What Is The USMCA?

Over the course of the 2016 U.S. Presidential election, then-Republican candidate Donald J. Trump took an aggressive stance across the political gamut. In addition to immigration and tax reform, the renegotiation or outright repeal of the North American Free Trade Agreement (NAFTA) was a featured issue on the campaign trail. Upon the final vote tally becoming known on 9 November 2016, NAFTA appeared destined for revision.

The United States Mexico Canada Agreement, primarily known as the acronym USMCA, is the culmination of two years of ongoing dialogue between the leadership of each North American nation. Initially announced on 30 September 2018, USMCA modifies many of the guiding tenets of NAFTA and is positioned to act as its replacement.

Replacing NAFTA

Since 1 January 1994, NAFTA has provided the regulatory framework for commerce between Canada, Mexico and the United States. Negotiated by U.S. President George H.W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas de Gortari, NAFTA sought to eliminate barriers of trade between member nations while promoting economic cooperation.^[1]

Inspired by the success of the European Economic Community (EEC), NAFTA included several main provisions:^[2]

• Reduced Tariffs: A key element of NAFTA was the elimination of tariffs. 50% of existing tariffs were abolished immediately, with the remainder to be phased out over 15 years.
• Establishment Of Standards: Member nations pledged to improve safety, health and industrial requirements.
• Supplemental Agreements: Environmental and labor commissions were created, each designed to impose existing regulations.
• Expanded Sectoral Trade: Telecommunications, agriculture, clothing and financial services were promoted. In addition, rules applicable to automobile manufacturing and foreign investment were relaxed.

From 1994 to 2016, NAFTA has been credited with regional trade increasing from US$290 billion to US$1.1 trillion. However, for the same period, the U.S. trade balance with Mexico shifted from a US$1.7 billion surplus in 1993 to a US$54 billion deficit by 2014.^[3]

The swelling U.S. trade deficit, as well as lagging domestic industrial performance, prompted the 2016 Trump campaign to label NAFTA as being a drag on the U.S. economy. Over the course of that year's electoral cycle, Trump attacked NAFTA publicly and called it "the worst trade deal signed, maybe ever."^[4] A key lynchpin of the Trump campaign focused on either the renegotiation or termination of the agreement. Upon winning the presidency, the Trump administration went to work crafting USMCA as NAFTA's eventual replacement governing North American trade.

What Is USMCA?

While economists, politicians and business owners foster different opinions regarding the eventual impact of USMCA, it will become the largest trade deal in the history of the United States. White House estimates have credited the agreement with potentially governing US$1.2 trillion in regional trade, pending Congressional approval.^[5]

According to senior governmental leadership, debate in the U.S. Senate and House of Representatives is scheduled to begin sometime in 2019.^[6] Final approval or denial will then follow as dictated by the U.S. Congressional docket.

Below are the official highlights of USMCA, according to the Office of The United States Trade Representative:^[7]

• Improved rules of origin for various products including automobiles and trucks, as well as regulations addressing currency manipulation.
• Modernising and strengthening the food and agricultural trade in North America.
• New protections for U.S. intellectual property and support for a 21st Century economy.
• Issues such as digital trade, anti corruption and good regulatory practices are formally addressed.

In contrast to NAFTA, USMCA is touted by the Trump administration as being both a job creator and wage booster. The following are the primary avenues by which USMCA is projected to achieve these goals:^[8]

• Higher Pay For Auto Workers: Beginning in 2020, 30% of all vehicle manufacturing must be done by workers earning a minimum of US$16 per hour. In 2023, the percentage will grow to 40%.
• Zero Auto Tariffs: Automobile manufacturers can qualify for zero tariffs if 75% of vehicle components are made in Mexico, Canada or the United States. This represents an increase of 12.5% over NAFTA specifications.
• Canadian Dairy Restrictions: Canada is slated to reduce regulations on American dairy imports, worth an aggregate of US$560 million.
• Dispute Resolution: Trade disagreements will be resolved by committee including members of all three member nations.
• Intellectual Property: Law enforcement officials will have jurisdiction in all three countries to stop the production and distribution of counterfeit goods. Harsher punishments for the online pirating of intellectual property are also implemented.

Citing the initial USMCA pact as being a "campaign promise fulfilled,"^[9] President Trump lauded the importance of the agreement from the time it first became public (30 September 2018) through its official signing at the annual G20 Leaders' Summit (30 November 2018). In a tweet issued in early morning hours following the G20, Trump displayed his approval:

_"Just signed one of the most important, and largest, Trade Deals in U.S. and World History. The United States, Mexico and Canada worked so well together in crafting this great document. The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!"_^[10]

USMCA: Market Impact And Fallout

While the Trump administration alluded to USMCA being in the works since 2017, the actual announcement came as a surprise to a good deal of market participants. Traders across the currency, equities and futures markets took note of its potential impact on the Monday, 1 October 2018 session:

• Canadian Dollar (CAD): The CAD closed the 1 October 2018 forex session with a 95 pip gain against the USD since the previous Friday's close. The rally represented a short-term 0.9% gain and the highest level of the CAD vs the USD since May 2018.^[11] A 60 pip gain by the CAD was posted against the EUR for the session, measuring 0.9%.
• Mexican Peso (MXN): Returns for the MXN were moderate following news of the USMCA breaking. For the 1 October session, the MXN gained .13% against the EUR, while losing 0.06% vs the USD.
• United States Dollar (USD): In the aftermath of the announcement, the USD lost ground vs the CAD and remained nearly flat against the MXN. However, a 0.24% gain was realised vs the Swiss franc (CHF) and a 0.34% gain posted against the EUR.
• Equities: The U.S. stock markets rallied following USMCA's announcement, led by a 200 point gain in the Dow Jones Industrial Average (DJIA) and 0.5% gain in the S&P 500.^[12] Canadian stock markets experienced considerable volatility following the news, with the S&P/TSX index gaining 0.2% for the 1 October session.((Retrieved 12 December 2018 https://www.theglobeandmail.com/investing/markets/inside-the-market/market-news/article-tsx-rises-as-investors-sort-through-winners-and-losers-in-new-nafta/))
• Futures: USMCA injected optimism into the agricultural futures markets, as American producers viewed the deal as boosting sectoral trade. For 1 October, December corn futures gained US$0.095 per bushel, while November soybeans closed US$0.12 per bushel higher.^[14]

The initial announcement of USMCA brought immediate volatility to the markets, ultimately benefiting a broad spectrum of asset classes including agriculture and energy. Upon the agreement being publicly signed by Canadian Prime Minister Justin Trudeau, Mexican President Enrique Pena Nieto and President Trump at the G20, global stock markets exhibited a mixed response.

Two-day performance in the lead up to and following the USMCA G20 signing for Friday, 30 November 2018 and Monday, 3 December 2018 came in mixed. As investors digested the broader implications of USMCA, uncertainty grew producing chaotic price action in markets around the world.

Summary

USMCA has been a hot-button political and financial issue. From the initial 30 September 2018 announcement to the official unveiling at the G20 Leaders' Summit, USMCA has brought periodic market volatility and stimulated verocious debate among economists. This is sure to be a recurring theme as the pact seeks U.S. Congressional approval. No matter the final result, any news regarding the USMCA is sure to move currency, futures, and equities markets around the globe.