While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections?...

Understanding the United States-Mexico-Canada Agreement
While on the campaign trail, Trump repeatedly singled out NAFTA – the North American Free Trade Agreement – as being one of the worst deals for Americans that he’s ever seen.

Blasting former President Bill Clinton, Trump said, “[Clinton] approved NAFTA, which is the single worst trade deal ever approved in this country," adding "NAFTA was one of the worst things that ever happened to the manufacturing industry and the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country."

Was Trump right? Or was it just bombastic campaign rhetoric? The answer, like most things, is complicated and depends on who you ask.

Nevertheless, the reality is that Trump fulfilled his campaign promise and NAFTA will be replaced by the United States-Mexico-Canada Agreement or USMCA.

Background of NAFTA
NAFTA – in theory – was designed to set the rules of trade and investment between the US, Canada, and Mexico. It was envisioned by President Ronald Regan and the concept was simple: reduce trading costs, increase business investment, and help North America be more competitive in the global marketplace.


NAFTA was signed by President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992. It was ratified by the legislatures of the three countries in 1993, including the US House of Representatives on November 17, 1993, the US Senate on November 20, 1993 and finally signed into law by President Bill Clinton on December 8, 1993. It went into effect on January 1, 1994.

NAFTA 2.0 – USMCA
The USMCA has a total of 34 chapters, 12 more than the original NAFTA, which only had 22 chapters. In addition, the USMCA has a staggering 1,809 pages – 1,572 pages for the treaty, 214 pages for annexes, and 23 pages for side letters.

In reading the new text of the USMCA, many would conclude that the original foundational pieces of NAFTA will remain largely in place. But according to proponents of the new USMCA, it was designed to increase labor protections, improve access to certain markets, remove barriers to certain trade and bolster reciprocity. Let’s explore a few of the key provisions:

• Automobiles. Vans, light and heavy vehicles are now subject to more strict rules of origin, requiring at least 70% of a product's value to originate in the U.S., Canada or Mexico in order to benefit from USMCA rules. In addition, 40% of labor used in the region must meet high salary standards.
• Labor standards. The U.S., Canada and Mexico agreed to abide by International Labour Organization standards and to prohibit any imports derived from forced labor.
• Dairy. Canada's dairy, egg and poultry markets are now more open.

The USMCA will be revised every six years, allowing the countries to consistently renegotiate the trade deal and avoid another NAFTA-like scenario wherein a country could threaten to withdraw.

Implications for Stock Markets
As your financial advisor, I don’t know the answer to that question. I do note, however, that the day after the USMCA was announced, global markets advanced as did the Canadian dollar. The DJIA rose almost 200 points for a gain of 0.7%, the S&P 500 rained 0.4% and NASDAQ lost 0.1%. But one day does not make a trend by any stretch.

That being said, while the new USMCA will preserve a $1.2 trillion trade zone between the three countries, investors should keep an eye on how negotiations with China proceed. Because China is after all America’s largest trading partner.

In fact, according to the Office of the United States Trade Representative (where you can read all 1,809 pages of the USMCA): “U.S. goods and services trade with China totaled an estimated $710.4 billion in 2017. Exports were $187.5 billion; imports were $522.9 billion. The U.S. goods and services trade deficit with China was $335.4 billion in 2017.”

That’s why I preach diversification

Stocks in the U.S. have rocketed to big double digit gains for 2013, leaving investors wondering, "when is it time to sell high?" Consider the options. For example, despite the recent emerging market stock rebound, EM equities were still trading at a 36% discount to U.S. stocks [link]

Transformative changes are taking place in the U.S. energy sector. The United States is fast becoming a major oil producer, with some estimates indicating it could surpass production levels of Saudi Arabia and Russia within the current decade. One potential implication: The U.S., once a major energy importer, could possibly emerge as an energy exporter. [link] 

The United States is likely on the verge of an energy revolution. In fact, both companies and consumers are already feeling some benefits, as natural gas prices have dropped and the price of oil has stabilized. What does this mean for your investments? [link]

The rise in home values has had a positive influence on consumers in the US, through a so-called “wealth effect.” And consumption is critical in the US economy. The dependency of consumption on consumer confidence and the subsequent reliance of the economy on consumption leaves the economy too vulnerable to financial market conditions. [link]

As stock, bond and housing values rise, consumers tend to feel wealthier, leading them to spend more. That increase in spending comes about not from rising incomes but because consumers are saving less. However, without growing incomes, the economy remains too vulnerable to financial market conditions such as interest rates. The Fed has focused on this recently, but what will they do next? http://goo.gl/FcaFw3