On Sunday, the United States and Canada reached a last-minute deal to save NAFTA as a trilateral pact with Mexico. The full text of the agreement can be located here.
The new United States-Mexico-Canada Agreement (USMCA) largely leaves the broad North American Free Trade Agreement (NAFTA) intact, and maintains current supply chains that would have been fractured under weaker bilateral deals.
The key provisions of the agreement related to the U.S.-Canada trading relationships are as follows:
1) Autos: Three quarters of auto content will originate from North America, up from the current 62.5% – a development expected to be scaled up over the next five years. Meanwhile, 40% of the car is to be produced by workers whose average pay is in excess of $16/hr. The Canadian auto sector will be awarded substantial protection against any subsequent auto tariffs imposed by the Trump administration. Only vehicles that failed to meet the rules of origin agreement might be subject to auto tariffs.
2) Dispute resolution: There are three types of dispute panels, but the one Canada was most interested in preserving was the mechanism for resolving disputes over bi-national anti-dumping and countervailing duties; so-called Chapter 19. This has been untouched, much to Canada’s liking.
3) Dairy: Expanded American access to Canada’s protected dairy market. The amount of access is still not known with precision, but it might be something in the order of 5% of the market, slightly higher than the estimated 3.3% Canada gave up in the Trans-Pacific Partnership deal.
The parties have not yet resolved their ongoing disputes across the steel and aluminum industries. Over the next two months, they will attempt to ease the friction caused by U.S. tariffs on steel and aluminium imports from Canada and Mexico.
Although details around the sunset clause are still blurry, it appears to be close to what Mexico originally negotiated. This means the USMCA is subject to an official review by all parties after six years (notably, after the current president will have left office) but is ensured to exist for 16 years. This represents a marked improvement from the original U.S. proposal for a five-year review, after which the deal could be ended immediately.
A more detailed write-up from the CBC can be read here.
All three countries win, as they managed to avoid the destruction of one of the world’s most successful trading agreements and eliminate a great deal of uncertainty.
President Trump wins in that he has technically “killed NAFTA,” if only in name, proving he can successfully broker a trade deal. He can now shift his trade aggressions towards China.
Canada wins in because it did not concede as much as was feared. The key dispute mechanisms remain in place, the auto sector quota is well above current export levels, the sunset clause is weaker than originally envisioned and a smaller portion of the dairy sector was opened than feared.
Mexico comes out slightly less well given its auto sector will have to pay substantially higher wages in certain circumstances. However, it will enjoy largely unrestricted access to the U.S. market, ensuring its large trade surplus will likely continue.
It’s important to note these positives are in the context of low expectations for the deal, rather than trying to improve current trade relations. While the USMCA can be perceived as slightly worse for future economic growth compared to NAFTA, the immediate response from financial markets is encouraging.
Overall, it’s an arrangement everyone can live with, and for now, that’s good enough.
The conclusion of this trade dispute is positive for markets. First and foremost, TSX profitability is under less direct threat from the potential for higher import costs; additionally, declining trade uncertainty is a support for the more trade sensitive Canadian dollar by removing some headwinds on domestic corporate and foreign direct investment. The Bank of Canada will also have to revise its economic outlook to a more positive one, which will increase the likelihood of interest rate increases (even as early as this month).
The USMCA is the latest example of what appears to be increased cooperation (relatively speaking) from the current U.S. administration with the rest of the world. In the past few weeks, there has been a deal with South Korea, a “cease-fire” agreement with the European Union, and a plan to move forward on talks with Japan. With the USMCA out of the way, the Trump administration can now place more focus on its lingering trade dispute with China. The situation is fluid and evolving, but it no longer looks like the U.S. is standing alone. It will be interesting to see whether these recent deals help the Republicans better position themselves for the November mid-term elections.
This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.