Using a sports analogy to summarize our recent North American free trade discussions I would have to say that Canada made a big save, but unfortunately we weren't able to score. We did come close to needing overtime as Team Canada and our trading partners to the south were eventually able to come to an agreement with seconds left on the clock - as we came very close to the midnight deadline on September 30th. This new arrangement is the furthest thing from a free-trade deal... it is more like a managed-trade deal. It is now officially known as the United States-Mexico-Canada Agreement or USMCA for short.
This entire game began back when Donald Trump was on the campaign trail promising not only to "build a wall", but to renegotiate the nearly 25-year old North American Free Trade Agreement (NAFTA). The real question is: will this new agreement lead to freer trade than under NAFTA? It certainly is a long shot.
Who Wins?
Overall it could be said that all three countries scored a win by avoiding the destruction of one of the world's most successful trade agreements.
Canada was able to put up a "save" by conceding less than we first feared we would. One concession is that the pre-existing tariffs on aluminum and steel will remain for Canada (and Mexico). This deal is particularly concerning for us because we are the largest exporter of these goods to the U.S.
Mexico is "down" a bit as their auto sector will have to pay substantially higher wages to their workers. That said, Mexico was able to "make a comeback" as they have mostly unrestricted access to the U.S. market, leading to the continuation of their considerable trade surplus.
Overall, I believe that President Trump claimed victory in many ways. One example is that American dairy producers now have access to 3.6% of Canadian dairy consumers - sending hundreds of millions of dollars of new dairy products into Canada. Trump was also able to limit China's ability to trade freely in North America by requiring any country in the USMCA give notice to the other members if they begin trade negotiations with a non-market economy (like China).
Canadian Energy and Autos
Canada's two largest export sectors to the U.S. - energy and autos - were mostly untouched by the USMCA. The USMCA will make Canadian automakers - and their unions - happy because it requires that the percentage of content on domestic models made in North America increase to 75% (up from 62.5% under NAFTA). It also increased the maximum number of vehicles made in Canada that can be shipped to the U.S. to 2.6 million vehicles per year. That being said, this is mostly for show. Canada's contribution to North American car production peaked almost 25 years ago, and we haven't opened a new auto assembly plant in over 10 years.
Sunset Clause
Unlike a jug of milk, NAFTA never had an expiry date. The USCMA, however is subject to review after six years, and the agreement itself is guaranteed to last for at least 16 years.
Where do we go from Here?
Donald Trump, Justin Trudeau, and Mexican President Enrique Pena Nieto still needs to sign the agreement - something they hopefully plan to do before Pena Nieto leaves office at the end of November. The USMCA still has to be approved by all three governments. I doubt that the U.S. Congress will even review the agreement until sometime in 2019. If the Democrats are able to win the Senate, or the House, in the mid-term elections they may even play hard ball as I doubt they would want to give Trump the win.
Mr. Trump's use of Canadian economic dependence on the U.S. makes one thing clear: as a country we really do need to diversify our trade partners. 75% of Canadian exports go to the U.S. while only 18% of U.S. exports head back to Canada. The good news is that Canada has trade deals with the European Union and important trade partners in the Pacific (such as Japan) - a great first step towards reducing our trade dependency on our neighbors to the south.
Investors seem to be happy with the USMCA based on the market reaction. Although the markets are aware that approval for the USMCA is no slam dunk it is enough to show that Canada, Mexico, and the U.S. are able to come to an agreement when it comes to trade.
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