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NAFTA 2.0

Charlie Reinhard

By Charlie Reinhard

Head - NAM Investment Strategy

April 30, 2018Posted InInvestments and Investment Strategy

Officials from the US, Canada and Mexico are trying to narrow their differences in the hope of putting a deal together in the coming days. While protectionism remains a risk, our base case scenario calls for a favorable North American Free Trade Association (NAFTA) 2.0 outcome.

A new deal is likely to require the region’s auto makers to include more North American parts in their fleets to bolster regional employment, albeit at a higher cost. President Trump wants to raise the share of content made in NAFTA countries from the current level of 62.5%. Also being discussed are the mechanisms for settling trade disputes.

The NAFTA region is one of the few today more reliant on trade with the US than with China, a sharp contrast from a generation ago. NAFTA participants say a deal is possible by early May, which would help keep the agreement out of the crossfire of Mexico’s 1 July President election and the USA’s 6 November midterms.

Also part of the calculus, 1 May is when temporary exemptions for US steel and aluminum tariffs on imports from Canada and Mexico are due to expire. What’s more, US negotiators are expected to travel to China next week for trade discussions, according to Bloomberg.

As the interested parties negotiate, the trade rules from the existing NAFTA agreement have remained in place. Once new terms are agreed to, we believe any related uncertainty discounted by financial markets will begin to recede, even though it will take until late 2018 or 2019 to complete the formal ratification process.