Canada, Mexico and the United States recently finalized a sweeping new trade deal after several months of tense negotiations. The pact, now called the U.S.-Mexico-Canada Agreement or USMCA (aka NAFTA 2.0), updates the 1994 North American Free Trade Agreement (NAFTA) and promises to lead “to freer, fairer markets, and to robust economic growth” in the three-country region.
Both Canadian Foreign Minister Chrystia Freeland and US Trade Representative Robert Lighthizer in a joint statement welcomed USMCA as a “modernized” pact that “will strengthen the middle class, and create good, well-paying jobs.”
Canadian Prime Minister Justin Trudeau said that USMCA would “enhance competitiveness & prosperity, while creating new jobs”; while Mexican President Enrique Pena Nieto added that the deal is a “win-win-win” agreement. President Trump, in the meanwhile, tweeted that “the USMCA is a historic transaction!” He added that “we had negotiated this new agreement based on the principle of fairness and reciprocity. To me, it’s the most important word in trade.”
Now, let’s take a look at who’s smiling and who’s not on the making of the new NAFTA.
Is USMCA the New Dawn for Auto Industry?
NAFTA required automakers to manufacture 62.5% of a vehicle’s parts in North America to qualify for zero tariffs. USMCA, in the meanwhile, raised the threshold. Now, 75% of auto components have to come from within the trade bloc. In addition, 40% of value added to vehicles must come from factories that pay its workers a minimum of $16 an hour. That is essentially triple the average wage in factories in Mexico right now. The new agreement, thus, will compel automakers to shift suppliers from Mexico to Canada or the United States.
Major automakers, including General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) , breathed a sigh of relief. After all, the North America supply chains won’t get hampered by something that they had heavily relied on.
General Motors, in particular, said that the agreement is “vital to the success of the North American auto industry.” General Motors co-owns the DMAX truck engine plant in Moraine, which has nearly 800 workers. Several Miami Valley companies also supply General Motors with auto parts, including Fuyao Glass America, also in Moraine, and Tenneco, in Kettering.
But, auto experts cautioned that the new trade agreement is going to bump up car prices in the United States, especially small cars that used to be manufactured in Mexico but may not be able to bring across the border tariff free anymore. Automakers also can’t depend on cheap Mexican labor now, which means further escalation in cost. Those costs will eventually spiral down to consumers in the form of higher car prices. Lest we forget, the Fed has already hiked interest rates and that means higher auto loans for consumers.
Thus, Ivan Drury, Edmunds' Senior Manager of Industry Analysis rightly said that “the new regional value content requirements mean that automakers will not able to source parts as freely, so there will be added costs associated with vehicle manufacturing.” He added that “given that new vehicle prices are already stretched to record highs, things could take an ugly turn for consumer wallets.”
US Farmers Welcome New NAFTA, Canadian Farmers Feel the Heat
The new North American trade pact has been welcomed by U.S. farmers. After all, the new trade deal is widely expected to protect tens of billions of dollars in farm goods traded across the country’s borders, per U.S. Department of Agriculture estimates.
The tri-nation deal should encourage each country to get rid of tariffs on each other’s products that have badly hurt U.S. prices for pork, cheese and other foodstuff. Needless to say, the United States for now is maintaining tariffs on foreign-made steel and aluminum. This, in turn, prompted Canada and Mexico to place retaliatory duties on U.S. products, ranging from pork to yogurt, slashing profits of some U.S. food companies and leaving farmers facing huge losses.
But now the new deal will benefit U.S. food companies, including Archer-Daniels-Midland Company (ADM - Free Report) and Tyson Foods, Inc. (TSN - Free Report) , as well as some farm groups that have raised concern over the tariffs’ impact on the U.S. farm belt.
Tyson, the biggest U.S. meat processor by sales, urged “approval of a new deal and the removal of retaliatory tariffs and other trade barriers so that U.S. farmers and companies like ours can continue to expand in these important markets.”
Canada, by the way, has agreed to drop its Class 7 pricing system. And that’s good news for the U.S. dairy industry. This is because Eric Meyer, the president of HighGround Dairy in Chicago, has said that “the pricing system allowed for Canada to be competitive to export their excess skim milk powder, taking away market share from the U.S.”
On the flip side, Canadian farmers complained that the agreement would limit exports. The Daily Farmers of Canada said that “we fail to see how this deal can be good for the 220,000 Canadian families that depend on dairy for their livelihood.”
Dow Hits New Record on Optimism Around Global Trade
Dow companies, such as The Boeing Company (BA - Free Report) , Caterpillar Inc. (CAT - Free Report) and 3M Company (MMM - Free Report) , which have been sensitive to trade-related issues, scaled north on the back of the revamped North American trade pact between the United States, Canada and Mexico.
Trade conflicts are always seen as a factor that can weigh on the global economy and eventually squeeze profits of such blue-chip companies. International Monetary Fund chief Christine Lagarde recently said that trade worries have affected global growth and that there were signs that major economies such as the U.S. had ”plateaued.”
Nonetheless, the unexpected new deal helped the 30-stock Dow Jones Industrials close at a record for the fourteenth time this year on Oct 2, while Boeing soared to an all-time high. The Dow rose 122.73 points, or 0.5%, to 26773.94, a record that tops its previous high of 26753.50 set on Sep 21.
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