The 30-day extension on exemptions for Steel and Aluminum tariffs is scheduled to expire June 1st. President Trump is positioning the U.S. Trade Team for a substantial reset. According to reports, U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystina Freeland held a terse meeting today over the tariffs and Canada’s unwillingness to close the NAFTA ‘fatal flaw‘ (loophole).
Both Canada and Mexico have structured key parts of their trade agreements to take advantage of their unique access to the U.S. market. Mexico and Canada generate billions in economic activity through exploiting the NAFTA loophole. China, Asia (writ large), and the EU enter into trade agreements with Mexico and Canada as back-doors into the U.S. market. So long as corporations can avoid U.S. tariffs by going through Canada and Mexico they will continue to exploit this approach.
If the U.S. applies the same tariffs to Canada and Mexico we apply to all trade nations, then the benefit of using Canada and Mexico -by those trade nations- is lost. Corporations will no longer have any advantage, and many are likely to just deal directly with the U.S. However, this would mean hundreds of billions in lost economic activity for Mexico and Canada. It is the NAFTA fatal flaw.
U.S. Trade Representative Robert Lighthizer has been working with Mexican and Canadian officials on different ways to remove this problem. However, in any solution where the one-sided NAFTA benefits are removed, Mexico and Canada lose. Therefore Canada and Mexico are approaching the negotiations as a zero-sum game.
Though it is still too early to tell, it appears Ambassador Lighthizer has informed Canadian Foreign Minister Freeland the removal of the NAFTA benefit for Canada and Mexico will happen. Apoplectic Minister Freeland is responding….
Remember, “IF” the U.S. team leaves NAFTA, the generally accepted hit to the U.S. stock market will be around 10% to 15%. This is due to Wall Street multinational corporations being the largest benefactors of the current status.
If Wall Street multinationals lose the NAFTA loophole benefit, they will initially make less profit until they reposition their investment assets according to the new trade structure.
However, in the past year more companies have shifted capital in preparation for the possibility of NAFTA being fundamentally restructured. So the ramifications are less now than they were mid-year 2017. In 2018 this overall NAFTA exit possibility is more ‘factored-in’ to the overall market valuation than it was in 2017.
It is common sense that Wall Street having been the biggest benefactor of NAFTA, will stand to lose the most in any NAFTA restructuring. Conversely, Main Street was the biggest loser in NAFTA, and Main Street will stand to gain the most from NAFTA restructuring which creates equity in trade opportunity.
That ‘America-First’ approach is one of the cornerstones of MAGAnomics.