Thanksgiving for USMCA

Oct 05, 2018 | Dian Chaaban


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After more than a year of discussions (and yelling), negotiators from the U.S. and Canada worked through the weekend to arrive at an 11th hour agreement late Sunday evening for Canada to join Mexico in an updated NAFTA deal. The new name – the United States-Mexico-Canada Agreement  (USMCA for short) – is a bit of a tongue twister so we’ll just keep calling it “New NAFTA” (or sing it aloud like some have been doing to the Village People’s YMCA tune).

Click here to read, ‘The ABCs of USMCA’ published this week by Eric Lascelles, Chief Economist at RBC Global Asset Management, which outlines all of the key changes affecting the Auto industry, the Dairy sector, China, Blanket tariffs, trade dispute mechanisms and the sunset clause.

So, was it a good deal for everyone?

From a high level, all three countries win as they seemingly avoid destruction of one of the world’s most successful trading arrangements 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 negotiate a trade deal. He can now turn all of his trade aggressions towards China.

Canada wins in that it did not concede as much as originally 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. That said, the country will enjoy largely unrestricted access to the U.S. market, ensuring its large trade surplus will most likely continue.

What could go wrong?

While the agreement in principle raises the prospect of a new NAFTA deal, there are still a number of hurdles

• The governments of the U.S., Canada and Mexico still need to vote and approve the pact – something that may prove difficult in the U.S. if the Democrats gain control of the House of Representatives after the mid-term elections

• Complexities are often known to arise during the late stages of trade negotiations or during the ratification period

• Details of certain chapters still need to be ironed out

Due to these complexities, we are still budgeting for potential scenarios in which the negotiations do not go as smoothly as hoped. There is still a possibility that the original NAFTA pact remains in place and a remote possibility both the original NAFTA and USMCA are torn up. This second scenario could involve a Democratic House rejecting the USMCA and President Trump retaliating by scrapping the original NAFTA.  Here is a breakdown prepared by my colleagues at RBC Global Asset Management to illustrate the 3 scenarios along with their odds and economic effect:

Here is the bottom line:

• The concessions that Canada made, such as on rules of origin in the auto sector and in granting the U.S. more access to the domestic dairy market, had been well telegraphed. And even some of Canada’s wins, like getting an exemption from potential U.S. auto tariffs, weren’t surprising.

• While it’s possible to conclude that the deal consists largely of tweaks to the old agreement, we believe reduced uncertainty about the U.S.-Canada trade relationship could prompt businesses to put more investment dollars to work and will support exports.

• Overall, however, the new deal doesn’t much change our base-case economic outlook. And we believe the USMCA won’t alter the Bank of Canada’s thinking on the pace and extent of future interest rate hikes.

• Click here for the full RBC Economics report.

And before I let you go, a moment of gratitude. 

As we enter the Canadian Thanksgiving weekend, I am reminded of the many things I am thankful for… I’m grateful for my health, my loving family and amazing friends.  I’m grateful to be Canadian and to live in #the6ix.  I’m grateful for my fantastic team and that I am backed by an institution as outstanding as RBC and I’m grateful for each and every one of you.

Many of you reading this are long-time clients, friends and family and some of you recently made the decision to trust us with your valued investments, financial planning, estate planning & tax planning. Regardless of how long we have been together, I want to thank you sincerely for your ongoing trust and loyalty.

This weekend, I hope you'll have an extra helping of stuffing (carbs don't count on long weekends), drink an extra glass of wine, snooze an extra hour in bed and spend a little extra time with family and good friends. 
 Now you are in-the-know with Word on the Street. 

Enjoy the long weekend and happy thanksgiving.

D.

Dian Chaaban
Investment & Wealth Advisor
Chaaban Wealth Management Group
416.842.4234