What is the latest on the United States Mexico Canada Agreement (USMCA)? How has China's coronavirus affected trade?

20161212 Tonyhatch (Cropped)

“The phase one trade deal (with China”) essentially takes China from a headwind and sets it up to be a potential tailwind” /CEO Lance Fritz, Union Pacific

USMCA (almost) put to bed; China’s virus issues disrupt global supply chains (and puts US Ag purchases at risk). 

  • USMCA/NAFTA 2.0 is waiting on Canada’s approval as of this writing, but that’s assured.  It does put some regulatory surety back into place (albeit with a 6-year review).  The White House says it will add 1.2 points to US GDP, the US’s own International Trade Commission says it’s more likely 0.35 points (and that owing to the somewhat reduced uncertainty; however The President’s proclamation of possible further metals tariffs show that is no sure thing).  The 2082-page document (!) has yielded at least one chestnut – the labor wage issue, designed apparently to move some auto (etc) business to the US, is not inflation-indexed….two other thoughts:

      • Even the Wall Street Journal is skeptical of the “big win”, to wit: the USMCA “is an amended, re-branded NAFTA, along with some new provisions (taken from) the (Obama) TPP”….

      • Although most trade observers (notably PWC) have said the international auto industry was the most affected in terms of supply chain restructuring, the impact of the virus on China and the weakened labor rules may mitigate against that; in any event, it is hardly boom times ahead for auto manufacturing….sales were down 2% last year (and Mexican production down 3%).

      • Meanwhile, the Mexican economy actually contracted in Q4/19 (-0.3%) and is expected to lag North American growth again in ’20 (consensus is +1%).
  • The China “mini-deal” had already seen some backlash before the great disruption of the new virus (centered on Wuhan, which the FT calls “the biggest transport hub in inland China”); Goldman has already estimated that the virus has taken fully 1.2 points off of Q1 Chinese GDP….This is obviously a human tragedy but also puts extreme pressure on trade over the short term (the Baltic Dry Freight index is now in negative territory) and, if the impact from the 2011 Japanese earthquake is a model, will have lasting global economic impacts….
      • Chinese exports to the US were down 11% last year.

      • The Ag purchase deal with the US was for 2 years (only); the US Farm Report thought, before the virus news, that it would take a “minimum of 4 months” to see any impact.

      • China may now have trouble hitting those targets.

      • Those targets were already suspect – note the decline in grain prices, and the moribund performance of the futures since the signing - more than the usual “sell on the news” pattern.

      • Other nations have noticed the move to “managed” from “free” trade – the EU, Brazil, etc – and we should expect WTO activity (although that is, naturally, less effective these days).