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

Perspectives» |

October 2, 2018

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

 

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. 

 



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Contributing Author

  Paresh Upadhyaya
Amundi Pioneer Director of Currency Strategy, US,
Portfolio Manager of Pioneer Global Multisector Income Fund