If you’re looking for a reason for U.S. stocks to keep climbing from current highs, this morning’s event at the White House is a big deal. President Donald Trump announced that the U.S. and Mexico have reached a bilateral trade agreement that would replace the 1993 NAFTA agreement among the United States, Mexico, and Canada. Although Canada isn’t a party to the agreement announced this morning, the hope is, the White House says, that Canada will come abroad very quickly, perhaps as early as Friday.
Now the agreement announced this morning isn’t actually a fully fleshed out trade agreement. The Trump administration today called the deal a “preliminary agreement in principle.” And even after the agreement becomes a finished product, it will require approval from the legislatures of the United States and Mexico.
But the stock market is willing to look past all that today–and for good reason. Considering that on some days it has looked as if the Trump administration’s opposition to NAFTA would blow up the supply chains that U.S. car companies rely on to produce their vehicles, today’s announcement is a huge positive.
Here in brief is that the proposed deal would do and what still have to be done.
New rules for autos would require that 75% of auto content must be made in the United States or Mexico for the cars to escape tariffs. That would be an increase from the current 62.5% content rule.
The agreement would also require the 40% to 45% of auto content be produced by workers making more than $16 a hour. The average hourly wage for a U.S. autoworker is $22. In Mexico autoworkers make less than $3 an hour on average.
The deal would also create new protection for intellectual property ranging from digital music to drugs.
The proposed agreement does not resolve the issue of “232 tariffs,” those imposed on imports into the U.S. in the name of national security. The steel and aluminum tariffs imposed by the Trump administration earlier this year were “232 tariffs.” Proposed tariffs on auto imports would be “232 tariffs.”
The U.S. Congress would have 90 days to vote “yes” or “no” on a final agreement. The vote is complicated by the fact that Congress only gave President Trump authority to do a trilateral deal with Mexico and Canada. Based on the reports of initial Congressional reaction to the news, there’s a considerable bloc of votes that right now hinges on Canada’s participation in the deal. Mexican president Enrique Pena Nieto would like to get the agreement finalized so that the Mexican Congress can approve it before President-elect Andrés Manuel López Obrador takes office in December.
The Standard & Poor’s 500 stock index rose 0.77% today and the Dow Jones Industrial Average closed ahead 1.01%. Shares of General Motors (GM) finished the day up 4.84%. Ford Motor (F) closed up 3.2%. Shares of auto safety equipment maker Autoliv (ALV), a member of my Jubak Picks portfolio, climbed 2.09%.