The USMCA Agreement: A New Opportunity for Investors

The United States-Mexico-Canada Agreement was successfully drafted in September 2018 to modify and update the existing North American Free Trade Agreement. This agreement is expected to be ratified on January 1st, 2020. One of the key sections that pioneered in the protection of investors overseas will be altered. Additionally, two major industries are expected to undergo several changes for the first time since 1994: the dairy and automobile industries.

USMCA states that US investors in Canada will lose access to investor-state dispute settlements, meaning investors will be required to take up their cases and complaints in local courts. Similarly, in Mexico, US investors will be able to receive investor-state dispute settlements for only a limited number of circumstances; the rest will have to be taken up in Mexican courts. The oil and gas sector will be the primary beneficiary of this service. Some of these circumstances involve the violation of the National Treatment Principle (which prohibits discrimination between domestic and imported goods) and expropriation (where a government takes control of a private property without the permission of the owner(s)). Previously, NAFTA granted US investors the right to sue the Canadian government when it deemed the government’s interference unlawful. In the majority of those cases, the Canadian government banned US commodities considered harmful to the environment while denying permits to US investors for the same reason. Furthermore, investors will still be allowed to file NAFTA claims within the first three years after the ratification of the USMCA, in an effort to ease the transition.

Dairy farmers in the USA will be granted larger, less restrictive access to the Canadian market. Under NAFTA, Canada imposes quotas on its domestic dairy market, shielding Canadian farmers from foreign competition. The USMCA allows US farmers access to 3.6% of the Canadian dairy markets while limiting the amount of Canadian exports to the US dairy market, expecting to increase US dairy sales by 12%. Due to the ongoing US-China trade disputes, US farmers have suffered due to tariffs imposed on agricultural products, reducing sales and limiting growth. Although the dairy industry is only a fraction of the agricultural sector, this will help farmers recover some of their lost sales.

Under the USMCA, the automobile sector will be required to produce at least 75% of all related components in one of the three countries to avoid any additional tariffs, an increase of 12.5% from NAFTA. Additionally, 40% of those components must be made in factories paying an average salary of $16 an hour. Several US and Canadian automobile companies will be forced to stop outsourcing production to countries that allows significantly cheaper wages, creating several local jobs and expanding the domestic automobile market. However, these higher input costs will possibly slow production growth and expansion, while raising the prices of automobiles. Another concern is that certain companies will be inclined to rely more on automation to avoid paying higher wages, delivering a huge blow to domestic job growth. With regards to the higher wages under the automobile section, the USMCA will make it mandatory for Mexico to comply with American and Canadian labor unions. In response to this agreement, shares in General Motors grew by 1.6%, Ford by 0.8% and Fiat Chrysler by 2.7%.

Overall, Mexico will become the primary attraction for US investors. Due to the new minimum wage requirements, automobile companies will relocate production to Mexico from Asia, keeping prices reasonably low (compared to the US or Canada), while reducing transportation overhead. The machinery and electrical industries in Mexico will be able to expand in order to supply relatively cheap labor and resources to the automobile companies relocating to the region, making that sector a prime investment prospect. In the US, local steel and aluminium production and sales will grow, enabling automobile companies to comply with using 75% regionally-made components. Along with the US tariffs on steel and aluminium, this will greatly boost investment in local steel and aluminium companies. Finally, with the expected sales growth for US dairy farmers, the local dairy industry will see a substantial rise in profits. Nevertheless, investing in large-scale dairy companies (such as Kraft-Heinz) may not be as lucrative as investing in important US steel or automobile companies.

Post Editing by Tom Handels