Canada and Mexico are the top two trading partners for the United States, together making up about 30% of total trade into and out of the U.S. So it was a big deal on Tuesday when Speaker of the House Nancy Pelosi announced that Democrats had made a deal with the White House to sign a new trade deal called the United States Mexico Canada Trade Agreement, or USMCA, that will keep goods flowing freely among the countries.
Without a deal, the three countries could have raised tariffs considerably on each other, slowing the flow of goods and endangering millions of jobs. With the support of major labor organizations including the AFL-CIO, Pelosi called it a “victory for America’s workers.” A deal could be signed by the end of the year, and it is expected to pass the Senate.
The USMCA is similar to the North American Free Trade Agreement, or Nafta, with a few important changes.
Final details of the USMCA are still being hashed out, and must also be approved by Canada’s parliament, so some elements could change. Based on information that has been released previously, some industries and companies will see particularly big benefits from a new deal. Agriculture and auto manufacturing are the two areas with the most to gain.
Cars sold in the U.S. are often made with some combination of Canadian and Mexican materials and labor. To get duty-free status under the USMCA, they would have to include an even higher proportion of North American parts than under Nafta.
The USMCA would strengthen labor protections, demanding that some percentage of vehicle components (40% to 45% in the initial deal) be made by people earning at least $16 an hour. Democrats got the administration and Mexico to agree to allowing inspectors to visit plants to ensure compliance.
The deal also demands that 70% of the steel and aluminum used in the automobiles be sourced from North America. If that section stays in the final version, it could help U.S. metals companies such as
United States Steel
Some companies that could benefit from the auto rules include
(TSLA), whose Model 3 is made with parts from the U.S., Canada and Mexico. Suppliers such as Canadian giant
(MGA) and Michigan-based
(BWA) should also benefit from the free movement on auto parts.
The new deal also includes provisions to open trade in agricultural goods. Canada is the U.S.’s biggest food and agriculture export market and Mexico is its third largest. The new deal opens up Canada’s dairy and poultry markets, which should help companies including
(DANOY), a French company that bought American milk-producer WhiteWave Foods and chicken producer
Another company likely to benefit from the deal is Kansas City Southern (KSU), which makes about half its revenue in Mexico because it controls a key rail line from Laredo, Texas, to Mexico City. That company’s stock has fluctuated based on the status of trade talks.
U.S. oil refiners could also benefit, because the deal ensures that refined crude products will continue to flow to Mexico, a growing export market. Among the biggest beneficiaries would be
Another way to play the deal is simply to invest in Mexico, which should benefit from USMCA, and is already showing signs of benefiting from the U.S.-China trade war. Through October, Mexico’s trade surplus with the U.S. was larger than in all of 2018. Companies including
(GPRO) have shifted production from Asia to Mexico to avoid tariffs and be closer to their end markets. To benefit from Mexican economic growth, investors can buy the
iShares MSCI Mexico ETF
Write to Avi Salzman at firstname.lastname@example.org