Canada is convinced Trump will withdraw from NAFTA

Reuters is reporting that souces inside the Canadian government say Ottawa is convinced that the U.S. intends to withdraw from the North American Free Trade Agreement (NAFTA). 

The news sent Canadian and Mexican currencies tumbling. 

Donald Trump promised during the presidential campaign to scrap NAFTA unless significant changes are made to the treaty.  Talks have been underway since early in the Trump administration but so far have seen little progress.


It is not certain the United States would quit NAFTA even if Trump gave the required six months' notice, since he is not obliged to act once the deadline runs out. Notice of withdrawal could also raise opposition in Congress.

One of the Canadian government sources also said later it was not certain that Trump would move against the treaty and that Ottawa was prepared for many scenarios.

But even the prospect of potential damage to the three nations' integrated economies sparked market concerns.

Wall Street's major stock indexes ended lower on Wednesday, partly due to those worries.

The Canadian dollar weakened to its lowest this year against the greenback on Wednesday as the NAFTA concerns tempered bets that the Bank of Canada will raise interest rates next week.

Mike Archibald, associate portfolio manager at AGF Investments in Toronto, cited "a tremendous amount of uncertainty on the horizon[.]"

That uncertainty plays to Trump's favor in negotiations.  No one knows the impact of a U.S. withdrawal from NAFTA, and it could be that both Canada and Mexico don't want to find out.

Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism.

The head of the U.S. Chamber of Commerce said that economic gains made through tax cuts and the lifting of business regulations would be undone if the U.S. canceled trade deals, including NAFTA.

General Motors Co[.] shares fell 2.4 percent.  The Detroit automaker has 14 manufacturing facilities in Mexico, including one that builds large pickup trucks, among the automaker's most profitable vehicles.  Trucks built there could be subject to a 25[-]percent tariff if the U.S. exits NAFTA.

"We have always said that this is a possibility," a Mexican government source with knowledge of the talks told Reuters, referring to the prospect of a U.S. withdrawal.

It's difficult to see if Trump's threat is real or a negotiating tactic:

Sending a termination letter would allow Trump, who has been frustrated with Mexican and Canadian reluctance to meet aggressive U.S. demands on the sourcing of automotive parts and on dispute settlement, to take a key step toward meeting his campaign promise of quitting NAFTA if it cannot be revised to shrink U.S. trade deficits.

"He can gain political mileage out of a big announcement to quit NAFTA without actually doing it," said Gary Hufbauer, a senior fellow and trade expert at the Peterson Institute for International Economics who has written extensively on NAFTA termination issues.

"He could say that he'll withdraw from NAFTA sometime after the six-month deadline if we don't get better results in the negotiations," Hufbauer said.

Using a withdrawal letter in this manner fits in with a scenario that some industry lobbyists and trade observers say is increasingly likely: [i]f there's no deal after two more scheduled negotiating rounds in late January and March, NAFTA talks would be put on hold for several months as Mexico's presidential election campaign gets under way.

We should get an idea of Trump's plans for NAFTA over the next few weeks, as administration trade and economic advisers are meeting to discuss trade issues, including the question of unfair trade practices by China.  The administration is contemplating steep tariffs against Beijing if China continues to violate international trade laws, gaining an unfair advantage over U.S. products.

But Mexico and Canada are our two largest trading partners after China, and blowing up NAFTA has the potential to harm the U.S. economy as much as if not more than the economies of those two countries.  By playing his NAFTA cards close to the vest, Trump may be keeping Mexico and Canada guessing as to his intent, but the uncertainty will also roil stock and currency markets in the short term.

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