FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest developments in the USMCA negotiations. For the full complimentary newsletter, subscribe today.
House Democrats back renegotiated USMCA, clearing way for passage
- The overhaul of the North America Free Trade Agreement (NAFTA), the US-Mexico Canada Agreement (USMCA), was signed over a year ago. But the original deal lacked bipartisan support in the US and was never ratified.
- US House Democrats have been working with the US Trade Representative since then to negotiate changes to the USMCA, including bolstered labor protections and oversight, in order to get their caucus behind the agreement.
- The US Trade Representative was able to renegotiate the USMCA with Mexico and Canada, implementing enough measures to get the support of Democrats.
- President Trump ran in 2016 on a platform that included renegotiating NAFTA. This will be a major political victory for his Administration, and a major talking point in the lead-up to the 2020 election.
The passage of the USMCA is important mainly because it resolves the long-standing uncertainty around the future of North American supply chains. This had held back cross-border investment, even though firms have looked to take advantage of cheaper costs of production for both goods and services in Mexico and Canada. We did not expect this to happen prior to the 2020 election, as this is a major symbolic win for Trump. Democratic leadership seems to have decided that the renegotiated USMCA is a good deal for US Labor, and that showing the ability to pass legislation in a bipartisan fashion is a better political tactic than appearing obstructionist.
There are important industry level impacts in the USMCA that will force firms to adjust their supply chains, notably in the auto sector. But from a broader macroeconomic perspective, the USMCA is unlikely to have a substantial impact on the US economy, as the changes under the USMCA are limited in scope. Firms should look to take advantage of certainty in the safety of cross-border supply chains going forward by making targeted investments into Mexico and Canada, where cheaper labor costs and weak exchange rates make investment attractive.