Political Risk Analysis - NAFTA: Scenarios For A Trade Deal In Crisis - JAN 2018


BMI View: W e maintain our core view that NAFTA will emerge largely in tact from ongoing renegotiations, but the likelihood of a termina tion has increased with the introduction of hard -line positions by the US. In this piece we outline our tho ughts surrounding a number of possible outcomes. Scenarios range from a 'zombie' NAFTA to an all-out trade war between the US and Mexico.

While it remains our core view that the North American Free Trade Agreement (NAFTA) will remain largely intact following the conclusion of ongoing renegotiations between the US, Mexico and Canada, the hard-line stance taken by US negotiators at the fourth round of negotiations in October has significantly elevated the possibility of a US exit. The US introduced a number of controversial proposals surrounding dispute settlement, dairy trade, government procurement, 'rules of origin' requirements in the auto sector and a "sunset clause", which would require a renegotiation of the agreement every five years. Many of these are 'non-starters' for Canada and Mexico. Their inclusion in the proposals raises questions of the US team's ultimate goal: is this stance only a negotiating tactic meant to force concessions from Canada and Mexico? Or, are the inclusion of so-called 'poison-pill' proposals intentionally meant to drive off Canadian and Mexican negotiators, allowing the Trump administration to terminate the NAFTA agreement and fulfil a campaign promise?

As we enter into the fourth round of negotiations, slated to begin on November 15 in Mexico City (reportedly moved up from November 17), talks thus far have raised more questions than answers. Agreements have reportedly been reached on only two chapters, one on small-business and another on competition, and talks have been extended into Q117, from an original target of year-end 2017 ( see ' NAFTA Update: Deadlock To Result In Few Treaty Changes ' , September 29). In this article we will explore a number of probable scenarios surrounding some of the most pressing questions at this stage in the NAFTA renegotiation process: Will the administration of President Donald Trump trigger the withdrawal process? Does the US executive have the authority to do so without Congressional approval? Is there a chance that Mexico walks away? What are the domestic political issues in play? What would be left after NAFTA? Would tariffs fall back to WTO most-favoured nation levels, or would the termination of the deal spark a trade war? What are the economic impacts and which sectors would be most heavily impacted in various scenarios?

Scenarios For NAFTA Renegotiations
Source: BMI

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