A Good Day for Trade

The US-Mexico-Canada trade agreement passed the Senate and will almost assuredly be signed by President Trump. Then it will be sent to Canada for approval. North America will soon have a new and improved trade agreement, generally known as the USMCA or, in Canada, NAFTA 2.0. We are often asked if this is a good thing for the US. Based on what we know so far, the answer appears to be that it will be potentially beneficial for some segments of the economy. So, it is a good day for freer trade with our two largest trading partners, at least as far as US exports are concerned.

The table below shows the importance of Canada and Mexico to US manufacturers, distributors, and exporters in general:

Exports (billions of USD)

The table provides for a few quick takeaways. First, we export more to Canada and to Mexico (singularly) than we do to China. In that regard, they are both more important trading partners to the US. Second, the 12/12s are all in negative territory (exports for the last 12 months are below the same time last year). Third, our exports to China have begun to rise, but what you cannot see is that they are rising off the lowest level we have experienced in the last 7.5 years. There is quite a hill to climb. Our exports to these nations and others are bound to improve as the global economy begins to pick up speed in the latter half of this year.

The table below shows the importance of the US to these nations:

Imports (billons of USD)

The table shows that imports into the US are declining and that China is the largest source of imports. It is interesting to note that our neighbors to the north and south combine to be a much larger source of goods coming into the US. Thus, taken together, they are more important than China in terms of both exports and imports.

The USMCA addresses the automotive industry in several ways. There will be a requirement that 40% of automobile parts be produced in plants that have a minimum wage of $16/hr. This will put some wage pressure on Mexico. Autos must have a regional content of 75% to be tariff-free, and there is a new mandate that automobile manufacturers use North American steel and aluminum. The last requirement will take several years to roll out. Taken as a whole, the agreement should help bolster automobile and parts manufacturing in North America.

Some fear that the agreement will open the flood gates for automobiles from Canada and Mexico into the US. That is not likely to be the case. As is often so, the perception may be out of alignment with reality. The reality is that US light vehicle sales for the 12 months ending with November 2019 totaled $1.154 trillion. Imported light vehicles from Mexico ($50.999 billion) and Canada ($37.464 billion) account for 4.4% and 3.2% of light vehicle sales (assuming the imports are sold and not held in inventory). It is not likely that we will see a major jump in the proportion of imports to sales.

The USMCA also streamlines operations for businesses by updating digital trade and copyright rules and by reducing redundancy. In addition, the agreement is expected to increase certainty in the business community, and that will be welcomed by importers and exporters alike. Not everyone will like every aspect of the agreement, but that is the nature of diplomacy and compromise.

Alan Beaulieu
President