NAFTA – What’s At Stake?
Author: Portfolio Specialist Group
August 22, 2017
The first round of NAFTA negotiations are now complete, as representatives from Canada, the U.S. and Mexico work towards a “modernization” of the 23-year old deal. Hopes are that a refreshed deal can be agreed upon by early next year, however this seems like an ambitious timeline in moving through the list of 117 objectives, along with sub-objectives. As soon as talks are finalized, legislative approval is still required, which could delay ratification due to Mexican national elections and U.S. midterm elections set to take place during the second half of 2018.
While reducing its trade deficit is a top U.S. priority in re-negotiating NAFTA, it is important to note that the U.S. runs a trade surplus with Canada of $8 billion and a deficit of $63 billion with Mexico.
Among the many issues being discussed, rules of origin may be the largest point of contention between Canada and the U.S. Currently, for a vehicle to qualify for duty-free status, close to two-thirds of its components must come from NAFTA member countries.
The U.S. is looking to increase that requirement, even going as far as adopting a minimum requirement for “made in America” content. Canada and Mexico obviously oppose this idea, though we’ll see where discussions go from here.
The auto industry argues that even small changes to the rules could disrupt the integration of the supply chain and negatively impact the industry. Autos have already lagged the S&P 500 over the past 18 months, and may be exposed to further downside risk should negotiations unravel through future sessions.
Source: Strategas Research, August 16, 2017
Other important areas to watch outside of autos include energy, where the sector has become highly integrated between the three countries, and in agriculture, where President Trump has indicated he wants to focus on Canadian market access for U.S. dairy, poultry and eggs, while Canada aims to protect its supply-management system of these products.
Agriculture could grow in importance in future NAFTA talks, as Canada and Mexico are the largest agriculture export markets for the U.S. after China, and many of the top agriculture producing states voted for Trump in the 2016 Presidential Election.
Source: Strategas Research, as of August 16, 2017
Not surprisingly, if there is one encouraging takeaway from the initial round of talks, it is that the trilateral nature of the discussions suggests an outright termination of the agreement is likely off the table. This in itself could be viewed as a win after President Trump has in the past described NAFTA as “the worst trade deal in the history of the country” and blamed the current arrangement as costing the U.S. thousands of jobs during his campaign.
The next round of negotiations will take place in Mexico on Sept 1st before moving to Canada later in the month. Further formal discussions have not been scheduled as of yet, though speculation is that there will be far more than three rounds required before an eventual agreement is made.
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