Last Thursday, Mark Carney and Mexican President Claudia Sheinbaum signed an informal pact, vowing to cooperate with one another on trade matters. The two leaders signed the pact during Carney’s official visit to Mexico. Taking place in Mexico’s Presidential Palace, the meeting included public appearances, speeches, and meetings with the press. Though tariffs were not the official reason for the meeting, they were implicitly discussed when Carney and Sheinbaum vowed unity in the face of any effort by President Donald Trump to divide them. The “division attempt” they mentioned would likely be something to do with tariffs, as Donald Trump has been known to use tariff threats to coerce countries into doing his bidding.
With the Mexico-Canada trade pact having been signed, the time has come for Canadians to think about what it means going forward. An increase in Canada-Mexico trade could theoretically offset some of the economic damage done by Trump’s tariffs, but probably not all of it. Canada does not have the infrastructure in place to supply crude oil and refined products to Mexico, for example. The more powerful effect of the Canada-Mexico pact would probably be the two countries’ improved bargaining position in future talks with the United States.
Source: Getty Images
Economic effects
How should Canadian investors feel about the new Canada-Mexico pact?
Cautious optimism would be a sensible approach.
While Canada will not make up for all of its lost U.S. trade with Mexico, Canada and Mexico showing unity in future trade negotiations could bear fruit.
In negotiations – as in life generally – it’s always better to be united than divided. Two united partners function essentially as one, giving them more leverage over any would-be adversary. If Canada and Mexico worked together on trade, each negotiating on behalf of both, then Canada could probably get some tariff relief. That would likely stimulate Canada’s economy, leading to a better investment climate.
Stocks affected by Canada/U.S. trade
Some of Canada’s biggest companies are deeply dependent on the free flow of trade between Canada and the United States. Railroad companies, exporters, and manufacturers are among those that have been hit the hardest by Trump’s new tariffs. They would likely be among those benefiting the most if future trade talks go well.
Take The Canadian National Railway (TSX:CNR) for example. It is Canada’s largest railroad company, transporting more than $250 billion worth of goods per year. The company is well known for its cross-border operations, which involve shipping goods from Canada to the United States.
Goods shipped by CNR have been among those hit the hardest by Trump’s tariff policies. Trump hiked tariffs on Canadian cars as well as timber, shipments of these goods to the United States have fallen off a cliff. Trump also hiked tariffs on Canadian energy, although those tariffs (10%) are not prohibitive. So, CNR’s crude-by-rail business is doing okay.
Regardless, much of CNR’s business is now affected by Trump tariffs. If future trade talks go well, then the company’s fortunes could really turn around.
Foolish takeaway
The bottom line on the recently announced Canada-Mexico trade pact is that it’s a step in the right direction for both countries. Giving both considerable leverage in future trade talks with the U.S., the pact marks a decisive turning point in the history of North American trade.
