The 24-hour news coverage of the renegotiation has made some Canadians, as consumers and as investors, wary. In its proposed new form, many of these fears can be laid to rest.
The trilateral agreement remains intact
First and foremost, the agreement remains trilateral and renamed as the United States-Mexico-Canada Agreement (“USMCA”). Legally, the deal remains tentative until ratified by all three governments, with some provisions not coming into effect until 2020—for example, changes to the requirements for North American-made auto parts.
NAFTA has provided a level of continental stability and the importance of its renegotiation reaches multiple Canadian industries. On the whole, the affected industries are not dominant contributors to overall Canadian GDP, but auto tariffs would have a significant impact on Ontario’s economy. From an investing perspective, global portfolio diversification minimizes the effects of whether the outcome of renegotiating NAFTA was a success or not. Canada’s stock market only comprises approximately 3% to 4% of global stock value, and therefore raises the importance of proper diversification and investing outside our borders. As a Canadian investor, distinguishing the impact of a trade agreement on your livelihood, versus the impact on your investing success, is paramount.
Main industries impacted
The main sectors affected by NAFTA’s successor, USCMA, include the automobile and dairy industries. Outside of these, other features of the deal include maintaining a dispute resolution mechanism, protection of cultural industries, increasing the threshold for duty-free purchases (which affects retailers), and a 16-year sunset clause with a six-year review period.
The steel and aluminum tariffs implemented by the United States earlier this year on exports from Mexico and Canada remain in effect. Side negotiations are still ongoing with respect to these tariffs and details are yet to be announced.
Members of the USMCA will be required to give notice if a member engages in free trade talks with a non-market economy.
Changes for the dairy industry
American dairy producers will now have access to 3.6% of Canada’s protected dairy market. This market is one of five of Canada’s supply-managed agricultural sectors that allows farmers to limit their production to the level of consumption in order to stabilize price and provide predictable income for farmers.
How is this different from the United States? Canadians pay their support to farmers directly through higher regulated prices. In the United States, farmers are subsidized to ensure stable compensation through taxes paid.
The impact to dairy farmers is still somewhat unknown as few details on government subsidies have been released. For consumers it will likely translate into lower prices for some dairy products. A diversified investor will register very little impact from this change.
Changes for the auto industry
Similar to dairy, the Canadian auto sector has been a major focal point of the NAFTA renegotiation. Following the ratification of NAFTA, 75% of car and truck components (parts) will have to be manufactured in North America to pass between countries tariff free. The current rate is 62.5%.
Additionally, at least 45% of auto parts made in North America must be made by workers who are making at least $16 USD per hour. The impact on Canadian wages is likely negligible. The most dramatic impact of this clause will be seen in North American vehicles made in Mexico where wages are much lower than either of the remaining trade partners. For consumers, these changes could potentially lead to an increase in new auto prices, as the cost of wage increases flow through to the end customer/buyer/purchaser.
Will this impact the Bank of Canada?
With a tentative agreement on USMCA now in place, there is a higher probability that the Bank of Canada will raise its target interest rate one more time this year, which puts greater pressure on bond returns.
With a speedy ratification of this tentative deal, a well-diversified investor can find comfort in the stability this agreement provides, despite intense media scrutiny. The future cannot be completely predicted by the past, and in times of political uncertainty, it’s even more important for investors to stay the course and trust that their well-constructed and properly diversified portfolio will help them reach their investment goals.
This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. ATB Financial is a registered trade name/trademark of Alberta Treasury Branches.
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