Does the USMCA Still Have a Steel Problem? - Market Realist

• The USMCA (United States–Mexico–Canada Agreement) was signed last year. However, only Mexico has ratified the agreement so far. A month before Mexico ratified the tripartite agreement, Donald Trump exempted Canada and Mexico from Section 232 steel and aluminum tariffs.
• The USMCA still has problems related to steel and aluminum. This time, the tariffs aren’t the problem—it’s the rules of origin. Meanwhile, Mexico seems willing to meet US demands halfway.

The USMCA, set to replace NAFTA, has yet to be ratified by the US and Canada. There have several stumbling blocks in the deal. Before the USMCA’s signing, the Trump administration sought to link the deal to Section 232 steel and aluminum tariffs. However, after the deal’s signing, tables turned. The US did not lift the tariffs on Canada and Mexico, despite the US neighbors linking the deal ratification to the lifting of Section 232 aluminum and steel tariffs. Canada is the largest steel and aluminum exporter to the US. Mexico is the second-largest steel exporter to the US.

Section 232 steel tariffs

Both Canada and Mexico played hardball over the Section 232 quotas. Whereas other leading steel exporters to the US agreed to quotas to get Section 232 exemption, Canada and Mexico got full exemption. While the exemption used subjective language on monitoring any surge in imports and transshipments, for all practical purposes, it’s a full exemption. Unsurprisingly, U.S. Steel Corporation (X) and AK Steel (AKS) stocks fell after the exemption. However, Alcoa (AA) stood to benefit. The company ships aluminum from its Canadian smelters to the US and was paying tariffs on those shipments.

Mexico ratified the USMCA a month after Trump gave a complete exemption from Section 232 steel and aluminum tariffs. As we’ve discussed previously, the tariffs were slowing ratification of the agreement.

Steel is back in the USMCA

While the Trump administration has granted exemption from steel and aluminum tariffs, the steel question is still lingering in the USMCA. The agreement has strict rules of origin for the automotive industry, one of the leading steel and aluminum end-users. According to Reuters, US trade representative Robert Lighthizer made attempts to tighten the rules of origin, insisting that the metals are “melted and poured” in North America.

Meanwhile, Mexico is willing to meet the US demand halfway. It has ruled out aluminum, as it does not produce key raw materials required for aluminum production. As for steel, the country is willing to accept the rules, provided they come into effect after five years.

Trump’s reelection

In his 2016 campaign, Trump talked about renegotiating existing trade deals that he felt were unfavorable to US interests. NAFTA was at the forefront of Trump’s criticism. Almost three years into his presidency, Trump does not have many trade deals to his merit. USMCA ratification would help Trump show his electorate how his trade rhetoric has helped secure better deals. For more analysis, read Why USMCA Ratification is Crucial for President Trump.

The China trade deal has also been a work in progress. Phase one of the trade deal is still pending.

Meanwhile, the US economy has been relatively strong this year. A strong economy, especially a robust labor market, could boost Trump’s 2020 reelection chances. However, the election could also test the economy. To learn more, read US Economy: Trump Was Right in 2019, maybe 2020?

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Does the USMCA Still Have a Steel Problem? - Market Realist
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