Nafta: Less than meets the eye

President Trump’s Nafta declaration yesterday echoes George W Bush’s infamous “mission accomplished”.

Yesterday’s announcement by President Donald Trump that Mexico and the US have reached agreement over Nafta is certainly good news on the face of it. However, the very positive reaction from investors — highly visible in America’s stock markets in particular — looks to me to be somewhat overdone. Consider.

  • The announcement was very scant on details, seemingly reflecting what has actually been agreed. Even the US Administration is referring to it as “a preliminary agreement in principle”, which appears to be a fair description from what is known — usefully summarised by Bloomberg’sinvesting.comhere. So, there is clearly still a great deal of detail to be resolved…and we all know where the proverbial ‘devil’ lies.
  • It is far from clear, at this stage, that Canada will sign up to the deal, despite Mr Trump's threats.
  • It is by no means certain that either Mexico or the US Congress, both having expressed a clear preference for a trilateral agreement, would sign off on the deal if Ottawa does not come on board.
  • Even if Canada does fall into line, ratification by the US Congress will likely prove to be a high hurdle to judge from the struggle which successive Administrations have had with trade agreements in recent years — and perhaps especially if Mr Trump’s claim that he is “terminating” Nafta proves to be more than just rhetoric. [Note: As I wrote almost a year ago, legally it is probably a Congressional, rather than Presidential, prerogative to withdraw the US from international treaties.] This applies at the best of times which this may not be bearing in mind too that, at best, ratification is unlikely to reach Congress until after the midterms and most likely not until the new year when a Democrat-controlled House would be unlikely to do Mr Trump any favours.
  • Nor am I entirely clear on where Mexico’s President-elect Andrés Manuel López Obrador (aka AMLO), who takes office on 1 December, stands on whatever has been agreed. An AMLO-controlled Congress in Mexico City takes over in the autumn and will also have a ratify the deal if it is to come into force — unless, that is, the current government can push it through before then, which I somehow doubt.

If all this sounds very much ‘glass-half-empty’ to readers, I’d have to agree. More positively, I would accept that, for now at least, the prospect of a Mexico/US trade war appears to be significantly diminished and maybe even eradicated altogether. Nevertheless, I have to agree with Krishnadev Calamur, writing in The Atlantic yesterday following the announcement as follows:

“Monday’s remarks fit the pattern of [Mr] Trump’s international negotiations. They showed his preference for dealing with countries one-on-one rather than through multilateral institutions, a tendency he’s displayed in trade negotiations with Europe as well. And they also showcased a strategy where Trump bluffs, rebrands, and claims victory.”

There is a wider downside to this too. Seeing a pattern thus far appears to be encouraging investors to the view that Mr Trump will ultimately do much the same with China (reflected in the bounce in Asian stocks this morning). This MAY prove to be the case; indeed, I acknowledged at an investor conference in Singapore just last week that Mr Trump is perfectly capable of doing some sort of deal personally with Xi Jinping, eg around the APEC summit in mid-November. Nevertheless, it is important to keep in mind that China is different, in particular that ‘China-bashing’ resonates very strongly with Mr Trump’s base. So, the seemingly established pattern may simply not apply when it comes to Sino-US trade relations.

In short, while yesterday’s announcement was a positive step, it certainly did not amount to “mission accomplished” which Mr Trump is effectively claiming.

Alastair Newton