NAFTA 2.0 AKA USMCA : US the biggest winner—and what does that mean for China?

Tuesday 09 October 2018

Market Commentary

While all three nations can claim they got, more or less, what they wanted from the new US-Mexico-Canada Agreement (USMCA), it seems the US benefited a bit more. 

The US demanded the treaty be modernized and the new agreement allows for freer flow of digital trade, better protection for intellectual property rights, and freer trade in financial services. It also enables improved US access to Canada’s dairy market.

Most significantly, the US was able to increase origin of content from 62.5% to 75% in the auto sector. It’s surmised that this will hurt foreign auto makers and parts, especially in Asia.  Mexico probably came up short in this deal, since at least 40% of the value of any single car or parts must be made by employees paid at least $16 per hour.  This should lead to a shift of some production away from Mexico, into the US and Canada.    

That said, these wins didn’t come without some compromise. The US wanted a sunset clause (when the deal ends and has to be reviewed for renewal) after five years, but Mexico and Canada rejected it. Instead, all nations agreed to review the deal in six years to decide whether to extend it beyond 16 years. And, the Canadians were adamant in keeping Chapter 19 (which allows companies to challenge emergency antidumping tariffs at a special panel); this was preserved. 

With regard to China: The markets have come to the conclusion—rightly so in our opinion—that trade concerns are largely concentrated between the US and China, and unlikely to spread beyond that. Now that the USMCA has been reached, the US can focus on its trade relationship with China. Interestingly, the US was able to add a provision to the agreement requiring any party to give notice if it engages in trade talks with a non-market economy, which we believe is a reference to China. We think this also makes it harder for those countries to reach individual trade deals with China. The US perceives it now has China on the defensive and is unlikely to compromise unless the Chinese meet US demands to fully open up their markets and defend intellectual property rights. With USMCA, President Trump can campaign that he’s winning and delivering on trade, and can continue to drive a hard bargain with China ahead of the US midterm elections in November. 

Contributing Author

Paresh Upadhyaya
 Director of Currency Strategy, US,
Amundi Pioneer


Important Information

Diversification does not guarantee a profit or protect against a loss. Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management and is as of October 2, 2018. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Pioneer Asset Management , and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer Asset Management product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.

This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services.

Other news

January XA
01/09/2019 Cross Asset

There Is No Synchronized Global Economic Cycle

A key theme at the start of 2019 is a synchronised global economic slowdown. This is the clear message given by the recent PMI surveys. Global growth seems to be on the wane, while global risks continue to add to the climate of uncertainty. In the developed economies, all eyes are on the US cycle and the fall in its ISM indexes. Meanwhile, in the emerging world, the focus is naturally on China, whose economy continues to show signs of losing steam at the start of this year.

Fed Building
03/01/2019 Cross Asset

Fed "quantitative tightening" is close to its end

Fed communication has moved significantly towards a much more dovish tone in the past two months. The change in communication has been twofold, both on rates (the Fed became "patient" and "flexible" on the rate outlook) and on prospects for the so-called quantitative tightening (no longer any "autopilot" in balance-sheet runoff). In this piece we focus on the second tool of Fed policy, analyzing rationales and targets behind balance sheet normalization, which have been detailed and widely expressed in recent Fed communication released by Chairman Powell, other Fed governors and the minutes of the January FOMC meeting. An earlier end to "quantitative tightening" (QT) has become likelier, working in combination with a more dovish stance on rates.