20 Jun

After Mexico Ratifies USMCA, Trump Asks Congress to Follow Suit

WRITTEN BY Mohit Oberoi, CFA

USMCA

Yesterday, Mexico ratified the USMCA (United States-Mexico-Canada Agreement). The agreement was negotiated last year and would replace the 25-year-old NAFTA. The United States and Canada are yet to ratify the agreement. Renegotiating NAFTA was among Trump’s prominent campaign promises. Trump criticized NAFTA as being unfair to the United States and went as far as saying that it was “one of the worst trade deals ever made.” After Mexico ratified the USMCA, President Trump tweeted, “Congratulations to President Lopez Obrador — Mexico voted to ratify the USMCA today by a huge margin. Time for Congress to do the same here!”

Section 232 tariffs

The USMCA was just agreed on last year. However, despite the agreement, there were some stumbling blocks, especially the Section 232 tariffs. The Trump administration slapped a 25% tariff on US steel imports and a 10% tariff on US aluminum imports. While Canada and Mexico were exempt from the tariffs to begin with, they were subsequentially slapped with tariffs after two exemptions. Both Canada and Mexico also retaliated against US tariffs. From the very beginning, the Trump administration linked Section 232 tariffs to USMCA although both Mexico and Canada sought to delink the two. However, while the three countries managed to renegotiate NAFTA, they couldn’t arrive at common ground on Section 232 tariffs.

Quota

The Trump administration was pushing for a quota for granting Section 232 exemptions. However, both Canada and Mexico opposed the quota saying that their steel and aluminum exports are not a threat to US national security, which is the basis of Section 232 tariffs.

While US steel companies like U.S. Steel (X), AK Steel (AKS), and Nucor (NUE) had welcomed the tariffs, the aluminum industry’s response was mixed and leading producer Alcoa (AA) wasn’t in favor of blanket tariffs. Nonetheless, despite the tariffs, U.S. Steel, AK Steel, Nucor, and Alcoa fell sharply last year and underperformed the S&P 500 (SPY).

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