During the 2016 U.S. presidential election, Republican candidate Donald J. Trump built a platform around the idea of restoring America’s economic prosperity. One of his primary talking points became the renegotiation of — or outright withdrawal from — the North American Free Trade Agreement (NAFTA).
After Trump won the election and assumed office, campaign rhetoric became reality. At the November 2018 G20 Summit in Argentina, all three North American nations signed the United States-Mexico-Canada Agreement (USMCA), effectively replacing NAFTA.
Since its inception in 1994, NAFTA has been a controversial trade deal. Promoted by President George H.W. Bush, and eventually ratified by Congress during the Clinton Administration, NAFTA aimed at reducing barriers of trade between Canada, Mexico, and the U.S. Proponents claimed NAFTA boosted economic prosperity through industrial cooperation and reduced tariffs. Opposition saw the deal as encouraging the outsourcing of U.S. manufacturing jobs and boosting the U.S. trade deficit.
Throughout the 2016 election, candidate Trump took a hard-line stance against NAFTA. Citing it as being the “worst trade deal in history,” Trump pledged in a campaign speech:
“I’m going to tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don’t mean just a little bit better, I mean a lot better.”
The rhetoric proved to be an effective rallying cry to the electorate, helping earn Trump a victory in the November 2016 presidential election. A little over two years later, Mexican President Enrique Peña and Canadian PM Justin Trudeau joined President Trump in signing USMCA.
USMCA: Form and Function
At its core, USMCA is designed to promote fair trade, preserve intellectual property, and foster the economic growth of North America. Governing an estimated $1.2 trillion in commerce, it stands among the largest trade deals in U.S. history.
Here are the key areas addressed by the agreement:
- Small and Medium-sized businesses (SMEs): Provisions of the agreement reduce costs and cut red tape for SMEs involved in cross-border business operations. De minimis (trivial) transaction levels have been revised to ensure that qualifying shipments benefit from reduced paperwork and duties.
- Agriculture: All ag products assigned zero tariffs under NAFTA will remain at these levels. Increased dairy market access, specifically between Canada and the U.S., are highlighted in the agreement.
- Modernizing NAFTA: Extensive protections for intellectual property and innovation have been outlined. Included are revised law enforcement guidelines, higher standards for digital trade integrity, labor collective bargaining provisions, and enhanced environmental standards.
- Manufacturing: Regional manufacturing value is promoted by requiring that 75% of auto content sold in North America be built in North America. In addition, 40% to 45% of all auto content must be made by workers earning at least $16 per hour.
Much like its predecessor NAFTA, USMCA is surrounded by controversy. Critics cite that it’s nothing more than a rebranding of NAFTA and will raise the prices of consumer goods. Advocates claim that it’s a positive step in the rebalancing of North American trade and promotes the success of small business operators.
The situation facing USMCA remains fluid. In order to be enacted, the U.S. Congress must approve the agreement. Given that the 2018 midterm elections resulted in a divided Congress, ratification by the 2020 launch date may prove to be a challenge. Until the deal clears legislative hurdles, NAFTA will continue to act as the governing doctrine in North American trade.
Lesson: Politics Often Influence the Markets
The impact of elections, trade deals, and geopolitics on the markets can be intense. Whether you’re trading commodities, equities, or currencies, it’s always a good idea to keep an eye on political developments and understand their impact.
For more information on how modern politics influences the marketplace, check out the lineup of expert advice and resources available at Daniels Trading. Staying abreast of evolving developments is a full-time job, but rest assured that the market pros at Daniels Trading have you covered.