Trump Administration Risky NAFTA Strategy Could Backfire

Five of seven planned rounds of negotiations for the North American Free Trade Agreement recently concluded in Mexico City, yet we remain far from a deal. As an investment banker and trade negotiator who has seen many deals crater because one party overplayed its hand, risk of a failed negotiation is real.

The toughest issues in a complicated negotiation are often saved for last. Still unresolved are the so-called “poison pills” that the administration has positioned as take-it-or-leave-it items. Those include the proposed sunset clause, which dissolves the agreement after five years if the three countries do not agree to continue it, and unrealistic demands that 50 percent of car parts come from the U.S.

usdcad Canadian dollar graph, December 4, 2017

The Trump administration’s tough posture and its apparent willingness to pull out of Nafta is the result of its notion that our relationship with many of our trading partners, and Mexico in particular, is a net loss for American businesses and workers and a zero-sum game for our economy. Clips of President Trump claiming that Mexico is “killing us on jobs and trade” play on a loop on cable news and social media daily.

But to use the current administration’s vernacular, this is “fake news.” The reality is that when it comes to renegotiating Nafta, the best way for the administration to deliver on its promise of putting America first, is to put North America first.

Some 80 percent of economists surveyed by the Wall Street Journal predict that a Nafta withdrawal would depress U.S. growth and even possibly trigger a recession, while causing enormous and potentially irreparable damage to our integrated supply chains. Additionally, a North America first approach aligns with the incredible growth and demand predicted for the region over the next several decades. PwC’s “The World in 2050” report estimates that North American GDP will practically double from $22.5 trillion to over $44 trillion in the next 33 years, with Mexico emerging as a top 7 global economy by 2050. Erecting barriers with neighboring markets makes little sense now, and it will make far less sense as Canadian and Mexican economic strength and consumer demand continue to grow.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza