Market Overview

NAFTA No More: The New North American Trade Deal, Explained

NAFTA No More: The New North American Trade Deal, Explained

U.S. stocks started off the week on a high note Monday after a trade deal between the U.S., Canada and Mexico was announced on Sunday evening.

The deal is called the United States-Mexico-Canada Agreement, or USMCA, and would replace the former North American Free Trade Agreement, or NAFTA. The deal is subject to approval by the three parties, and in the case of the U.S., a Congressional vote. 

The positive initial market reaction to the deal suggests investors like what they see. Here’s a look at how the new deal is different from the old one.

What Has Changed?

USMCA has new rules-of-origin provisions related to the percentage of imports permitted for goods produced within the region. The rules are expected to restrict the number of Canadian automobiles exported to the U.S.

The agreement allows the U.S. to retain the right to impose up to 25-percent emergency tariffs on cars and auto parts on the basis of national security.

The new deal will also likely pressure companies to shift production from Mexico to the U.S. by mandating that factories paying workers at least $16 per hour must generate a minimum input.

The USMCA is reportedly beneficial for U.S. dairy farmers. President Donald Trump has been extremely critical of what he sees as unfair protectionism in the Canadian dairy market, and the USMCA is geared to give U.S. farmers much greater access to the Canadian market.

Additional Provisions

The USMCA contains updated rules intended to modernize free trade by adding provisions specifically pertaining to digital transactions and intellectual property.

The USMCA also reportedly has much better enforcement provisions, including a review procedure once every six years.

NAFTA had no expiration date and was in place indefinitely. While the Trump administration reportedly wanted the USMCA to expire in just five years, the deal reportedly has a 16-year sunset clause.

Market’s Seal Of Approval

U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland said in a joint statement that the new deal will “strengthen the middle class and create good, well-paying jobs and new opportunities for the nearly half a billion people who call North America home.”

Daniel Ujczo, practice group chair of international and regional practices at Dickinson Wright, said Monday that the U.S. was a big winner from the new deal.

“I think it’s fair to say that the U.S. achieved virtually all of its negotiating objectives,” Wright said. “When you go through the text and compare that to the objectives the U.S. put out in July of 2017, there are very few that the U.S. did not achieve through this process.”

In statements, General Motors Company (NYSE: GM) called the deal “vital to the success” of the U.S. auto industry and Ford Motor Company (NYSE: F) said it is “very encouraged” by the USMCA announcement. Both stocks were trading higher by more than 1.7 percent on Monday.

Investors seem to share the optimism based on market action on Monday morning. The SPDR S&P 500 ETF Trust (NYSE: SPY) traded higher by 0.6 percent, the iShares MSCI Mexico Inv. Mt. Idx. (NYSE: EWW) traded higher by 1.5 percent and the iShares MSCI Canada Index (NYSE: EWC) traded higher by 1.4 percent.

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