We have a deal! Despite all the twists, turns, and politics, the U.S., Mexico, and Canada ultimately managed to reach a deal, clearing a cloud of uncertainty that had hung over the North American industrial market for months. Perhaps the biggest benefit of the new United States-Mexico-Canada Agreement (USMCA) is what it does not do: eliminate NAFTA entirely, throwing supply chains into chaos and threatening the longest and strongest industrial boom for commercial real estate on record.
NAFTA has had a profound impact on the North American industrial market. Supply chains have become supra-national with truck traffic and need for warehousing skyrocketing. Since it took effect, annual loaded truck containers flowing into the U.S. have nearly doubled. Meanwhile, warehouse stock in the three countries has grown by over 5.5 billion square feet, with U.S. warehouse inventory growing by nearly four billion square feet.
The new USMCA avoids a breakdown of $1.2 trillion of merchandise trade between the U.S., Mexico, and Canada. It’s not just about merchandise trade though. Professional services also stand to benefit. With highly integrated supply chains, North American countries rely on services to move and track products across borders multiple times before a final good is ready for sale. New trade facilitation measures simplify and streamline customs procedures to allow the easier flow of goods which, in turn, reduces the cost of trade for service providers, manufacturers, and consumers.
On the Road Again
No industry had more to gain (or lose) with USMCA negotiations than the automotive industry. North America is the third-largest producer of light- and medium-duty vehicles and second-largest producer of automotive parts in the world. Since NAFTA’s implementation in 1994, firms have utilized the free trading relationship to extensively integrate supply chains. For example, 40 percent of U.S. imports from Mexico and about 75 percent of U.S. exports to Mexico are intermediate goods to be used in later-stage production of final goods. This helps lower overall manufacturing costs which, in turn, means increased competitiveness for North American-based automakers and lower costs for domestic consumers. This preferential trading relationship has enticed international automakers to build over 27 production plants in the U.S. It is also a major reason why new vehicle prices have risen only 8 percent since NAFTA’s inception, while overall consumer prices have gone up by 86 percent.
Stricter rules of origin now require the share of a vehicle’s components that come from within North America to rise from 62.5 percent to 75 percent in order to be considered tariff-free. New requirements also state that to avoid a 2.5 percent levy, 30 percent (gradually moving to 40 percent by 2023) of an auto’s final assembly must be done by workers earning at least $16 per hour, far above the current average Mexican autoworker’s wage of $3.14 an hour.
The new USMCA avoids a breakdown of $1.2 trillion of merchandise trade between the U.S., Mexico, and Canada.
One continuing challenge for U.S. automotive importers will be determining whether second- or third-tier suppliers are compliant with the new labor provisions. Regardless of industry, shippers would be wise to review the USMCA agreement closely to determine if there are any specific requirements tied to labor enforcement that could lead to increased administrative costs. Failure to do so could result in added production and distribution costs for goods stopped at the border.
IP Protections & Digital Trade
The deal provides stricter protections for, and enforcement of, intellectual property rights for data, patents, and trademarks in multiple sectors, including pharmaceuticals, agriculture, and biology. Canada agreed to extend patent protections for pharmaceuticals, such as biologic drugs, from eight to 10 years, and raise trademark and copyright protection spans from 50 to 70 years, in line with the U.S. and EU.
Both Canada and Mexico will double their de minimis shipment value levels, which is the minimum value of an imported shipment that is subject to duty collection and customs documentation. The increase is significant for small- and medium-sized businesses that have smaller-value shipments and can often struggle to pay customs duties and compliance costs. The changes will also make it easier for online orders to ship across borders and will likely encourage some U.S. retailers to increase cross-border e-commerce. According to estimates from the International Trade Commission, these changes are expected to boost cross-border shipments from U.S. online retailers to Canada by 4.6 percent (or about $335 million) and boost online sales to Mexico by 3.5 percent (or about $92 million).
U.S.-Mexico-Canada (and China)
An important provision tucked away near the end of the accord clearly has China in its crosshairs by attempting to prevent Chinese exports from entering the U.S. through Canada or Mexico. USMCA Article 32.10 requires each country to inform others before entering into free-trade agreements with “non-market” economies — meaning China. It also requires advanced review of the full text of any proposed agreement, including any annexes and side instruments, and provides the option to terminate the USCMA on six months’ notice.
U.S.-China trade policy remains the most fluid aspect of the near-term outlook for industrial real estate. The Phase 1 deal between the U.S. and China reached in December 2019 and signed in January 2020 is a promising development, although it lessened only some tariffs (largely on consumer goods). It is unlikely that existing tariffs (largely on industrial equipment and intermediate goods) will be removed entirely any time soon since they are largely viewed as leverage for future negotiations.
Nothing Lasts Forever
The USMCA has a renewable 16-year lifespan, which includes an automatic six-year review process and a 10-year window to negotiate any differences. While there is a risk, albeit small, that the USMCA may not be renewed at the end of the 16-year period, the deal provides firms the certainty needed to implement longer-term investment and production plans. Another important element of the USMCA is that Mexico’s and Canada’s automotive exports are now insulated from any future Section 232 tariffs imposed by the U.S., which helps to further embolden corporate investments.
The new agreement means businesses are more likely to move on sourcing and production decisions.
Don’t Bet Against Industrial Real Estate
The new agreement means businesses are more likely to move on sourcing and production decisions. Deciding where to locate a manufacturing plant is a long-term decision that firms often live with for decades, so selecting the correct location is critical. Reducing the total cost of operations and the risk of business interruption, while improving speed to market, will continue to drive site selection. Top-of-mind selection criteria will remain the availability and skill of labor, connectivity to customers and suppliers, energy costs, tax rates, and commercial real estate occupancy costs.
The new USMCA trade deal supports an already bright outlook for the North American industrial market. Cushman & Wakefield’s 2020 North American Industrial Outlook expects logistics and industrial real estate to remain one of the hottest commercial property types over the next couple of years. Economic indicators, with strong links to industrial fundamentals, point to continued growth in 2020 and 2021. Consumer spending supported by stable inflation, wages, growth, and low unemployment bode well for industrial real estate demand, not to mention the continued demand tied to e-commerce fulfillment.