With NAFTA on the way out after 13 months of intense negotiations, corporate financial officers will need to get up to speed on the new United States-Mexico-Canada Agreement (USMCA) trade agreement between three frequent trading partners - the U.S., Canada, and Mexico.
New trade terms between the
three North American countries
are just about official.
Under the agreement, which will need to be approved by late November from the United States, Mexico, and Canada. As of September 30, the terms have been agreed to by the leaders of all three countries and the agreement appears to have no roadblocks in advance of a country-by-country vote in a few weeks. All sides want to accommodate Mexican President Enrique Peña Nieto, whose last day in office is December 1, 2018.
As for actual implementation of the trade agreement, expect it to be gradual. Mexican Economy Minister Ildefonso Guajardo has already stated that USMCA won't roll out until the second half of 2019.
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Key Takeaways: Here's a rundown on what USMCA means to corporate finance decision makers, and to companies, in general.
Timeline: The new deal locks on all of the agreed terms for the next 16 years, giving businesses a solid measure of certainty that USMCA isn't going anywhere.
There is, however, a caveat.
After the first six years of the 16-year timetable, all three countries have agreed to review how the deal is going and can agree to extend the trade deal for another 10 years. If there is a disagreement, the countries have 10 years to reach a new deal, but in that interim, the 16-year deal holds.
That's a positive outcome for corporate decision makers, given the U.S. originally offered a five-year deal limit. With 16 years, any critical financial decisions made by company leaders will be made knowing there's plenty of time for deals to play out.
Key Financial Points. With USMCA in and NAFTA out, there is no shortage of key takeaways on the financial front as the ink dries on the new pact:
Under the terms of the deal, the U.S., Mexico, and Canada agree to keep the current exchange-rate, as measured by the currency market.
In addition, the three countries agree to avoid manipulating their currencies, the U.S. dollar, the peso, and the Canadian dollar.
Financial markets seem to approve of the deal, with the Dow Jones Industrial Average up 200 points in the immediate aftermath of the deal's announcement.
Currencies have rallied after the USMCA announcement, as well. The Canadian dollar hit a fourth-month high, rising 0.5% within 24 hours of the deal being approved. The Mexican peso rose by 0.6% - a four-month high.
The pact is widely viewed by economic analysts as a significant positive. Toronto-based BMO Capital Markets, for example, says it's call for GDP growth in Canada of 2.0% in 2019 is adjustable now “to the upside and not the downside."
Economic Impact for Consumers and Businesses. There's much at stake economically with the new trade agreement. Since NAFTA was introduced back in 1993, merchandise trade between the U.S. and Canada has doubled, while trade between Mexico and Canada has risen nine-fold in the past 25 years.
Last year, the total amount of trade
imports between all three countries
stood at $1.1 trillion.
Consequently, senior company executives will need to conduct their due diligence on the new agreement. To better evaluate how USMCA impacts specific industries, for example, focus on the agreements rules of origin (ROO), which injects some new accounting principles into the mix.
New USMCA rules of origin changes should, in particular, earn a closer look from corporate leaders in the agribusiness, auto, chemical, and textiles industries.
Other changes in key areas include small package freight costs, which should be cheaper for U.S. companies delivering to Mexico and Canada after both countries lowered sales taxes on express deliveries, and on intellectual property, where IP timetables have been extended to 70 years beyond the life of the author, up from 50 years under NAFTA. Other big issues, like immigration rules and steel tariffs, were left largely untouched from NAFTA to the USMCA.
Geopolitics. Most changes in the USMCA deal are modest – more protection for the U.S. auto sector, the opening up of Canada's dairy market to the U.S. and Mexico, preservation of Chapter 19 independent dispute resolutions for Canada, and better pay and protections for Mexican workers. Yet overall, the playing field has been tilted toward the U.S. for the short term. According to the Washington, D.C.-based Brookings Institute, “Canada's 'victories' consisted of maintaining the status quo in many important areas; but while actual changes to NAFTA were modest, they were almost uniformly in the direction of what the U.S. wanted, and away from what Canada and Mexico wanted."
Find the actual agreement text (well worth reading for corporate financial officers) at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico