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The Magical, Wonderful, Tremendous US-Mexico-Canada Agreement Is Brought To You By NAFTA


The “United States-Mexico-Canada Agreement” is brought to you by Donald Trump and a bunch of people who apparently aren’t very creative when it comes to devising new acronyms.

Trump has already gone out of his way to insist that last night’s deal represents some kind of epochal shift in the global trade order. “Late last night, our deadline, we reached a wonderful new Trade Deal with Canada, to be added into the deal already reached with Mexico”, Trump tweeted, before rechristening NAFTA and insisting that he has just solved all of the old deal’s problems:

The new name will be The United States Mexico Canada Agreement, or USMCA. It is a great deal for all three countries, solves the many……….deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world. The USMCA is a historic transaction!

Ok, man.

To be clear, it’s not that this isn’t a “win” for Trump. It is. At least optically. Rather, it’s that as usual, it’s not entirely clear this represents the kind of sweeping rewrite and across-the-board victory for America that he insisted would be the outcome of every deal he signed as President.

Here are the main points (this is from BofAML, but obviously this summary is going to look the same no matter where you read it):

  1. Canada agreed to easy protections on its dairy market, among them, it will now provide US access to about 3.5% of the market (Canada is likely to compensate dairy farmers).
  2. The US relented on its demand to eliminate the dispute settlement system on Chapter 19, a big win for Canada.
  3. Canada agreed to the terms of the US-Mexico deal, among them a de minimis of US$100 (the amount of imports without duties, which in NAFTA is US$20), stricter rules of origin for autos, a 10 year sunset clause with a 6 year revision and an update on several topics from labor to commerce to intellectual property.
  4. The US and Canada reached an agreement to protect Canada’s autos from high auto tariffs if the US imposes them under law 232 with a quota of 2.6 million vehicles exported. The latter is similar to the “side-letter” that Mexico agreed with the US that protects 2.4 million vehicles. So far there are no exemptions from steel and aluminum tariffs.

So basically: There is no resolution on the steel and aluminum tariffs; Trump caved (sort of) on auto tariffs which makes sense because the idea of taxing cars on national security grounds is insane; the dispute system looks basically unchanged (Chapter 11 is being phased out, but Chapter 20 and Chapter 19 are still in there); the Class 7 milk system is gone, so that’s a win for Trump; there’s no sunset clause; and there’s some language around IP protection in there, which the USTR is apparently pretty proud of.

On autos, cars will have to have 75% of their content sourced from the U.S. and Mexico (that’s up from 62.5%) and 40% of a car needs to come from workers making more than $16/hour. But all of that was expected.

Again, I’m not sure this is actually that monumental a rewrite. “Canada’s dairy-farmer lobby says it can’t see how USMCA deal can be good”, Bloomberg remarked overnight, on its MLIV blog, adding that the “largest U.S. labor-union group is withholding judgment, saying it’s unclear whether USMCA will reverse outsourcing of jobs.”

For what it’s worth, Raymond James analyst Frederic Bastien thinks there will be some manner of side deal between the U.S. and Canada on the steel and aluminum tariffs. We’ll see.

And look, I don’t think anyone is necessarily out to disparage this deal for the sake of disparaging it and if you saw something you liked in NAFTA, well then it’s hard to turn around and say something that is basically just NAFTA tweaked is bad. It’s just not entirely clear whether this changes things enough to justify all of the hand wringing it caused. Are the provisions noted above going to fundamentally alter trade between the U.S. and its neighbors in a way that actually matters to U.S. labor and to America more generally? More simply: Is this really going to move the needle on anything? Maybe, but I doubt it.

What it does do for sure, though, is alleviate a source of concern and uncertainty for market participants.

“At least some pent-up investment may be deployed [and] the deal also reduces risk premium and is therefore supportive of Canadian assets such as CAD”, BofAML writes on Monday, adding that it “also clears the way for the Bank of Canada to continue hiking, constitutes a win for Trump and reduces the risk of escalation of global trade wars, as it provides a path for other trade deals such as an eventual US-China agreement.”

That last bit is probably a stretch. In fact, this might well embolden the Trump administration to take an even harder line on China.

If this is indeed a “playbook” for future deals (as it was billed) then the “new” deals are going to fall short of Trump’s promise to completely rewrite the rules of global trade and commerce, which is actually a good thing, but he sure will have succeeded in aggravating everybody in the interim period. Additionally, if it took this long to rework NAFTA, it’s entirely unrealistic to think that a comprehensive deal with China can be reached anytime soon.

Here’s BofAML documenting the next steps:

Next step is for 3 leaders to sign new NAFTA on Nov 30. We expect USMCA to be signed by leaders of the three countries in 60 days, on November 30, and to be voted by Congresses/Parliament afterwards, most likely in 2019. In the meantime, NAFTA remains in effect. For USMCA to come into effect it will need to be approved by simple majority in both houses of US Congress (starting with the House), by simple majority in the Canadian Parliament and by qualified majority (2/3) in the Mexican Senate (which AMLO should be able to get without much trouble).

Meanwhile, Trump sent his congratulations to Canada and Mexico for demonstrating that they have the patience and the intestinal fortitude to stomach him for nearly two years despite being variously maligned on social media and insulted at every possible turn.

“Congratulations” indeed.


4 comments on “The Magical, Wonderful, Tremendous US-Mexico-Canada Agreement Is Brought To You By NAFTA

  1. Here’s what I’m confused about: if this is sending a positive signal, what is that signal representing? That Canada/US trade won’t break down in the near future? Are we now operating under the suggestion that the breakdown of global trade was somehow not baked into the markets and that maintaining the status quo is now somehow positive news? I don’t get it. It reminds me of market euphoria and late stage sentiment. Any news, no matter how benign will be seen as a sign to spend more and take on more risk. It doesn’t matter that in context, these stories really don’t change the fundamentals of the markets or trade generally. But they feed into a psychological need to provide justification for more risk taking behavior.

    H, I’m reminded of your write ups regarding the Philips Curve and how even seemingly benign movements in certain indicators result in wild swings in wage inflation, eventually tipping the curve over. The economy, while we like to describe in rational terms, is still based on the actions of irrational people.

  2. Just listening to… your leader discuss the most historic deal ever. As a furiner, I can only think of one think as he speaks…

    Acorn doesn’t fall far from the tree.

  3. This just looks weird. Once again, Trump declares victory about not very much, it seems to me. There are other ways that this trade agreement messes things up the way “managed trade” people like, opening ever more avenues for the venal to exploit. Check out the access to the US market for dairy products! Meanwhile if Canada opens “3.5 per cent” of its dairy market to the US, does it have to open it to NZ dairy (this is where I live)? The devil is going to be in the detail here, and it’s a devil with a tail.

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