NAFTA: Rock, paper, scissors - BBH

"The North American Free Trade Agreement is more than 20 years old and should be updated," Marc Chandler, Global Head of Currency Strategy at BBH, argues.

Key quotes:

"Trump is no fan of NAFTA, and it seemed that he was prepared to pull out of it as well.  However, he apparently was persuaded, some say by Canada's Prime Minister Trudeau, not to abandon the agreement.  The new negotiations will begin tomorrow.  The US and Mexico are particularly eager for a fairly quick resolution.  Mexico holds elections in the middle of next year, and although the US mid-term election in not until November 2018, there is concern that trade could be an issue in the primaries.  In addition, it is thought that the White House would like a success in what has otherwise proved to be a lot of thunder with little rain."

"The US runs a trade deficit with both Canada and Mexico.  However, it does not appear to be a generalized lack of US competitiveness, as some suggest.  Nor does it appear to be a function of some macroeconomic imbalance.  The proper level of analysis is industry specific.  If it weren't for auto and auto parts, the US would run a trade surplus with Mexico.  If it weren't for energy, the US would record a trade surplus with Canada."

"The Trump Administration's trade strategy was part of a broader agenda that included tax reform at home. To the extent that globalization has come to mean offshoring and extensive supply chains, Trump argued that it hurt America.  To address this, he flirted with a border tax, that was pushed by the Republican leadership in the House, until being dropped last month.   Corporate tax cuts were also advocated to create disincentives to offshore production.  Mexico, and to a less extent, Canada are not eager to alter the extensive supply chains.   The global supply chains, after all, were an important part of the economic development experienced in Mexico and Asia in the last quarter of a century."

"One of the most difficult issues with the new NAFTA negotiations is the Chapter 19 dispute resolution mechanism.  Simply put, the rulings often go against the US, and it is not surprising that the Trump Administration wants to scrap them.  However, Canada, and to a lesser extent Mexico, find protection against the US, which is of course so much larger than Canada or Mexico.  Indeed, Canada appears to have made this a critical issue.   This warns of the risk of protracted negotiations, and possible brinkmanship tactics.    NAFTA may not be loved by any of the participants, but there would be no winners if the NAFTA were to collapse."