Nafta by Any Other Name Is Just Fine With Corporate America
(Bloomberg) -- The sky isn’t falling.
That’s the message coming from Corporate America after President Trump reached a deal to revise the North American Free Trade Agreement. The accord, which covers $1.2 trillion in commerce, arrived after months of negotiating amid concern that Trump would exit the treaty with Mexico and Canada and upend global supply chains.
“We were concerned when hanging over our heads was total withdrawal,” said Matt Priest, chief executive officer of the Footwear Distributors and Retailers of America. “To put that to bed is great and to have something that includes Canada, and not just Mexico, is fantastic."
The Trump administration had already agreed last month to an updated relationship with Mexico, which increased pressure on Canada to make concessions to join the deal. The accord -- now dubbed the United States-Mexico-Canada Agreement, or USMCA-- needs to be approved by lawmakers from all three countries.
The benefits for U.S. companies that rely on duty-free trade with Canada and Mexico are largely that Nafta will live on, with a few modest tweaks. Here’s a rundown by industry:
Stocks of U.S. automakers including General Motors Co. rose on Monday after they avoided the prospects of steep tariffs and disruption to supply chain that spans all three countries.
But there are concerns, with some of the biggest changes in the agreement coming in vehicle production. A car must have 75 percent of its parts come from the region to receive duty-free designation, up from 62.5 percent. It also requires that at least 40 percent of a car is made by workers whose pay averages more than $16 an hour, which could push production from Mexico’s cheaper labor market to the U.S.
“New regional value content requirements mean that automakers will not able to source parts as freely, so there will be added costs,” Ivan Drury, senior manager of industry analysis for car-shopping website Edmunds, said in an emailed statement. “Given that new vehicle prices are already stretched to record highs, things could take an ugly turn for consumer wallets.”
The deal could shift auto-parts production, but mostly those used by European and Asian carmakers building vehicles in Mexico for the U.S., said Kristin Dziczek, analyst at the Center for Automotive Research in Ann Arbor, Michigan. But in many cases, foreign carmakers would choose to pay a fine because it would be cheaper than spending to relocate production for big items, like engines and transmissions, that they import into the Nafta region.
For retailers and consumer brands, the threat of losing cheap imports was a huge concern. Constellation Brands Inc. was at the top of the list, with its main business being producing beer brands Corona and Modelo in Mexico and shipping to the U.S. But now those fears have been eased.
“We are pleased a deal has been reached that preserves Nafta’s trilateral framework, which is critical to protecting North American supply chains that support millions of American jobs,” Matt Shay, CEO of the National Retail Federation, said in a statement.
U.S. dairy farmers will be able to ship more products to their northern neighbor, a prospect their Canadian peers don’t like. But even with increased access to Canadian dairy markets, the new deal could hurt Dean Foods Co., the biggest U.S. producer, according to Amit Sharma, an analyst at BMO Capital Markets. The agreement could boost demand and prices for raw milk that the company uses to make its products, such as ice cream, and reduce profit margins, Sharma said.
The steel and aluminum tariffs Trump imposed on Canada and Mexico remain. Canada and Mexico will push to resolve the levies over the next two months, leading up to the signing of the new USMCA deal, three people familiar with talks said, speaking on condition of anonymity. The import duties have boosted costs for metal users, including the construction industries, on both sides of the border.
Alcoa Corp., the largest U.S. aluminum producer, is “disappointed there was no resolution to the Section 232 tariffs on aluminum and we continue to call for a full exemption for Canada and our fair trading partners,” spokeswoman Monica Orbe said in emailed statement.
U.S. pharmaceutical companies earned a victory with Canada’s agreement to allow them to their sell brand-name drugs for a decade -- up from eight years -- before facing competition from generics.
When Trump won the election, shares of Kansas City Southern declined because its railroads haul goods between Mexico and Canada on the so-called NAFTA highway. Its stock, along with other North American rail companies, rose on Monday with the risk to the trade zone being taken off the table.
Clean-energy manufacturers with factories in Mexico, such as Enphase Energy Inc. and Acuity Brands Inc. are relieved because they rely on unfettered access to the U.S. and Canada, according to Jeffrey Osborne, an analyst at Cowen & Co.
The deal bars countries from forcing companies to store user information in servers based in the country where those consumers reside. This helps major cloud companies like Amazon.com Inc. and Alphabet Inc.’s Google, which sell storage to Canadian and Mexican companies and governments but don’t want to build out separate storage facilities in those countries. Some security and privacy advocates have expressed concern that including the provision could make non-Americans more susceptible to being monitored by U.S. security agencies like the NSA or CIA.
©2018 Bloomberg L.P.