How Does the USMCA Trade Agreement Affect Cross-Border Investing? Staying Aware in 2023
The United States-Mexico-Canada Trade Agreement (USMCA), which was signed to replace the North American Free Trade Agreement (NAFTA) in 2018, also has a few obstacles to overcome before it supersedes NAFTA and becomes North America's exclusive trade agreement. Before taking effect, the USMCA must be ratified by the American Congress. However, the probability of its progress seems even more definite.
Before we dive in, if you would like to learn more about the factors that may impact your real estate financing and investments, click the link below for a free strategy call with our team at LendCity today.
A quick primer on NAFTA and USCMA
NAFTA, which took effect in 1993, had tremendous impacts on the economies of the United States, Mexico and Canada. The agreement drastically changed the manufacturing landscape in North America. While the trade agreement contributed significantly to the growth of its three constituent economies, the actual benefits of NAFTA are the subject of significant controversy. The merits of NAFTA are still debated to this day.
Regardless of the original agreement, few politicians disagree that NAFTA requires an update. Since 1993, trade among the three partner countries has more than tripled. Additionally, the need for the development of more stringent intellectual property laws has become increasingly apparent.
The USCMA attempts to address many of the more outdated components of NAFTA while maintaining the general spirit of the 1993 trade pact. Importers, business owners and politicians are preparing for the ramifications of the USMCA’s implementation. Likewise, many real estate investors in the U.S., Canada and Mexico are wondering how the new agreement will affect their ability to invest freely throughout North America.
Direct implications
The USCMA will directly impact Canada’s real estate scene, and by extension, Canadians’ ability to invest in real estate both at home and abroad.
Tariffs levied on Canadian steel and lumber by the Trump Administration have had a detrimental effect both on real estate development in the United States and economic growth in Canada. Trade experts expect the U.S. to remove tariffs on these Canadian products with the implementation of the USMCA, which will promote more economic growth and real estate development across North America. This will significantly lower construction prices, potentially increasing real estate stock in several key markets.
Increased consumer confidence and lower steel and lumber prices make it easier for real estate investors to make capital improvements to their properties. It’s much easier to justify additions and significant repairs when there’s a strong economic outlook, and when the cost of steel and lumber are stabilized.
The most significant impact of the USMCA to Canadians is the way that the Bank of Canada is expected to respond. In recent months, inflation has risen above the central bank’s target rates, and the Looney is growing continually weaker. To combat the devaluation of the Canadian Dollar, the Bank of Canada is expected to begin raising interest rates once the USMCA is ratified. This will directly impact mortgage interest rates and potentially complicate first-time investments.
For established investors, rising interest rates will mean their properties rise in value as the Looney improves its valuation. This will subsequently raise the barrier to entry for first-time investors, however, and could potentially heat Canada’s already-active real estate market.
If you own a property you purchased with a variable-rate mortgage, your investment is susceptible to interest rate changes by the Bank of Canada. As the central bank prepares to battle inflation, it’s advisable for real estate investors of all experience levels to prepare accordingly.
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Indirect implications
Many policy analysts expect the USMCA to have largely positive effects on the economics of Mexico, the United States and Canada. For commercial real estate investors in Canada and the rest of North America, this could already be proving an economic boom.
Uncertainty surrounding the future of NAFTA caused many businesses, particularly those in border areas or regions dependent on international trade, to defer lease renewals or downsize their operations.
Thanks to the security imposed by the USMCA, businesses now feel confident enough to sign long-term lease agreements. Because the threat of a serious North American trade dispute is now lower, except for lingering tariffs on some Canadian products, companies that rely on international trade are much more comfortable making long-term investments in their communities. This means that demand for commercial properties, particularly logistics facilities and industrial sites, is likely to continue to grow.
Another key benefit of the USMCA is how it will spur economic activity and promote higher wages across several industries. For instance, the USMCA introduces a minimum wage requirement for some auto factory workers that spans all three countries. This may grow purchasing power in Mexico, and promote the return of some manufacturing positions to the U.S. and Canada. This could, in turn, allow real estate investors to command higher rental rates and invest in more premier properties.
It’s important to note that there are significant drawbacks to the USMCA as it currently stands. The pact, as written, sunsets after just 16 years unless all three signatories agree to an extension. This may deter long-range investments.
Additionally, President Trump is threatening to immediately withdraw the U.S. from NAFTA if the USMCA isn’t ratified by Congress. This could spell significant trouble for the North American economy. While the American President is unlikely to follow through with the threat, the spectre of a North America without an extended trade agreement is enough to give many investors pause.
A hopeful outlook on the USMCA
The USMCA ensures Canadians will have the opportunity to continue investing in the economies of the United States and Mexico for years to come. It also provides Americans and Mexicans with the continued opportunity to participate in Canada’s economy in a meaningful way. While not all provisions of the USMCA will be popular, it’s an important step forward in the integration of North America’s economy. The hope is, it will create numerous investment opportunities on both sides of the border.
If you’re a current real estate investor or thinking about jumping into the market, you’d be wise to follow the trajectory of the USMCA bill. How it evolves and what’s eventually ratified could play an important part in your investment future.
If you would like to learn more about the factors that may impact your real estate financing and investments, click the link below for a free strategy call with our team at LendCity today.