals is obviously going to be a key factor. 

And with Prime Minister (Mark) Carney trying to strike economic partnerships with different countries and economies, especially with the middle powers, that has brought a lot of attention back to the U.S. and Canada, where we’re looking at diversification in a strategic way, but at the same time that also sends a signal to the U.S. that we’re ready to play ball where required.

If Washington pushes hard on one issue in negotiations, what’s the pressure point most likely to force Canada to make a concession?

There are several trade irritants and issues that have existed for decades. When we look at the dairy sector, for example, the U.S. has always felt that Canada hasn’t provided full access to the dairy sector. So I would say concessions are likely to happen if both parties come to the table.

Canada has already shown some flexibility with the digital service tax, which was one of the sticking points. 

A few topics will be front and centre where either of the parties will have to negotiate, concede, or come to a middle ground. Definitely the sectoral tariffs on aluminum, steel, and lumber. When it comes to automotive, we’re talking about the rules of origin and how the regional content valuation is defined. We’re also talking about agricultural inputs, which have also been a key discussion topic.

I would say that in most areas, Canada will be okay to concede on certain aspects like digital service trade, as well as tightening the automotive rules (of origin), with an important element being avoiding transshipment … cheaper goods coming from other parts of the world easily entering North America via Canada and Mexico.

I don’t see Canada making any concessions on supply-chain management. Where they might make certain concessions is on the tariff quotas — on up to what percentage of volume is probably allowed within the Canadian market. I think that’s where they may show some flexibility to provide the U.S. with some comfort.

What specific concessions could Canada realistically extract using the leverage of critical minerals?

Critical minerals are certainly an important part of Canada’s strategic value … In my opinion, Canada’s value proposition goes well beyond minerals.

We have reliable energy sources, strong agricultural production, aerospace capabilities, advanced manufacturing expertise, engineering talent, and emerging leadership in areas like AI and clean technology…

Where Canada’s issue probably would lie is making sure that there is national sovereignty retained while it gives the U.S. access to critical minerals.

Canada has also had several procedural aspects and regulatory approvals that are challenging. Considering the nation-building projects and some of the other initiatives: we hope that the approval process can be expedited in many ways, which can actually give the U.S. faster access to some of those critical minerals.

But it obviously is going to be more strategic rather than just a straight-up access to critical minerals, because Canada is also going to try and see where it can hold its leverage and position without over-compromising.

Are you seeing U.S. buyers or manufacturers already adjusting sourcing strategies in ways that strengthen Canada’s negotiating position?

Yes, but the change is more strategic rather than immediate. Companies are not simply moving suppliers overnight. They’re reassessing risk.

Historically, procurement decisions were often dominated by cost. Today, executives are asking broader questions. How resilient is the supplier? Are we exposed to geopolitical disruption? Do they have visibility into their supply chain? Can they continue delivering during periods of volatility?

Could Canada be cut out of the next wave of North American manufacturing investment?

It’s the million-dollar question. Is there a risk? Yes. Is it easily implemented in real terms? That’s a bit more challenging to imagine.

We have seen some disruption there, where the big three (domestic automakers) in the U.S. have been forced to invest a lot more within the U.S. and take out investment from elsewhere. But when you actually see those big three companies publicly speaking, you still see them saying that Canada is a very important market and (they) want to continue to build vehicles and serve the Canadian market.

There is always a possibility. But sometimes what appears on the surface is often a negotiating tactic and is not something that the administration necessarily rolls through with. Something that is working really well and where companies, and even U.S. companies, have spent significant amounts of capital over decades because of the free-trade system, suddenly to uncouple that does not always make sense.

Despite CUSMA being in place, companies are increasingly making bilateral, U.S.-first decisions. You don’t think Canada will lose its place in the automotive production system on the continent?

No, I don’t think so because Canadian manufacturers have already started to pivot in some ways. Historically, Canada was known for its assembly or engine production and a lot of those aspects.

I think they’re quickly moving to realize that there’s a lot more that Canada can offer in terms of software-enabled vehicles, the technology within that, and Canada is excelling a lot in that space right now. So there could be new ways and means for Canada to adapt.

Canada is still considered a very reliable partner for a sizeable market. Obviously, it doesn’t compare to the U.S., so companies are going to be a bit more (inclined) towards the U.S. But a lot of U.S. companies have been extending their contracts till the end of the year or to the best extent they can.

So we did not see those contracts being turned over or the supply chain changing overnight. We saw that changing through the year or end of the year when contracts came up for renewal.

How much influence does U.S. industry lobbying behind CUSMA’s renewal actually have in a protectionist political climate?

For any elected party or the current administration, economic growth and factors that are going to propel the economy forward are extremely important, which means the voice of the business community is extremely important.

We’ve seen the largest manufacturing association in the U.S., the National Association of Manufacturers (NAM), work very closely with the associations here in Canada, whether it’s CME or the Automotive Parts Manufacturers Association, on common agendas. We saw letters being sent to U.S. Trade Representative Jamieson Greer, where seven associations on the automotive side came together and said why they believe that CUSMA should continue.

Also important to keep in mind, there’s a huge dealership network in the U.S., and each of these dealership networks directly tie back into the congressional districts. So when you look at all of these components coming together and applying pressure on the administration, lobbying goes a long way.

Is there any evidence that Washington is likely to soften its stance closer to the midterms?

I feel like this topic has taken a bit of a backseat given what (is happening in Iran). Depending on the outcome of the U.S.-Iran issue, as well as the global geopolitical landscape, I think there’s going to be pressure on the administration to prove that employment, productivity, and overall economic growth still exist. As we get closer to the midterms, I feel like there will be a lot of pressure from the opposition. This could (help) an agreement be struck.

We’ve seen a lot about bilateral talks, especially between Mexico and the U.S. Is there a risk of it hollowing out CUSMA over time or creating a two-track system?

There’s definitely that risk because we’ve seen that Mexico’s discussions have already progressed far compared to Canada not even having a scheduled meeting in the calendar.

The issues on both sides are a bit different as well. The bigger concerns were around security and fentanyl. I feel like the issues that Mexico will have with the U.S. are a bit different than what Canada will have with the U.S.

So we are going to see some bilateralism within the trilateral agreements, which might not actually be a bad idea because it might just mean more clarity and specific agreement to certain things that benefit both countries. But a trilateral framework still works more competitively across the North American trading bloc.

Are there any other sticking points that you think would be best handled bilaterally?

In certain cases, sectoral tariffs would be better handled bilaterally. The leverage that’s going to be used to negotiate some of these elements is going to be different for each country. So some of those discussions might happen separately and might be more successful than three parties sitting together. But Canada and Mexico also do need to work a little more closely to have the same narrative … of why the overall trilateral agreement is important and what value it brings to the U.S.

Walk us through your optimistic view of the next few months.

I feel like we’ll have a period of silence between now and the next month or two, till the geopolitical situation and some of the other larger topics really settle down…

 Between September and November is when we can see some definite movement happening on which way or direction this might likely go.

The sentiment across the lobbying groups and the political environment is that by end of fall is where they anticipate that we might be reaching some sort of an agreement. We might definitely be in for some headwinds, and may not land at the trade agreement that we were hoping for. We might have to concede in a couple of areas or more areas, but I think overall we might still be able to preserve the North American Trade Agreement.

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