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October 5, 2018

The U.S. this week struck a new trade deal with its neighbours, revamping a decades-old agreement that is set to have ripple effects throughout the affected economies.

The United States-Mexico-Canada Agreement, or USMCA, is the culmination of the Trump administration’s effort to renegotiate the North American Free Trade Agreement (NAFTA).

Key to the deal is that more U.S. product must be used in Mexico, primarily in automobiles, says Walter Kemmsies, Managing Director, Economist and Chief Strategist, JLL Ports, Airports and Global Infrastructure.

The USMCA states that 40 percent to 45 percent of a vehicle must be made by workers earning a minimum of US$16 per hour.

“The idea here really is to make sure the wages are relatively equal across the trade bloc,” says Kemmsies, in an interview with Bloomberg. The aim is that “as the car industry continues to grow, the U.S. gets a better slice of that.”

NAFTA had been in place since 1994, when it lifted many of the tariffs on trade between the U.S., Canada and Mexico. The agreement had not been updated since its inception, despite advances in digital trade, intellectual property rights and regulatory practices.

The agreement has been largely responsible for the creation of today’s corporate supply chains. Extending these complex structures across the continent helped companies achieve new economies of scale, cost savings and efficiencies not previously attainable because of tariffs and other obstructions.

A key goal for the U.S. when renegotiating the terms was to facilitate the export of goods where the U.S. has a comparative advantage. It was just one of many attempts by the U.S. to throw its weight behind new trade deals globally.

This has included the instigation of a trade war with China, something Kemmsies says also played a part in the development of the USMCA.

“This is a strong signal to American businesses, if they are going to continue to import goods, they need to diversify away from China,” he says in the interview.

The new deal doesn’t mean manufacturing will return to the U.S. “But there will be more production in the U.S.,” he says. “And if we continue along this track, it will increase U.S. exports.”

While good for the economy, Kemmsies says this increase in export demand could be constrained by the country’s inadequate infrastructure if improvements aren’t made imminently.

“Congestion on U.S. roadways, railways and waterways has worsened as economic activity continues to expand because investment in transportation infrastructure has lagged population and economic growth.”

Click to read how currency hedging is creating opportunities for U.S. investors.

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Walter Kemmsies

Managing Director, Economist and Chief Strategist, JLL

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