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.

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Big picture move by President Trump today that has massive, and generally misinterpreted, ramifications for any trade deal with China, EU and most importantly NAFTA.

China is using U.S. nuclear negotiations with North Korea as leverage for more beneficial trade outcomes; the communist regime is in full manipulative dragon-mode. President Trump can see through the economic play and is dropping the Panda outreach.  Eagle-one now hits back at Chairman Xi for deploying such dangerous tactics.

If you have been following trade nuance, the Automobile Sector is one of the biggest points of contention within varying trade negotiations. In the NAFTA discussion the auto-sector, via rules of origin, runs at the heart of NAFTA’s fatal flaw.

The fatal flaw is the use of Asian, mostly Chinese, auto components within auto manufacturing. Mexico and Canada arguing to allow more Chinese auto parts in North American manufacturing; and President Trump demanding more North American parts for North American auto manufacturing.

Many U.S. Auto manufacturers have moved to Mexico to exploit the NAFTA loophole (fatal flaw). Vehicles assembled in Mexico use cheaper Chinese parts and are shipped into the U.S. without any tariff under NAFTA rules.

It didn’t take long before EU auto-manufacturers, mostly German, to begin taking the same approach. Albeit to a lesser extent, German auto companies also invested in building vehicles in Mexico/Canada for tariff-free transfer into the U.S. This works out great for Canada and Mexico auto-workers, but not for the U.S.

In essence, the auto-sector is representative of much of the manufacturing exploitation by multinational corporations beyond vehicle production. China has supported this approach because they produce the components for multiple sectors (furniture, appliances etc).

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Today President Donald Trump is speaking about MS-13 gang violence and overall immigration issues at the Morrelli Center in Bethpage, NY.  Anticipated start time 2:00pm EST:

UPDATE: Video Added

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President Trump hosts a meeting with California leaders and public officials who oppose California’s illegal and unconstitutional sanctuary policies that release criminal illegal aliens into public communities. They are expected to discuss shared efforts to end the nullification of federal law and restore community safety. Anticipated Start Time 3:15pm EST

Administration Attendees: President Donald J. Trump, Attorney General Jeff Sessions, Department of Justice; Secretary Kirstjen Nielsen, Department of Homeland Security; Thomas Homan, Deputy Director of Immigration and Customs Enforcement.

UPDATE: Video Added

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California Delegation Attendees: House Majority Leader Kevin McCarthy; Assemblywoman Melissa Melendez (CA-67); Councilmember Pam Patterson, City of San Juan Capistrano; Mayor Troy Edgar, City of Los Alamitos; Mayor Julie Hackbarth-McIntyre, City of Barstow; Mayor Natasha Johnson, City of Lake Elsinore; Mayor Elaine Gennawey, City of Laguna Niguel; Mayor Crystal Ruiz, City of San Jacinto; Mayor Sam Abed, City of Escondido; Mayor Pro Tem Warren Kusumoto, City of Los Alamitos; Sheriff Adam Christianson, Stanislaus County; Sheriff Margaret Mims, Fresno County; Sheriff John DAgostini, El Dorado County; Supervisor Michelle Steel, Orange County (R); Supervisor Kristin Gaspar, San Diego County (R); Deputy Sheriff Ray Grangoff, Orange County; District Attorney Stacey Montgomery, Lassen County.

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The NAFTA phone call between Justin from Canada and U.S. President Trump took place yesterday.

Due to the importance of the timing; and against the backdrop of Trump’s meeting with auto executives; and considering that Canadian Foreign Minister Chrystia Freeland spent five days in Washington DC last week without an agreement; and understanding no NAFTA talks are taking place this week; it was important to see who called whom in order to understand the import of the phone contact:

President Donald J. Trump spoke today with Prime Minister Justin Trudeau of Canada to address the renegotiation of the North American Free Trade Agreement. President Trump underscored the importance of quickly concluding an agreement.  (WH – link)

According to Canadian officials, Justin from Canada was the initiator of the call yesterday.

Speaker of the House Paul Ryan previously set a deadline date of May 17th, due to the statutory requirements for any agreement, based on this year’s legislative calendar.  That’s the day after tomorrow.  There is general consensus no agreement prior to that date is possible.   Additionally Mexico’s national election is July 1st, 2018.

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Critical Update – Critical Update – Critical Update

Those who are watching the NAFTA negotiations must pay close attention to the activity in the past 36 hours.  There is a key video at the bottom.  First the backdrop:

As most are aware the NAFTA fatal flaw, the “loophole”, surrounds Mexico and Canada structuring their economic manufacturing policy -and trade deals- through the exploitation of a back-door into the U.S. Market. Understanding this key issue is paramount to understanding President Trump’s approach therein.

Remove the NAFTA “loophole” and there is no longer an incentive for U.S. manufacturers to locate their operations in Mexico or Canada. However, the removal of this loophole also means China, ASEAN nations and the EU lose the same incentive.

There have been hundreds of billions of previous investment by multinational corporations in Mexico and Canada.  Every dollar spent was intended to continue this exploitation.

Then came Trump.

In terms of investment size and scale of manufacturing, the auto-sector is perhaps the primary industry attempting to position themselves to avoid any reversal of the NAFTA scheme; and it is a self-interested economic scheme. In the short term there are billions at stake; in the longer term there are trillions within the equation.

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NAFTA is at a critical stage.  Mexico has committed themselves to a full-court press this week in an effort to retain the investment influx from multinational corporations.  To retain their advantage, Mexico needs to keep the NAFTA loophole allowing Asia and EU to use Mexico and Canada as back-doors to the U.S. market.

Additionally, AM-LO, a self-described soft-Marxist (similar to Hugo Chavez) is likely to win the July 1st Mexican election.   Yesterday, Mexican Foreign Secretary Luis Videgaray travels down the street to the State Department for a meeting with Secretary Pompeo. From the U.S. perspective, anything from Secretary Videgaray is essentially moot at this point; the Mexican government is moving toward a more socialistic economic model.

[Transcript] SECRETARY POMPEO: Good afternoon. Today it is my pleasure and a great honor to welcome the Mexican Foreign Secretary Luis Videgaray to the State Department. Welcome.

We had a great discussion and we had so because Mexico is one of the United States’ closest partners. Together we are working to build a more secure, prosperous, and democratic hemisphere. We are neighbors, allies, and friends.

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There is a geopolitical strategy happening this week that is essentially under the radar.

U.S. Treasury Secretary Steven Mnuchin, USTR Robert Lighthizer, Economic Council Chairman Larry Kudlow, and the U.S. trade team are heading to China.

The outcome of their discussions connects the initiatives behind North Korea, China and NAFTA.  The steel and aluminum tariffs are part of the toolbox.  Only one media personality, our favorite suspicious cat, appears to understand the larger economic play and how it is being deployed.

From the U.S. perspective, NAFTA has a fatal flaw. Mexico and Canada admitted the flaw for the first time a few weeks ago. The flaw is Mexico and Canada’s exploitation of NAFTA as a backdoor into the U.S. market for Asian, mostly Chinese, manufactured products. Multinational corporations who have invested in Canada and Mexico are determined to retain the flaw.

President Trump understands that as long as Canada and Mexico can unilaterally make trade agreements with the EU and ASEAN nations, any NAFTA agreement between the U.S., Canada and Mexico is moot. The NAFTA talks are paused.

The U.S. Team now heads to China. There’s no doubt part of the objective is to begin a structural discussion that must happen for the U.S. trade team to approach closing the fatal NAFTA flaw from the source of origin. [*note* on the EU side of this issue, Commerce Secretary Wilbur Ross is leading a similar discussion. Mnuchin and Lighthizer are focused on Asia, Ross has responsibility for Europe]

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U.S. Trade Representative Robert Lighthizer and the trade ministers from Canada and Mexico are not in Washington DC this weekend; however the trade staff from all three nations stayed in DC working to finalize agreement on NAFTA with increased urgency.

The nation pushing hardest to complete an agreement quickly is Mexico.  The Mexican national election is July 1st and the soft-Marxist Andres Manuel Lopez Obrador (AM LO) has increased his lead.  AM LO is now 22 points ahead of his next closest competitor. Lopez Obrador, a self-described Hugo Chavez ideologue, is guaranteed to win – and Mexico will become Venezuela 2.0 within five years.

The looming Mexican election, and the radical political departure therein, means if a deal is not made soon, there will be no deal.

Andres Manuel Lopez Obrador will likely nationalize large segments of the Mexican economy for more progressive wealth distribution…. Enter, quickly, and with a transparency in their desperation, the multinational corporations who have already invested hundreds of billions into Mexican ports, transportation infrastructure, raw material procurement contracts, manufacturing/processing and assembly facilities, and all around exploitation of NAFTA as a tariff-free, profit-driven, back-door to the U.S market…

Yes, as oft repeated, there are trillions at stake.

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Trade Representatives from Canada, Mexico and the U.S. are in the deepest weeds within NAFTA negotiations, and some of the current proposals are flat out nuts.

Within the auto-sector the “Rules of Origin” continue to be one of the biggest sticking points.  The U.S. position is that 80% or more of a vehicle made in the U.S., Mexico or Canada should be made from parts from the U.S., Mexico or Canada, ie. North America.  Canada and Mexico are trying to argue for lower North American content because they want more Asian/Chinese parts in American automobiles. [Reuters Link]

On its face their position is ridiculous.  Canada and Mexico are not arguing for more Canadian and Mexican content; they are arguing for more Chinese content.  The U.S. is arguing for more North American content.  Canada and Mexico want to support China’s economy; the U.S. wants to support Canada, Mexico and the U.S. economy.   Let that sink in for a moment.

In an effort to enhance their ridiculous position, Canada and Mexico have come up with a proposal that is, well, bananas. Can/Mex want the United States to tax vehicles made in Canada and Mexico.  Stop. Re-read that.  Yes, that is correct.  Canada and Mexico want Chinese parts so badly, they are arguing for the U.S. to tax American (NAFTA) automobiles.

Nuts.

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