;

US drives through to reach trade and investment positives

TXF: The week that was

With the new trade agreement between the US and Canada, a revised NAFTA, and the passing of the BUILD Act in the US, Jonathan Bell asks if we are finally beginning to see some positives on trade from the politicians?

My taxi driver from downtown Helsinki to Vantaa, Helsinki airport last Friday evening was a giant Finn, with a ZZ Top-type beard cascading half way down his chest and a heavy Nordic Noire out-of-the-birchforest voice. The taxi was a mighty-fine Finnish-built (with the big help of EU supply chains) hybrid Volvo. Knowing I was flying back to Manchester, UK, he boomed: “So what is going on with you British and Brexit?” I left him in no uncertain terms that I thought Brexit was a total economic disaster for the UK and that the country would end up suffering badly for the next 20 years!

ZZ then pitched in with: “You know the real big problem with Britain?” he pushed. Before I could respond, he answered his own question: “Your education system is crap, that’s why so many people voted to leave Europe.” So you can imagine how this conversation went for the next 30 minutes. ZZ actually knew everything about the subject of Brexit – perhaps he is a university lecturer and does taxi driving just to mingle with mortals like myself.

By the end of the journey, we had sorted the whole Brexit disaster out – and although we aren’t politicians, I wish we were both in control. He did also tell me that he had many British friends now living in Finland who since Brexit had sold up everything in the UK. But then again, they probably needed to as decent beer in Helsinki is £10 ($13) a pint!! For that amount I can get three pints of fine ale down my local pub!

So last week I was somewhat heartened that for once, politicians in the US actually managed to deliver something positive for a change. And heartened because for so long we have been shrouded in negativity surrounding international trade negotiations and political stalemates on trade which seem to ensure not much actually happens in Washington bar the bluster, balderdash and back-stabbing.

US and Canada agree to new trade deal – hoorah!

Back in August, the US agreed a renewal of NAFTA with Mexico – but this left Canada still out in the cold of what should have been a tripartite agreement. However, 10 days ago the US and Canadian negotiators were able to overcome major sticking points between the two countries to finally reach an agreement on a new NAFTA – to be called the super-catchy United States-Mexico-Canada Agreement (USMCA). This could even be a new revitalised song for the Village People!

The US and Canada said in a joint statement: "Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernised trade agreement for the 21st century."

It also stated: "USMCA will give our workers, farmers, ranchers and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region.  It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home."

Canadian Prime Minister Justin Trudeau said that it was a "good day for Canada".

In a couple of tweets the following day, US President Donald Trump said: “Late last night, our deadline, we reached a wonderful new trade deal with Canada, to be added into the deal already reached with Mexico. It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the US and will bring all three great nations together in competition with the rest of the world. The USMCA is a historic transaction!”

Of course, the agreement still needs to be formally signed. The earliest the three countries could sign the pact is 30 November, when the three leaders are all expected to be in Buenos Aires for the G-20 summit. But no date or location for the signing has been announced yet. Much will depend now on what happens in the US mid-term elections and whether the agreement is ratified by US Congress. I won’t go into the inevitable political wrangling in the US here. Let us see what actually plays out.

Like all trade agreements, the new pact won’t please everyone, but most seem to be in agreement that the 25-year old NAFTA needed amending and that the new pact has gone a long way to improve it. The auto industry will be particularly keen to move forward and reinforce supply chains, production and strategically plan ahead.

I mentioned much about the changes in the auto sector back in my blog in August, but to reiterate, one of the key provisions the new deal will require is more of a vehicle's parts to be made in North America in order for the car to be free from tariffs. Effectively, it requires that 75% of the auto parts must be made in Canada, Mexico or the United States, up from the current 62.5% rule. This has been designed to bring back some production that moved abroad. US auto producers have largely applauded the pact, and Ford says the agreement will "support an integrated, globally competitive automotive business in North America”.

The pact also requires that 40% to 45% of auto parts are made by workers earning at least $16 an hour. The goal is to level the playing field between US/Canadian and Mexican auto workers and to incentivise manufacturers to build more in the US/Canada. One of the main criticisms of NAFTA was that it prompted US auto manufacturers to move production to Mexico, where workers earn much less than their US/Canadian counterparts.

Whether these measures will actually increase jobs in the US/Canadian auto sector again remains to be seen. There are sceptics who believe it may still be cheaper to import autos and pay the current 2.5% tariff on importing cars and auto parts. No doubt, this will be observed closely, and the US president is already considering levying a 25% tariff on imported vehicles, citing national security.

In other areas of trade, on the issue of dairy farming, a big sticking point between the US and Canada, USMCA will now open up some of Canada's dairy market to US farmers. But, the Dairy Farmers of Canada has come out and criticised the new trade agreement, claiming it puts the livelihood of Canadian dairy producers at risk.

But there is also one big area of current dispute that has been left out of USMCA – and that is the issue of the tariffs that the Trump administration imposed on imports of steel and aluminium from Canada and Mexico (25% and 10% respectively), and the subsequent retaliatory tariffs those countries have imposed. The US tariffs on steel and aluminium are a direct extra cost factor for US auto manufacturers, so this is something that remains particularly irksome for the auto sector.

As with most things, there are winners and losers with such trade tariff measures. For some of the big commodity trading companies that just happened to be sitting on large inventories of aluminium in the US when these tariffs came into force – most notably Castleton Commodities and Glencore – they will be laughing all the way to their overflowing coffers. It is understood that Castleton has a stockpile of around 500,000 tonnes of aluminium near to New Orleans, and one report said the site was so big that it was visible from space!

US decides to BUILD?

In another seemingly positive development involving political will in the US, last week the US Senate passed the catchy Better Utilisation of Investments Leading to Development (BUILD) Act, overhauling the way the federal government lends money for foreign development. The measure creates a new agency, the US International Development Finance Corporation (IDFC), which consolidates the Overseas Private Investment Corp (OPIC) and other US government development organisations. In Trump’s earlier budget proposals, OPIC was one of the agencies which had been earmarked for reform.

The new $60 billion agency is supposedly designed as something of response to China’s growing influence around the world in terms of development finance, and particularly to counter the concept of the ‘debt-trap’ which some emerging countries find themselves in with soft loans from entities such as China Development Bank (CDB) in particular.

The US House of Representatives (US Congress) had already approved the bill. In a statement, the White House said Congress had taken an important step toward fulfilling Trump’s commitment to reform development finance institutions: “so that they better incentivise private-sector investment in emerging economies and provide strong alternatives to state-directed initiatives that come with hidden strings attached.”

By all accounts, the bill will allow the new development agency to take an equity stake in projects rather than just lend money. It will also let the agency provide political risk insurance to help foster private investment in emerging markets.

While the desire to tackle development funding from China and the likes of CDB is a good thing, one wonders just how much impact this measure will actually have. Anyone going to Africa, in particular, will see only too well just how extensive the Chinese development finance thrust actually is. Chinese development projects underpinned with soft loans are everywhere. China puts so much effort, money and political will behind these initiatives that it will take more than a revitalised OPIC in the form of IDFC to seriously dent the Chinese offering.

And what about US Exim? US politicians have left US Exim to flounder now for years. US jobs, industry and exports suffer. Why? Because US politicians simply cannot see and agree as to what is best for their country. Other nations profit from this, particularly in markets across the African continent where US Exim used to be very active. US Exim mainly provided guarantees on commercial bank loans for such deals for big US exports to vital infrastructural contracts and projects. These were never corporate subsidies or whatever other such nonsense the Tea Party and others have always come up with, these efforts were commercial sense. Combine a fully functioning US Exim with IDFC, give them both the proper tools they need, and then you may just have an outward-looking force to better challenge the global export might of China and others in emerging markets.

Exclusive TXF essential subscriber content:

Celebrating growth: Top takeaways from TXF West Africa 2018
Last month, TXF gathered a delegation of senior players active across West Africa to discuss the exciting developments playing out across the region. Here’s just a snapshot of what we concluded.

Shop talk: Bespoke CPRI insurance for Gerald Metals
Robert Frank, global head for insurance and risk mitigation at Gerald Metals, spoke to TXF about the CPRI market, the digitisation myth and how having multiple brokers keeps them on their toes.

M25 refinancing: A choice decision?
The M25 motorway refinancing earlier this year was the UK’s largest since the Intercity Express deal in 2015. However, was the public bond market the right route given the deal priced higher than hoped for earlier in the year when a sub-100bp level looked more likely?

ECA Data: Fonzi's weekly facts, figures and forecasts

TXF Data's top lending opportunities, latest Category A projects under consideration by ECAs, and provisional CIRR trends are here for this week

The news you thought you had but you don’t…

Aquila Capital secures 520MW wind financing
Aquila Capital has secured financing for two wind farms totalling 520MW of capacity in Sweden. The €400 million 357MW Valhalla wind farm is financed on a debt to…

More details on Gordie Howe Bridge financing
Fluor and its partners ACS Infrastructure Canada and Aecon Group have confirmed financial close on the C$5.7 billion ($4.4 billion) Gordie Howe Bridge 36-year P3 DBFOM concession…

Erseven leaves Bunge
Cem Erseven has left Bunge and will be on gardening leave for three months before starting with his new employer on the…

OMERS closes on Commodore Leeward acquisition facility
Canadian pension fund OMERS Infrastructure Management reached financial close on the $402.9 million debt backing its acquisition of the Commodore…

Trafigura’s $1.945bn RCF keeps the pricing tight
Trafigura has closed a $1.945 billion-equivalent revolving credit facility (RCF) and term loan facilities. Signed on 27 September, the facilities were oversubscribed and…

Sign in to post a comment. If you don't have an account register here.

X

Round off Geneva Commodities Week in style with our exclusive event dedicated to structured commodity finance.

TXF Geneva 2018