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Uncertainty Looms for USMCA to Pass U.S. Congress, Say Analysts
A new trade deal between the United States, Canada and Mexico is expected to have a modest impact on the oil and gas industry, and reduced uncertainty between the trading partners could lead to an eventual lifting of tariffs on steel and aluminum imports, according to analysts. However, they warned the ongoing trade dispute with China could worsen.
After years of negotiations, the three countries on Monday unveiled the United States-Mexico-Canada Agreement (USMCA). The deal is expected to replace the 24-year-old North American Free Trade Agreement (NAFTA).
In a note to clients Tuesday, analysts with ClearView Energy Partners LLC said at first blush, the USMCA “appears to be something of a mixed bag for energy. By our reading, it would preserve existing cross-border, tariff-free energy trade while retaining, but slimming down, NAFTA’s investor-state dispute settlement mechanism [ISDS] for oil and natural gas.
“Similarly, it would urge harmonization of energy performance standards and take modest steps toward new environmental strictures, but it would not yet end tariffs on steel and aluminum.”
The oil and gas industry has been eager to preserve ISDS protections, which shield U.S. investors, including oil and gas companies, from unfair treatment or asset seizures by host nations.
Economists with RBC Financial Group on Tuesday called the retention of ISDS protections in the USMCA “somewhat of a coup for the Canadian side,” which had argued that the mechanism “was indispensable, particularly given the seemingly erratic approach of the current U.S. administration to tariff actions.”
Case in point, Canada, Mexico and the United States didn’t come to an agreement on ending tariffs on steel and aluminum imports. President Trump conceded at a press conference Monday that, under the USMCA, “we probably, for the most part, won’t [have] to use tariffs unless we’re unable to make a deal with a country.” Trump slapped a 25% tariff on steel and a 10% tariff on aluminum imported from Canada, Mexico and the European Union on May 31.
According to reports, Canadian Prime Minister Justin Trudeau is urging Washington to remove the tariffs. “Moving forward on eliminating the tariffs on steel and aluminum remains a priority for us, for Mexico, and is something the Americans have indicated they are more than willing to work on,” Trudeau said, according to Reuters.
RBC said Canada “will get a 60-day exemption from any further U.S. tariffs or import restrictions imposed under Section 232 to allow the two parties to work toward a negotiated outcome.” The economists added that “the fact that those tariffs remain…shows there are still limits to Canada’s protection from aggressive trade actions from the U.S.”
Fitch Ratings credit ratings analysts said the trilateral agreement “should reduce key uncertainties” for trade between the United States and Canada, and between the United States and Mexico. Most NAFTA provisions were included in the USMCA, Fitch noted, but there were big changes in the auto sector.
Under the new agreement, 75% of a vehicle’s value must be produced in North America, versus 62.5% under NAFTA, and 40% of a car must be produced in factories where workers are paid at least $16/hour. The USMCA also includes a 16-year sunset clause, longer than the five-year sunset clause that the White House had wanted.
“Nonetheless, the agreement significantly reduces key near-term macroeconomic risk for all three countries,” Fitch analysts said. “The longer-term impact of the new agreement in terms of investment, jobs and growth, especially for Mexico, will depend on how supply chains in certain sectors, namely autos, respond to the new content requirements.”
RBC analysts agreed that there were “few surprises” in the new agreement. “While it’s possible to conclude that the deal consists largely of tweaks to the old agreement, we believe reduced uncertainty about the U.S.-Canada trade relationship could prompt businesses to put more investment dollars to work and will support exports.”
Texas Oil & Gas Association President Todd Staples said the members supported the trade deal and believes it will be good for the oil and gas industry.
“As the leading oil and natural gas producer, the No. 1 state in many agricultural products, and a major exporter, Texas is home to those who understand the value in strong relationships with our neighboring countries,” Staples said. “Texas oil and natural gas companies of every industry sector are playing a major role in producing jobs and opportunities for all Americans, and this pact will move us toward North American energy security and continued improved relationships with our closest trading partners.”
While the USMCA will require legislative approval from all three countries to take effect, passage by the U.S. Congress may be trickiest.
“We think it will be ratified in Canada and Mexico,” RBC economists said. “It is also much more likely to make its way through the U.S. Congress now that Canada has joined — even potentially a different Congress controlled by Democrats after the November midterm elections.”
Fitch called passage by Congress “the greatest uncertainty” for the trilateral deal, adding that a vote will be delayed until 2019, after the 2018 midterm elections, due to a requirement that the U.S. International Trade Commission first provide a report to lawmakers.
“How the new Congress votes, especially if the House of Representatives flips to the Democrats, could be a key stumbling block,” Fitch analysts said.
ClearView said if the Democrats were to win both the House and the Senate in November, they “could theoretically hold the USMCA hostage…We would add our view that this sort of ‘tail-case’ election outcome could potentially derive, in part, from political aftershocks associated with Judge Brett Kavanaugh’s Supreme Court nomination process.”
Despite optimism that trade issues on the North American continent were beginning to be sorted out, analysts warned that tensions between the United States and China on trade could escalate.
ClearView analysts said they took note of President Trump “explicitly crediting his administration’s use of tariffs for promoting successful NAFTA renegotiation” during his press conference to announce the USMCA. “In our view, this points toward further brinkmanship in other trade proceedings, reinforcing our conviction for continuing U.S.-China trade conflict and ongoing energy trade, and sanctions, risk.”
Analysts at Fitch concurred, and said Sino-U.S. trade tensions “remain and now loom significantly larger for the U.S. economy than those with Mexico and Canada.” The row between Beijing and Washington has “begun to affect our global growth forecasts.” The 10% tariff on $200 billion of Chinese imports, announced last month by the White House, “is unlikely to be the end of the trade war, and a threatened increase in tariffs to 25% is likely.” The tariff is scheduled to increase to 25% after Jan. 1.
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