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By Victor Zhang - October 3, 2018
After years of denouncing the North American Free Trade Agreement (NAFTA) as the “single-worst trade deal” in U.S. history, President Donald Trump has negotiated a new pact with our neighbors to the north and south. The United States-Mexico-Canada Agreement (USMCA) gives a 21st century facelift to the 24-year-old NAFTA, updating several provisions and addressing issues unheard of in 1994.
Since NAFTA took effect in January 1994, the engines of economic growth and North American trade have changed dramatically. Industries and products that were in their infancy in the early 1990s are significant growth drivers today.
Building on NAFTA, the USMCA reflects today’s environment, updating several provisions of the old agreement and addressing issues unheard of in 1994. Some highlights of the new pact include:
Auto industry incentives: To qualify for tariff-free auto sales, car makers must ensure that 75 percent of their components are manufactured in North America. That’s up from the NAFTA-mandated 62.5 percent. This is likely to create challenges for European and Japanese automakers operating in the U.S., because these companies typically import expensive components from their home countries.
Additionally, unlike NAFTA, USMCA includes auto industry wage provisions. Beginning in 2020, workers earning at least $16 per hour must account for at least 30% of a company’s auto production. By 2023, that mandate jumps to 40 percent. President Trump demanded this requirement to help boost U.S. auto production.
Meanwhile, the U.S. agreed to tariff-free imports of 2.6 million Canadian- and Mexican-made cars every year. The first $34.2 billion in annual auto parts imports from Mexico and Canada also will remain free from U.S. tariffs.
Intellectual property protections: The new trade agreement provides more stringent, 21stcentury protections for patents and trademarks, including modern-day provisions for the biotech and financial services industries. The pact also covers internet domain names, an issue of growing importance in the 24 years since NAFTA’s launch.
Of note, the USMCA extends patent protections for U.S. drug manufacturers, eliminating competition from generic drug makers for 10 years. Under NAFTA, U.S. drug companies retained exclusive rights to their products for eight years in Canada and five years in Mexico.
Internet commerce clause: When NAFTA took effect in 1994, online shopping and internet commerce didn’t even exist. Today, they are staples of the global economy. The USMCA provides some relief for Mexican and Canadian consumers and small businesses purchasing goods from U.S. online retailers. Both nations will double the thresholds at which they collect duties and customs documentation.
Dairy industry opportunities: The USMCA alleviates some stiff barriers U.S. farmers face when trying to access Canada’s domestic dairy market. Specifically, the agreement lets U.S. farmers export a gradually increasing amount of certain dairy products (cheese, milk products, eggs, etc.) to Canada every year, duty-free.
Steel and aluminum tariffs: Despite Canada’s efforts to eliminate U.S. tariffs on Canadian steel, the taxes remain in place for now. The retaliatory tariffs Canada imposed on various U.S. products also remain in effect. Negotiations continue, as the U.S. wants Mexico and Canada to accept quotas on imported steel and aluminum in exchange for lifting the tariffs on imported aluminum and steel.
President Trump and his Mexican and Canadian counterparts are on board with the USMCA and will sign it before year-end. However, the legislatures of all three countries also must approve the deal—and that may take a while. In the meantime, our investment teams will analyze the draft agreement, looking for opportunities and warning signs for investors. Watch for details of our ongoing analysis in the coming months.
We believe this economy has enough labor fuel to keep expanding for another year or three at most given the current pace of job creation.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.