Issue #64 - USMCA - The New NAFTA: The Good, The Bad, The Ugly

Canada, Mexico, and the US have reached a tentative agreement to replace NAFTA.  Although many details have yet to be hashed out, here’s what we know so far:

The GOOD

• Much of the existing NAFTA agreement will remain in place.
• No cap or tariff on automotive exports from Canada, and new requirements introduced requiring more North American content and higher wage minimums for workers.
• Potential exemption of a portion of auto parts in the event of worldwide tariffs are imposed by Trump on National Security grounds (Section 232 National Security Tariffs).
• American farmers gained access to 3.6% of the Canadian dairy market (increased from 3.25% in the original TPP), which is a fairly negligible proportion of the market. This increase may help Trump in the polls given swing-state Wisconsin’s production of dairy exceeds  Canada’s entire dairy production.
• The existing dispute resolution mechanism wherein unfair trade practices are presented to international judges will remain in place instead of being presided over by US judges as Trump wanted.
• Cultural exemptions for Canadian media will remain in place.
• Increased 'duty-free' limit on orders from the US up from $20 to $150.

The BAD

• Although much attention was paid specifically to dairy, all five supply-managed agricultural sectors including milk, cheese, eggs, chicken, and turkey have been opened to the US. Poultry farmers in Canada will be particularly hard hit by the concessions made in the new agreement.
• No mention of pharmaceutical, copyright, or technology patents could mean some very bad news for Canadians is yet to come.
• Steel and aluminium tariffs on Canadian producers has yet to be addressed.

The UGLY

• Perhaps most disappointing of all is that the US President Trump still holds the Section 232 which allows him to invoke tariffs on any industry, at will, citing threats to National Security. At this time, this executive power continues unabated.
  
  

How it will impact you

In large part, the impact on regular Canadians will be felt in three major categories:

Economy

• The threat of a potential trade war between these two trading partners now seems unlikely. This abatement should encourage more investment by executives and the economic stimulus that goes with it.
• Furthermore, the uncertainty should get priced out of the stock market, allowing the battered Canadian stocks to recover, which will help retail investors and their retirement plans.
• Canadian retailers may feel the pinch from Canadians now being able to buy up to $150 worth of goods from the US without being subject to duties.  (Amazon, etc.)

Housing

• The large real estate markets of Toronto and Vancouver have slowed down considerable in the past few months, some of which was attributed to the economic uncertainty of these negotiations. This new agreement should spur consumer confidence and in turn, the real estate market.
• For those of us with mortgages, we can expect further interest rate increases. Now that this major contribution to uncertainty has been removed, we will likely see the Bank of Canada continue to normalize interest rates back toward historic averages.

Currency

• Rising interest rates should bode well for the Canadian dollar. Coupled with the recent resurgence in the price of oil, we will likely see the Canadian dollar cross the $0.80 threshold, at least temporarily.

Our Thoughts

Overall, we feel that for Canadians to claim this as a 'win', the bar would have to be set very low.  The supposed victories are mostly focused on having kept things they way they were, while our concessions and our lack of having addressing the Section 232 'trump card' clearly favour the US.  Ultimately, this is a win in the sense that "It could have been a lot worse"...  

As always, please do not hesitate to direct any questions to us!

Related
CBC:  What we know about the new USMCA trade deal
CNN:  US and Canada reach deal on NAFTA after talks go down to the wire