USMCA Deal Removes One Source of Trade Uncertainty

About the Author

adam phillips

Adam Phillips, CFA, CAIA, CFP®

Managing Director, Portfolio Strategy/Partner
Torrance, California

Beggars Can’t Be Choosers

After securing bipartisan support with the backing of Democratic House Speaker Nancy Pelosi, the United States-Mexico-Canada Agreement (USMCA) is now expected to clear the House by as early as Christmas and be passed by the Senate sometime in January.

It may not be the trade deal most of us have been waiting for, but the agreement struck Tuesday to replace the North American Free Trade Agreement (NAFTA) is a welcome development and removes at least some degree of uncertainty as we look ahead to 2020.

A Win-Win:

The latest trade deal is being hailed as a victory by both sides of the aisle.  Replacing NAFTA was a major goal outlined by President Trump’s campaign in 2016.  In addition, the agreement has the potential to boost manufacturing in the U.S.  For instance, under NAFTA, auto manufacturers were required to produce 62.5% of vehicle components from one of the three countries to avoid tariffs.  Under the terms of the new deal, this amount has increased to 75%.  In addition, the USMCA will require that 30% of vehicle production be completed by workers that earn an average wage of at least $16 per hour.  This number will increase to 40% in 2023.

The deal ultimately earned Democratic support by including enforcement mechanisms that will hold all parties accountable to the new rules.  In addition to achieving these concessions, agreeing to the deal at the height of the impeachment inquiry allows the party to demonstrate that it is business as usual despite the distraction of the ongoing hearings.

A Positive Development, but Tempering Our Enthusiasm

The latest agreement is expected to have a relatively modest impact in the context of our overall economy.  For instance, in April the U.S. International Trade Commission estimated that a prior but similar version of the USCMA would create roughly 175,000 jobs over the course of six years.  For perspective, the U.S. economy created 266,000 jobs in November alone and has averaged monthly job creation of nearly 200,000 over the last six months.

However, perhaps the best part of the USCMA is that it comes at a time when global trade uncertainty is hampering business confidence and capital investment.  Although most would prefer some resolution to the ongoing trade dispute between the U.S. and China (which serve as the world’s two largest economies), it is worth noting that the U.S. does considerably more trade with its two nextdoor neighbors.  Furthermore, a trade deal with these key trading partners has eliminated the risk that fallout from negotiations would result in another trade war and the introduction of new tariffs.


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