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Relax! NAFTA isn’t going to collapse

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Get more articles like thisBack to full articleAs American, Canadian and Mexican negotiators meet for a fifth round of NAFTA discussions in Mexico City, CNBC reported that a number of analysts are projecting significantly high odds that the trade pact would fall apart: Jens Nordvig, Exante Data CEO, sent out a warning note Monday that his firm now sees a 30 to 40 percent chance of NAFTA “blowing up” by March. While Ian Bremmer, president of Eurasia Group said in a note Monday that he has long thought there was 50/50 chance NAFTA would fall apart, but he is also becoming increasingly concerned. “The big risk is that trade tension in NAFTA spreads to a more global stage, for example if the EU sides with Mexico in WTO disputes. This is where the global risk grows very large,” Nordvig

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As American, Canadian and Mexican negotiators meet for a fifth round of NAFTA discussions in Mexico City, CNBC reported that a number of analysts are projecting significantly high odds that the trade pact would fall apart:

Jens Nordvig, Exante Data CEO, sent out a warning note Monday that his firm now sees a 30 to 40 percent chance of NAFTA “blowing up” by March.

While Ian Bremmer, president of Eurasia Group said in a note Monday that he has long thought there was 50/50 chance NAFTA would fall apart, but he is also becoming increasingly concerned.

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

Canada’s McLean’s magazine proclaimed in an article that, “If NAFTA dies, ‘all hell will break loose’“. As a consequence of these trade jitters, both Canadian and Mexican equities have underperformed American ones.
 

Relax! NAFTA isn’t going to collapse

Relax, even if the Trump administration didn’t get its way in its negotiations, the path to walking away from NAFTA will be long and difficult.

Obstacles to leaving NAFTA

Bloomberg recently published an excellent primer on how Trump could kill NAFTA (it’s not as easy as you think).

Technically, any country could leave on six month’s notice, but the process of leaving the trade pact will be as complicated as the Brexit process. The NAFTA treaty was implemented as an Act of Congress, H.R. 3450, the North American Free Trade Agreement Implementation Act, and it will be up to Congress to repeal all of the laws that set up the NAFTA relationship in order to unwind the treaty.

That’s where the political obstacles come in. Here is a chart of each state’s biggest export trading partner. Umm…see the problem?
 

Relax! NAFTA isn’t going to collapse

The Petersen Institute analyzed the effects of a cold turkey NAFTA withdrawal and concluded that it would have a direct cost of 187,000 export jobs, mostly in the American heartland (click link to see the interactive impact by state).
 

Relax! NAFTA isn’t going to collapse

Notice a pattern here? The worst hit states tend to be deep red Republican leaning areas that voted for Trump. Assuming that the GOP fails to pass a tax bill by year-end, and Trump wanted to deliver a political victory by withdrawing from NAFTA, he will find a fight in Congress with Republicans.

Relax. Despite the tough rhetoric, it’s difficult to see how the Trump administration could realistically tear up the NAFTA treaty.

About Cam Hui
Cam Hui

Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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