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US Canada agree to trade deal, avert potential trade nightmare

Canada has joined Mexico and the United States in a new trade agreement averting a potentially massive hit to trade, profits and employment in North America. The new NAFTA will be called USMCA (United States Mexico Canada Agreement). Here are some of the major headlines under the new agreement.

The economic effects of USMCA are likely to be limited, as it is widely seen as a rebranding of NAFTA than an entirely new deal. Markets will be relieved though that trade between the major three countries will keep flowing. Rules of origin have become more demanding for auto manufacturers, since the percentage of regional auto production will be gradually increased from 62.5% to 75%.

It is expected that local Canadian, Mexican, and US suppliers will benefit from increasing the regional content of vehicle production, as OEMs would be inclined to make new contracts. Additionally, 40%-45% of final automotive assembly have to be done by workers earning an average of USD 16 an hour or more. While this is aimed at Mexico (Mexican workers in the automotive industry earn USD 3.5 a hour on average), it seems most probable that businesses in Mexico will keep the competitive advantage of low labour costs and accept instead a foreseen additional 2.5% tariff. Additionally, quotas will increase leaving more room for growth.

3.6% of the Canadian dairy market will be opened to the US products. Stricter definitions on what is included in this quota will however need to be added. Expectation is that dairy prices in Canada will fall somewhat as a result of the increased competition from US and other markets via the 3.25% access granted in CPTPP agreement. This does keep in place supply chain management, however there are wide differences in opinions on the extent to which it remains. The dispute settlement provision will be kept in place, which is a victory for Prime Minister Trudeau. A notable exclusion from the agreement is the inclusion of language on steel and aluminum exports to the US.

Bottom line, the agreement will keep trade in North America flowing and should strengthen business between the three countries. Agriculture may experience a tightening of margins and is an industry to pay close attention to in 2019 once the agreement is ratified. Steel and aluminum businesses will remain on our watch list until an agreement on tariffs is reached. This also extends to industries reliant on steel and aluminum.

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