Here’s What You Need to Know About the USMCA Agreement

After a particularly long period of negotiations, the NAFTA agreement between the U.S, Mexico, and Canada morphed into the USMCA, the US Mexico Canada agreement. The renaming of the agreement considered a reflection of the U.S administration’s desire to bring to an end the concept of a North America free trade zone and deliver a Trump vision driven trade agreement between the three countries.

There was plenty of political wrangling, with pressure on Canada to find common ground with the U.S or face the prospect of being excluded from what may have become the USMA Agreement.

While the USMCA brings to an end the coveted free trade agreement, as details of the USMCA emerge, a number of changes were made, while both Canada and Mexico are expected to continue to face aluminum and steel tariffs.

At first sight, sectors of particular focus, where there were some minor adjustments to the original NAFTA terms, included:

Auto: As one of Trump’s main areas of focus, negotiations over the auto sector seemed to be extended, whilst the final terms were not too dissimilar to the old agreement, the key terms being:

• No hard limit on Canadian exports into the U.S was introduced, with both Canada and Mexico becoming exempt from 232 national security tariffs on the proviso that exports to the U.S don’t grow by 40%.
• The percentage of auto parts manufactured in North America (Rules of Origin) was raised from 62.5% to 75%, with an added condition that up to 45% of manufacturing must be carried by workers with an hourly wage of equal to or above $16 with the next 5-years.
• Member countries of the USMCA are also now able to sanction other member countries for labor violations in relation to goods produced and traded within the USMC trade zone.

When considering the rules of origin, auto manufacturers will work no doubt be doing the math and, if it’s cheaper to manufacture parts outside of North American when factoring in tariffs, this could end up being a flawed condition. Much will depend on what tariffs Trump rolls out to make the condition a win-win.

For Mexico, the $16 per hour wage condition will be an issue that could ultimately lead to manufacturing moving to Canada or the U.S, but again, much will depend on the math, the fall back being to absorb tariffs. It’s great for Mexican workers, but not so great for the American consumer, higher costs likely to be passed on.

Dairy: One of the biggest bones of contention, alongside the auto industry, was the dairy industry, where U.S farmers lacked opportunity in the Canadian market due to Canada’s tight controls that include tariffs and quotas on dairy products imported into Canada.

Key changes to previous conditions include:

• Canadian supply management restrictions eased to permit U.S farmers to export an equivalent of approximately 3.5% of Canada’s dairy industry.
• Canada agreed to remove Class 7 milk, which had made U.S importers of milk less competitive.

Class 7 milk is a less expensive class of milk that was introduced in 2017 to address Canada’s rising surplus of non-fat solids that resulted from increased demand for butterfat. The reality is that Class 7 milk was introduced to appease Canadian milk producers who were being driven out of the market by diafiltered milk producers from the U.S. Diafiltered milk was invented after the signing of NAFTA, meaning that U.S diafiltered milk producers were not subject to NFTA’s tariff rate quota.

Pharmaceuticals: The period of data protection for biologic drugs was extended to 10-years.

Other minor differences in terms from NAFTA include the following:

Copyright/Intellectual Property Rights: Terms of copyright raised from 50 years beyond the life of the author to 70 years.

Dispute Resolution: Canada managed to retain the Chapter 19 dispute settlement system that was introduced to provide a system to resolve trade disputes and considered a means of protection from protectionism itself.

National Security: Steel and aluminum tariffs remain under Section 232 that permits the U.S to ultimately cease the import of materials considered critical for national security to ensure that domestic supplies are sufficient to meet demand in the event of war.

Sunset Clause: While NAFTA was a perpetual agreement, the USMCA expires in 2034, with parties to the agreement to convene in 2024 to decide on whether the agreement should be extended beyond 2034.

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While the deal is done and was wrapped ahead of the self-imposed 30^th September deadline, the actual signing is not scheduled to take place until a signing ceremony at the end of November or on 1^st December. While the ceremony will be for the cameras, the ratification of the agreement by Congress will be the interesting part, both Canada and Mexico also needing to ratify, though no issues are expected from either side of the U.S borders.

November’s mid-term elections could see a shift in the balance of power that could leave the future of USMCA in the hands of the Democrats and few expect the Democrats to ratify one of Trump’s key campaign pledges, to bring an end to what the U.S President had branded the single worst trade deal that the U.S had ever made.

One also wonders whether the U.S President will have the full support of the Republicans, Trump’s negotiating tactics having certainly damaged relations with neighbors on either side of its borders and all for some minor adjustments and a name change. Even if the Republicans remain in full control of both houses come 1^st December, some may decide to distance themselves from the Agreement in an attempt to protest against the way both Mexico and Canada were treated, a move that would associate the agreement more with the U.S President than with the Republican Party itself.

For those who would like to take advantage of the agreement effects, the Loonie responded to the news positively, moving to C$1.29 levels against the Dollar, with the conclusion to negotiations now supporting the BoC’s hawkish stance on monetary policy, assuming economic indicators continue to be supportive in the coming weeks. A BoC rate hike before the end of the year will likely to drive the Canadian Dollar to C$1.26 levels against the U.S Dollar, assuming crude oil prices don’t fall out of the sky. The Mexican Peso strengthen versus the US dollar, closing the previous week at 18.8313.