Much Ado About Everything No 6: The USMCA Clears The Decks

The 'new' Nafta is a big deal for Donald Trump politically, if not substantively. But it is more bad news for Beijing.

It may prove to be more of a political win than a substantive one. But there is no question other than that the deal struck on Nafta this week is a significant win for President Donald Trump. And a very timely one at that, just five weeks ahead of the midterms.

From Mr Trump’s perspective it is not only an election promise delivered, as he has claimed; on top of the revised trade agreement just signed with South Korea and his getting Japan and the EU to the table for bilateral negotiations, it is also confirmation that his aggressive use of tariffs gets results. This last point is, perhaps, particularly important during this election season as it gives him a seemingly strong argument to counter Republicans, voters and legislators, who are concerned about the economic impact on the US of the escalating trade war with China (to which In shall return shortly). With so much else at stake in the midterms, I doubt that this will make much difference; but it may encourage some Republicans to go out and vote who may otherwise have decided to stay at home, which could just tilt a tight race in a critical seat.

Nevertheless, consistent with some of the reservations I expressed in my 28 August article, it would be surprising if the United States-Mexico-Canada Agreement (or USMCA, as the Nafta-successor agreement is to be called) were to match the hyperbole of Mr Trump’s 1 October Rose Garden press conference (pictured above). So, bearing in mind that the detail of the new treaty (which runs to over 1,000 pages) has yet to be released and will probably require weeks of analysis before its full import is clear, for now at least I think that the main considerations we should keep in mind about the USMCA are as follows.

  • The deal is not yet done in that it has to be ratified by all three parties. This will not be a quick process. Nor can it be taken as a given. In particular, a House of Representatives controlled by the Democrats may be reluctant to give Mr Trump his victory despite their greater leaning towards his views on trade than is prevalent among Republicans.
  • With all due respect to Mr Trump, from what has been publicly flagged of the new deal it does look to be far more of a Nafta update (long overdue), fine-tune and rebrand than a tearing up of the 1994 agreement and fresh start.
  • If this is correct, it would not be unreasonable to treat with some caution Mr Trump’s claim that it will pour “cash and jobs” into the US — let alone that it will significantly redress the US’s bilateral trade deficits with Canada and Mexico. The generally cautious reaction of the auto sector in the US, which was at the heart of much of the negotiations, is usefully indicative in this respect. Writing in the Financial Times (subscriber access only), Peter Campbell and Patti Waldmeir summed it up as follows:

“The car industry breathed a sigh of relief at Sunday night’s announcement of a revamped trade agreement between the US, Canada and Mexico. But if Donald Trump was hoping the deal would unlock new investment in US plants, he may be disappointed.”

  • This is not to say that yesterday’s US stock market rally and the additional upward pressure on the oil price were totally unjustified (even if overdone). But the improvement in market sentiment may have been more about relief that failure and its probable consequences in terms of a Trumpian backlash had been avoided rather than a rousing cheer for agreement per se.
  • All this being said, what I believe to be the most important consideration to draw from the USMCA lies in what Mr Trump had to say about China in the Rose Garden yesterday, as follows:

“China wants to talk very badly. I said frankly it’s too early to talk, because they’re not ready. If politically, people force it too quickly, you’re not going to make the right deal.”

The long and the short of it is that agreement with Canada and Mexico and the easing of trade tensions with other partners can and should be seen as a clearing of the decks for probable further escalation with China.

In my 3 April article, I reflected on how even then it looked as if the Trump Administration was intent on using trade to try to contain China’s rise. Today, as is implicit (in a small but significant way) in the clause in the USMCA which permits the US to withdraw should one of its partners enter into a trade deal with a “non-market economy”, it does seem that trade is indeed a cornerstone of a containment strategy.

This should, in my view, be where investors are focusing. However, as things stand I fear that the FT’s Edward Luce, responding to Rana Foroohar’s 30 September Swamp Notes, was correct when he wrote as follows:

“…your note makes me ponder, once again, what it would take for the markets to better reflect today’s geopolitical risks. ‘It's not the wolf at the door, it’s the termites eating at the foundations,’ was a line that used to be cited about how markets disregarded the long-term effects of fiscal policy. We could say the same today. The US budget deficit is soaring at precisely the point in the cycle we should be conserving firepower for the next recession. But the bigger concern is trade war — or worse. Relations between the world’s two biggest economies, the US and China, are deteriorating rapidly across every front — not just trade, which is alarming enough, but on diplomacy, freedom of navigation and national security. Taiwan is also getting edgier. Last week, [Mr] Trump accused China of interfering in the US midterm elections. If this trajectory cannot be halted, the markets may suddenly have to readjust….”

Alastair Newton

[Picture credit: Getty Images]