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USMCA creates new uncertainties for business as politicians claim victory

The sudden resolution to months of wrangling between Democrats and Republicans over President Donald Trump’s replacement for the North American Free Trade Agreement has brought some much-needed clarity for industries from automotive to agriculture.

It has also created some new uncertainties.

Within the automotive sector, those cheering the deal include U.S.-based parts manufacturers, who will benefit from the stipulation that 40% of a vehicle must be made by North American workers earning more than $16 an hour. Automakers, however, are wondering how that will affect their costs as they are forced to move more production to the U.S.

The Office of the U.S. Trade Representative projects that the United States-Mexico-Canada Agreement will incentivize a $23 billion increase in annual U.S. auto parts sales, according to the American Automotive Policy Council, a trade group that represents Ford Motor Co. General Motors Co. and Fiat Chrysler Automobiles NV.

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Matt Blunt, the president of the group, said in a statement that the USMCA "allows the U.S. auto industry to remain globally competitive by ensuring vehicles and auto parts are able to move freely across country lines."

The USMCA would require that 70% of the steel and aluminum that car producers buy originate in North America, and 75% of the components must be made in North America for autos to qualify for tariff-free treatment.

The auto industry represents 20.5% of total U.S. trade with its North American neighbors. According to Panjiva, a division of S&P Global Inc., U.S. auto trade with Canada and Mexico rose by 3.6% over the past year.

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Agriculture winners

The implications were more clear for U.S. agriculture: Score a new North American trade deal or risk losing vital farm trade with top trading partners.

As part of the USMCA deal, Canada agreed to eliminate its class 6 and class 7 milk pricing, which U.S. dairy exporters argued stifled their access by giving a pricing advantage to Canadian milk. It also agreed to increase its acceptance of dairy imports from the U.S., raising it to 3.59% of the Canadian market from the 3.25% cap under NAFTA. Although the deal aims to boost U.S. dairy exports to Canada, industry officials are skeptical that will happen, due in part to Canada's history of trying to circumvent previous import agreements.

In an interview, Warren Maruyama, a partner at the law firm Hogan Lovells in Washington and a former general counsel for the U.S. trade representative, said he was "mildly surprised" that Democrats and the Trump administration were able to come to terms on a deal. He said that the pharmaceutical industry is probably "pretty unhappy" with the latest changes but that agriculture likely averted a crisis.

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Farm groups have touted the deal as boosting market access for goods like corn, dairy, poultry and eggs, while also introducing more modern phytosanitary standards. Without a deal amid a withdrawal from NAFTA, they cautioned, exports would be slashed at a time when the sector is already being targeted with retaliatory tariffs by North American trading partners and China.

The U.S. International Trade Commission projected that the U.S. farm sector will benefit from an annual increase of U.S. ag and food exports of $2.2 billion, or 1.1%. Dairy exports alone are projected to rise by $314.5 million, or 7.1%, $227 million of which is expected to be in additional exports to Canada.

Drug exclusivity

What was seen as one of the more prominent changes in the Democrats' revamp was the successful rollback of market exclusivity for certain types of drugs in the originally proposed deal. Democrats opposed an original proposal to raise the number of years of regulatory data protection for biologics in the USMCA, something they warned would raise the price of prescription drugs in the U.S. That was removed in the negotiation.

"The Dems' biggest gain was in biologics," Peter Allgeier, president of consulting firm Nauset Global LLC and a former deputy trade representative under the Bush and Obama administrations, said in an interview. "I don't think Trump gave away the farm on labor and the environment, especially since enforcement remains in the hands of the executive."

For any of this to happen, the deal must first pass the legislative bodies of the three countries.

For the U.S., the deal could be considered soon in the House, where it is expected to pass easily after Democrats' recent signaling for support. Then it would move to the Senate, where it would likely be up for a simple majority vote. However, some Senate Republicans have expressed dismay with the revamped USMCA in recent days.

Political victories

Senate Majority Leader Mitch McConnell, R-Ky., said the deal was "not as good as I had hoped," The Hill reported. The publication reported that some Republican Senators felt excluded from the negotiation process and that concessions on pharmaceuticals left the agreement leaning more in favor of Democrats.

Still, holding up a trade victory for Trump ahead of his looming election would be political suicide for some Republicans, and most do not expect a stifling of the deal's advancement from within his own party.

In Mexico, the deal is expected to pass quickly, especially given that the country's senate ratified the pre-Democrat-revamped USMCA proposal in June.

Several trade analysts asked by S&P Global Market Intelligence were split on who comes out the victor ahead of the 2020 presidential election.

Enforcement provisions are now much tougher under a passed agreement, said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington, with the presumption that violations of labor or environmental standards have a potential trade impact.

"On balance, the USMCA deal is a bigger victory for Trump than the Dems," Hufbauer said. "But the substance of the deal is far, far smaller than the political hoopla."

Lester, meanwhile, predicted that both Trump and the Democrats will claim victory.

"And they both have some basis for this, so it will all be a wash and not affect the election much," Lester said. "It will be interesting to see how the Democratic presidential candidates come out on it."