Top of mind for many Canadians over the past year has been the uncertainty caused by the renegotiation of the North American Free Trade Agreement (“NAFTA”) that first came into effect in 1994. On September 30, 2018, Canada, Mexico and the United States reached a tentative agreement on a renegotiated trilateral trading pact.
The 24-hour news coverage of the renegotiation has made some Canadians, as consumers and as investors, wary. In its proposed new form, many of these fears can be laid to rest.
The trilateral agreement remains intact
First and foremost, the agreement remains trilateral and renamed as the United States-Mexico-Canada Agreement (“USMCA”). Legally, the deal remains tentative until ratified by all three governments, with some provisions not coming into effect until 2020-for example, changes to the requirements for North American-made auto parts.
NAFTA has provided a level of continental stability and the importance of its renegotiation reaches multiple Canadian industries. On the whole, the affected industries are not dominant contributors to overall Canadian GDP, but auto tariffs would have a significant impact on Ontario’s economy. From an investing perspective, global portfolio diversification minimizes the effects of whether the outcome of renegotiating NAFTA was a success or not. Canada’s stock market only comprises approximately 3% to 4% of global stock value, and therefore raises the importance of proper diversification and investing outside our borders. As a Canadian investor, distinguishing the impact of a trade agreement on your livelihood, versus the impact on your investing success, is paramount.
Main industries impacted
The main sectors affected by NAFTA’s successor, USCMA, include the automobile and dairy industries. Outside of these, other features of the deal include maintaining a dispute resolution mechanism, protection of cultural industries, increasing the threshold for duty-free purchases (which affects retailers), and a 16-year sunset clause with a six-year review period.
The steel and aluminum tariffs implemented by the United States earlier this year on exports from Mexico and Canada remain in effect. Side negotiations are still ongoing with respect to these tariffs and details are yet to be announced.
Members of the USMCA will be required to give notice if a member engages in free trade talks with a non-market economy.
Will this impact the Bank of Canada?
With a tentative agreement on USMCA now in place, there is a higher probability that the Bank of Canada will raise its target interest rate one more time this year, which puts greater pressure on bond returns.
With a speedy ratification of this tentative deal, a well-diversified investor can find comfort in the stability this agreement provides, despite intense media scrutiny. The future cannot be completely predicted by the past, and in times of political uncertainty, it’s even more important for investors to stay the course and trust that their well-constructed and properly diversified portfolio will help them reach their investment goals.
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