By Jorge Amato
Head - Latin America Investment Strategy
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US and Mexico reach bilateral deal, Canada to join talks
The US and Mexico announced that the two countries have reached a bilateral trade agreement, resolving several thorny issues that had hampered NAFTA negotiations for months. President Trump said in a press conference that he will now begin negotiations with Canada on what he sees as a replacement to NAFTA. We view this “termination” of the existing deal as merely an optical tactic, as the basic contours of NAFTA would remain in any new deal.
President Trump floated the possibility that Canada could be excluded from a final deal, threatening to impose tariffs on every car imported from Canada if the two sides cannot come to an agreement. We expect Canada to accept many of the details agreed upon bilaterally between the US and Mexico, though Canada-specific agriculture and metals trade issues remain sticking points. Mexican leaders have insisted that this deal must be finalized on a trilateral basis. US Trade Representative Lighthizer also noted during the press conference that a notice of an updated NAFTA could be sent to Congress later this week if an agreement with Canada is reached.
Both the Mexican peso and Canadian dollar strengthened on Monday when reports of the deal were confirmed by government officials. CAD traded back below 1.30, 0.5% stronger, with investors discounting the higher probability that an eventual deal involving Canada will be reached. Global financial markets also rallied more broadly as this trade agreement is new evidence that US trade disputes can ultimately be resolved.
In order for the new trade deal to be approved before newly elected Mexican President Lopez Obrador takes office in December, the US Trade Representative must notify the US Congress by the end of this week to trigger the necessary procedures that precede final Congressional approval.
While the final text of a deal won’t be released while negotiations with Canada are ongoing, some details of the agreement have been reported: