NAFTA Negotiations – Expect Turbulence

August 18, 2017

In the coming months you’ll be hearing and reading about all sorts of expected catastrophes about to happen in Canada as a result of the renegotiations underway of the NAFTA. Never forget, the media is working to attract your eyes and attention so will be doing and saying whatever is necessary to accomplish that goal. This may include scaring you with dire predictions of what will happen when NAFTA is modernized.

NAFTA was originally put in place more than 20 years ago. There are now industries and common methods of doing business today that didn’t exist when the original agreement was written. It is reasonable and desirable for Canada, Mexico and the US to have it brought up-to-date.

When it comes to NAFTA, according to our chief economist Jean-Francois Perrault, “the US bite won’t be as bad as its bark”. You see, there are 14 million American jobs that depend on the massive daily exchange of goods and services between our nations. While they’ve been relatively quiet about it, Canadian officials have been getting in front of State Governors, Congressional Representatives, US Senators, and Municipal Politicians all across the USA. They have effectively reminded all those people how valuable NAFTA is to their constituents. As a result there is significant engagement in the process from many outside the White House.

According to the New York Times this effort has created a “doughnut around a White House-shaped hole” in support of the agreement. Pressure from these officials should help keep the Trump administration in check as talks move forward. With both Republican and Democratic Congressional Representatives figuratively at the negotiating table, the core elements of the agreements should be secure.

There are several areas of common ground between all three parties to NAFTA which will be dealt with through this process. Our economist believes we could see an “early and sustained focus on these issues”. If so, they believe it will “be a sign that the US administration is prioritizing achievement of an agreement on changes to NAFTA by end-2017 rather than the narrow pursuit of its self-interest”.

Our Analyst also believes there are “lines that won’t be crossed” in the negotiation. Specifically, neither Canada nor Mexico can agree with the US administrations’ overriding goal of reducing US trade deficits by changing NAFTA. Only 7% of the US trade deficit comes from trade with Canada and Mexico. The vast majority of their trade deficit (60%) comes from trade with China, another large chunk (21%) from trade with Europe, with the balance coming from other non-OECD Countries. This means that Canada and Mexico can’t solve the US trade deficit problem.

“On a superficial level, the US Objectives read as an aggressive agenda to rewrite NAFTA in favour of the US. Taken in context however their aims are much more modest.” With this in mind; I believe it makes sense to look through the hoopla we’ll be hearing in the coming months and instead focus on the more likely outcome. I think we’ll see the eventual agreement on a revised NAFTA will be one where the essential elements of NAFTA 1.0 will remain intact, but with necessary updates.  NAFTA is getting tweaked, not ripped up.

If you found this article interesting or would like a complimentary financial evaluation, click here for our contact information.

Keir Clark (www.keirclark.ca) is a Portfolio Manager for ScotiaMcLeod®, a division of Scotia Capital Inc. in Fredericton

This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”) Member, CIPF, but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI.  The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable.