October 1, 2018 Weekly Market Commentary: NAFTA 2.0?Submitted by Boyer Financial Services, Inc. on October 1st, 2018
The U.S. and Canadian negotiators worked around the clock this weekend to finalize a trade deal before the Sunday midnight deadline.
U.S. President Donald Trump is set to sign a new trade deal that will make revisions to the 25 year old North American Free Trade Agreement (NAFTA). Now dubbed the "U.S.-Mexico-Canada Agreement" (USMCA), the deal will ease the burden of uncertainty for companies who generally rely on tariff-free commerce.
Below are some fast facts on key changes in the new USMCA:
1. Allows greater access to the Canadian Dairy Market for U.S. Dairy Farmers. The U.S. will be allowed to export the equivalent of 3.6% of Canada's dairy market, up from the existing level of about 1%. Canada will also get rid of their "Class 7 Pricing System,"which is thought to be a disadvantage for U.S. Farmers.
2. A USMCA Review Clause, which includes a 16-year expiration date, and also a review of the agreement every 6 years where the deal can be extended.
3. The Dispute Settlement system, which allows member countries of the agreement to bring grievances of unfair trading practices against other member countries, remains intact from the original NAFTA deal, which is a win for the Canadians.
4. In regards to other agricultural goods, Canada will give the U.S. access to their chicken, egg, and turkey markets. While British Columbia will allow the sale of U.S. wines at its state owned liquor stores. Mexico also agreed to import certain U.S. cheese products.
5. Members of the agreement must produce 75% of each car made for the car to pass through other countries duty-free. 40% of each car must be produced by workers making $16 an hour or more.
6. Auto tariffs by the U.S. on imported cars and car parts from Mexico and Canada will be largely avoided (assuming the agreed upon cap level is not surpassed).
7. The deal increases the copyright period in Canada to 70 years after the creator's death, up from 50 years. While the period for Pharma-produced drugs to be on the market before generics can be created is being increased to 10 years; up from the current number of 8 years in Canada. This is a big win for the Pharmaceutical industry.
8. The de-minimis limit will be increased by Canada and Mexico respectfully. The de minimis level is the amount of a good a person can take across the border without being hit with duties.
Friends and colleagues, you are probably thinking to yourself, so what does this mean for me? Well, the deal will most likely not take effect until late 2019 at the earliest, since the agreement won't officially be signed until late November (barring any setback from any of the member country's legislature). The real question is, "Are we expected to see an immediate change in the economy now that a deal has been reached?" The answer is no. As stated above, key provisions may not be rolled out until most likely 2020... and it will take some time to see the effects that the new agreement has on certain industries at the forefront of trade discussions (farming and agricultural goods, the auto industry, pharma, and e-commerce to name a few).
However, i believe there is room for optimism! In my opinion, the fact that a trade deal has been reached is enough in itself for continued market optimism, and fuel further U.S. job growth. I stated in my previous market commentary that i thought a new trade agreement between the U.S. and one of its allies could create a domino effect, putting further pressure on other countries to renegotiate their own trade deals with the U.S. or be left behind. This statement still rings true for me, as i think we are in for a busy Q4 of trade talks with China, and the European Union.
The details still need to be rigorously read through and digested, but i think that the USMCA is step in the right direction in the President's long and arduous journey of decreasing our trade deficit, fighting for "Made in the USA" products, and increased wages for the American worker.
Stay tuned for more weekly commentaries on important market events and economic policy. If you have any questions, i urge you to contact me via phone or email.
Have a great week, and celebrate every day!
Jason R. Jacobi
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