Ten Stocks That Can Win with the USMCA Deal

The new U.S.-Mexico-Canada Agreement (USMCA) on trade, replacing NAFTA, cleared a key hurdle when Speaker of the House Nancy Pelosi announced that Congressional Democrats have a deal with President Trump to support it. The U.S. Senate is expected to approve USMCA, and it may be signed by President Trump before the end of the year.

Ten stocks that could benefit mightily from USMCA, according to Barron's, include Tesla Inc. (TSLA), General Motors Co. (GM), Ford Motor Co. (F), United States Steel Corp. (X), Magna International Inc. (MGA), Borg Warner Inc. (BWA), Danone SA (DANOY), Tyson Foods Inc. (TSN), Kansas City Southern (KSU), and Marathon Petroleum Corp. (MPC).

Significance For Investors

The North American auto industry, which has plants spread across the three countries, is a major focus of USMCA. To move duty-free across borders, vehicles must have a higher proportion of parts manufactured in North America than was required under NAFTA, plus at least 70% of their steel and aluminum made in North America.

Overall, 75% of the value of completed cars and trucks must originate in North America to avoid duties. Additionally, 40% of the value of a car and 45% of the value of a light truck must be attributable to manufacturing facilities in North America where the average pay is at least $16 per hour.

GM and Ford, in addition to their older plants in the U.S. and Canada, have increasingly moved production to Mexico, and GM became the largest automaker in that country in 2018. Tesla incorporates parts made in all three countries in its Model 3. Borg Warner, a leading manufacturer of vehicle power trains, has factories in all three countries. Magna International is the largest supplier of auto parts based in Canada, and thus relies on unfettered access to the U.S. market.

Meanwhile, U.S. Steel could see an increase in sales to the auto industry as a result of the higher North America content requirements. Nucor Corp. (NUE) is cited in the report as another U.S-based steelmaker that could benefit.

Canada already is the biggest market for exports of U.S. agricultural products. Under USMCA, Canada agrees to open up its dairy and poultry markets further, good news for French-based Danone, which owns U.S. milk producer WhiteWave Foods, and chicken processor Tyson.

Railroad company Kansas City Southern already earns almost half its revenue from trade with Mexico, and the new agreement may increase its volume of business. Meanwhile, Mexico is a growing export market for refined crude oil products from the U.S., and Marathon may be well-positioned to be a big winner from an increased flow under USMCA.

Looking Ahead

The USMCA deal already has been approved by Mexico, and awaits passage by the Parliament of Canada, in addition to the U.S. Senate. Some details may change in the interim. Canada and Mexico already are the top two trading partners for the U.S., combining to account for about 30% of total U.S. imports and exports.

USMCA promises to increase economic activity among the three nations, while lowering costs for businesses and consumers. A notable exception is that automobile buyers in the U.S. are likely to see higher prices, the result of USMCA rules that dictate higher North American content and average labor costs above the norm in Mexican auto plants.