Macroeconomics Insight Center

North American retailers and suppliers breathed a sigh of relief last week when the United States, Mexico, and Canada reached a tentative new trade agreement to replace NAFTA. The direct effects on core retail are small, but there are large economic and political implications to consider inside and outside of North America.

The new United States-Mexico-Canada Agreement (USMCA) still needs to be approved by the legislatures of the respective countries. Assuming it is approved, new provisions could shape several areas of the North American economy and lay the groundwork for U.S. trade discussions with other countries.

The most direct effect for retail may be from higher duty-free limits, which could boost U.S. eCommerce shipments to Canada and Mexico. The minimum duty-free shipment threshold would double to USD100 in Mexico and go from CAD20 to CAD150 in Canada. This means Mexican and Canadian consumers may order more from online retailers that ship from a U.S. location. Items may also arrive faster without the additional processing. Online marketplaces and eCommerce retailers that do not have shipment options from within Canada or Mexico could see demand pick up.

Impact on the Auto and Dairy Industries

The U.S. job market could get a lift from changes to the automobile and dairy sectors, but current oversupply in these products may limit job gains.

A requirement for a higher share of vehicles and parts to originate in North America and be made by workers making at least USD16 an hour may encourage more automobile manufacturing in the U.S. and Canada. Mexico may see a loss of automobile jobs, or at least slower job growth, given the higher wage provision. An unintended consequence is that the higher costs could end up making North American auto producers less competitive in the long run in markets outside the region. Inside the U.S., automobile inventories have ballooned in recent years, indicating production for domestic consumers may need to be scaled back.

The trade deal will lower dairy prices in Canada by opening the country to more U.S. dairy exports. Canadian retailers and shoppers will welcome lower milk prices, but Canadian dairy farmers will lose income in an already oversupplied Canadian dairy market. For U.S. farmers, the increased access may not be enough to alleviate their own glut of dairy supply.

An Eye Toward Future Trade Deals?

Three other areas of the agreement are notable because of their potential inclusion in future trade deals, especially with the European Union, Japan, or China. They are likely to be sticking points with one or all these countries.

Enforceable rules on a country weakening its currency to gain an export advantage would be more applicable to complaints some have against Japan and China, rather than Mexico and Canada.

A provision in USMCA that allows any of the three countries to terminate the agreement if another country in the trade pact makes a separate free trade agreement with a “non-market” country is largely aimed at boxing China out unless it comes to an agreement with the other countries as well.

Perhaps the broadest impact will be from rules on digital trade. Concerns of government overreach and the inefficiency of having data storage physically present in every market where a company operates are behind the changes. The USMCA attempts to strengthen a company’s ownership of the data it collects, or the codes and algorithms behind those capabilities.

While these digital rules would better ensure companies can privately manage their global data, they may also restrict privacy protections that some countries are pushing for their citizens. The EU has taken a sharp look at how Google, Facebook, and other companies collect, use, and protect data. Amazon and other global online retailers may face similar restrictions on the data they collect on shoppers visiting their websites.

Even as some of the short-term uncertainty for North American retail has been resolved, the costs and benefits of the USMCA and future trade negotiations will be determined in the long term.

For more information, please contact:

Doug Hermanson, Principal Economist

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