NAFTA Gone, USMCA In: ETFs In Focus

The month of December has been marked by announcements of long-awaited trade deals. Apart from the phase one U.S.-China trade deal, the United States-Mexico-Canada (USMCA) deal also hogged investors’ attention. USMCA basically replaced the North American Free Trade Agreement or NAFTA signed in 1994.

Trump was against NAFTA as he apprehended the loss of thousands of U.S. industrial jobs to low-wage Mexico. The U.S House of Representatives passed the new North American trade deal on Dec 19, in a sweeping 385-41 vote.The deal is now expected to be approved by the Senate next year.

Below we highlight the ETF areas that could be impacted by the new USMCA deal, either positively or adversely.

Auto

Auto stocks were in a tight spot following Trump’s presidential victory. This was because Trump was expected to adopt a stricter stance on immigration and outsourcing. Companies like Ford Motors (NYSE:F) and General Motors (NYSE:GM) outsource their car production to Mexico. Canadian auto suppliers should also surge as the U.S.-Canada free-trade deal will erase auto tariffs.

But Japanese auto stocks responded negatively to the deal. “The new deal included a requirement that 75% of auto parts come from North America, up from the previous 62.5% required by NAFTA.” While the move will boost U.S. production, Japanese automakers might take a hit. They manufacture cars and trucks in Mexico for export.

USMCA tightens rules of origin for auto parts and requires a larger share of cars (around 40% to 45%) to be made by workers earning at least $16 an hour. This wage level may not incentivize U.S. and foreign car makers to shift jobs to Mexico. All these factors put focus on auto ETF First Trust NASDAQ Global Auto ETF CARZ. Two of CARZ’s top three holdings include Japanese automakers Honda and Toyota Motor.

Steel

U.S. steel should benefit from the requirement of higher North America content in the auto industry. This puts the spotlight on VanEck Vectors Steel ETF (ASX:SLX) . The fund has 42.73% exposure to the United States.

Mexico

Trump’s win in the U.S. presidential election has been a pain for several foreign country investing. But it was Mexico that faced the maximum wrath. Needless to say, the country ETF iShares MSCI Mexico Capped ETF EWW will profit from the treaty. The deal hopes and low rates have boosted the fund by 5.3% in the past three months.

U.S. Industrial Stocks

With narrowing wage differentials in the United States and Mexico, President Trump’s efforts for bringing back manufacturing jobs to America and a dovish Fed should bode well for the sector. Industrial stocks are red hot now and have hit a level not seen since 2018, probably on easing trade tensions. As a result, the spotlight is on Industrial Select Sector SPDR Fund XLI.

U.S. Consumer Stocks

U.S. Treasury Secretary Steven Mnuchin estimates the USMCA deal to add 0.5% to U.S. GDP growth. Since consumer spending makes up about 70% of the U.S. GDP, this incremental growth from the USMCA deal should benefit consumer stocks and ETFs like iShares U.S. Consumer Services ETF (IYC).

Canadian Currency

Along with Mexico, the Canadian currency should benefit from the new treaty. Invesco CurrencyShares Canadian Dollar (NYSE:F) thus comes into focus.

Livestock

The livestock industry came under pressure in the middle of 2018 as U.S. pig farmers were subjected to retaliatory pork tariffs from Mexico. Since Mexico is the largest buyer of U.S. pork based on volume, the tariffs were deemed as a major setback for American meat producers. So, one can take a look at livestock ETN iPath Series B Bloomberg Livestock Subindex Total Return ETN COW (read: Commodities Up for a Solid 2020? ETFs to Benefit).

Corn

Per analysts, corn is likely to be one of the main beneficiaries of the deal since Mexico is one of the largest purchasers of American corn. Teucrium Corn ETF CORN is thus set to soar.

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