Another big worry for markets-NAFTA fails and trade wars erupt

As trade negotiators prepare to meet up in Mexico this week, Wall Street is increasingly anxious the 23-year-outdated NAFTA trade package could break apart, creating the potential for fresh trade clashes in THE UNITED STATES and around the world.

Analysts say tough “America first” trade chat from President Donald Trump in Vietnam last week raised new concerns about his opposition to discounts like the North American Free Trade Agreement with Mexico and Canada. Trump has pushed for the renegotiation of NAFTA, and he in addition has threatened to withdraw from it, something analysts say appears to be increasingly possible.

The talks enter a fifth round Wednesday, and the U.S. has been wanting to narrow a $60 billion trade deficit with Mexico and modernize the contract on specific things like intellectual property, digital trade and financial services. After the last round, U.S. Trade Representative Robert Lighthizer explained he was “shocked and disappointed by the resistance to change” by Mexico and Canada on these fronts but added there has been some activity on modernization.

“There are lots of scenarios where this factor merely dies. You can’t guideline that out,” explained Greg Valliere, chief global strategist at Horizon Investments. “I feel that [Trump] only sent a signal in that speech that he doesn’t want any sort of multilateral discounts. He only wants bilateral discounts. To be reasonable, you could say we’re able to cut a manage [Canadian Primary Minister Justin] Trudeau, probably with Mexico. And with [U.K. Primary Minister] Theresa May. There are options.”

But there is also downside and the potential for increased U.S. protectionism. “There are already trade disputes between your U.S. and Canada on lumber and dairy products. We slapped tariffs on their aircraft. There are already issues. There may be a battle with China over aluminium and steel. I simply worry these things become more countless,” Valliere said. Trump is definitely expected to help to make a trade announcement Wednesday, but analysts usually do not expect it to get about NAFTA.

Sticking details in the negotiations have been over fresh tips of origin, with the U.S. searching for that 85 percent of any car to get sourced to NAFTA countries, with 50 percent of the total from the U.S., whereas current sourcing guidelines will be for 62.5 percent to be produced in NAFTA countries. The U.S. imports vast amounts of dollars in car parts from Mexico annually, furthermore to actual automobiles. Additional factors of disagreement have been the U.S. insistence on dropping an activity to resolve disputes and also the addition of a five-year termination clause.

“They’re making great improvement in the Congress in the tax bill. Is usually this really where you intend to move and offset some of those rewards? But polling is solid upon this on NAFTA, and this may get something they would like to do,” explained Daniel Clifton, head of policy research at Strategas Research. “I believe the market will extrapolate a more substantial global trade battle if that happens.”

Jens Nordvig, Exante Data CEO, delivered a warning note Monday that he now sees a 30 to 40 percent potential for NAFTA “blowing up.”

While Ian Bremmer, president of Eurasia Group said in a note Monday that he has longer thought there was 50/50 prospect NAFTA would break apart, but he’s also becoming more and more concerned.

“The big risk is that trade stress in NAFTA spreads to a more global stage, for instance if the EU sides with Mexico in WTO disputes. That’s where the global risk grows very large,” Nordvig said in an email.

The potential economical impact is unclear but there would be an immediate response in the currency markets. Nordvig points out that the peso fell to a minimal of 22 vs. the dollar in January. It had been at about 19.15 Monday.

“If NAFTA blows up, it is very vulnerable,” Nordvig notes, adding Mexico could turn politically left in its forthcoming presidential election. “Consequently, we are discussing potentially extremely significant [peso] weakness in a NAFTA blow-up scenario, particularly if it drives political changes in Mexico also.”

He said the Canadian dollar would as well against the U.S. dollar if NAFTA ended. “But that’s not the case globally. In fact, I believe over the medium-term, [euro] and [Chinese yuan] would take advantage of the U.S. “America First” policy, as it has to help to make the [dollar] a less attractive reserve currency,” Nordvig mentioned.

The economical consequences of the finish of NAFTA are unclear but Valliere notes that American farmers could be among the groups that feel impact being that they are big exporters. The U.S. had a $12.5 billion surplus with Canada in 2016, and it traded $628 billion in goods and companies with the U.S. this past year, weighed against Mexico’s $580 billion.

Bremmer said Canada and Mexico also see the potential for the foretells fall apart. “Both will have plans well underway for how to respond to just what a NAFTA-significantly less North America looks like. The economical hit is equally very clear for both, however the politics will be another subject,” he wrote. “Anti-Trump sentiment in Canada is indeed high that there’s not likely to be much fallout for Trudeau and his liberal get together if the relationship falls apart. In the meantime, Mexican president Enrique Pena Nieto is definitely ostensibly the pro-Trump guy; it has a huge impact on next year’s elections.”

The bigger impact would obviously be on Mexico’s economy and businesses. There’s been a substantial decline in shares of Mexican companies which may have large exposure to the U.S., regarding to Strategas.

Source: Strategas Research

“The Mexican authorities want to downplay the influences so they’re putting out numbers about how exactly much trade already goes under WTO guidelines and non NAFTA guidelines. They’re trying to speak about diversification of marketplaces. They speak about the development of imports from Argentina and Brazil,” explained Juan Carlos Hartasanchez, senior director at Albright Stonebridge Group. He explained imports, largely grain, have grown 10 to 15 percent within the last yr from Brazil and Argentina. “They logically need to boost confidence. Nevertheless, the impact is still strong. I believe GDP would suffer…It definitely would be a significant hit to GDP only as a result of the sheer size of Mexican U.S. trade.”

Hartasanchez said if the U.S. does withdraw from NAFTA, Mexico has got said it would not remain at the desk though using the withdraw would be half a year away. “Just how [the U.S.] could justify getting out is saying the blame falls on Mexico and Canada and saying they weren’t ready to renegotiate,” he said.

Within an editorial, the Wall Street Journal Sunday said the largest threat to Trump’s economy is his trade agenda. The newspaper pointed to its own poll that said 82 percent of economists surveyed said the overall economy would expand more slowly for the next two years that it could have otherwise, but simply 7 percent anticipated recession. “That underestimates the hazards of recession inside our view, offered the political shock from such a reckless take action by a U.S. President and the harm that would ensue to North American and even global source chains,” the editorial explained.

Valliere said free trade has turned into a target of both the left and far best. “People can’t stand free trade any more. It’s unpopular,” he explained. “I believe you could make a compelling case that it is helped the U.S. It’s helped our export sector. It’s brought in goods that are inexpensive and that’s been best for consumers… But there exists a concentrate on the people who have been hurt.”

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