On Monday 29 January, the latest round of the North American Free Trade Agreement (NAFTA) negotiations was concluded without a new agreement. NAFTA took effect 24 years ago and is designed to lower trade barriers between the three signatory countries: Canada, US and Mexico. Since its passage, goods trade among the three nations has nearly quadrupled. However, the current US president has been worrying about the trade deficit the US has with Mexico. Hence, the US initiated the renegotiation of NAFTA in 2017. Since last summer, six rounds of negotiations have already been held but still without any light at the end of the tunnel. Canada and Mexico both largely want to maintain the status quo while the US is in favour of a large(r) revision. Also in the most recent round, advancement was made in certain areas but no progress was recorded with the most contentious issues (e.g. rules of origin, inclusion of a sunset clause, reforming the treaty's dispute settlement mechanism, and improved labour standards in Mexico). The next round of renegotiations has been scheduled for the end of February.
Impact on country risk
The negotiations have known a rocky path in the past year. The threat of a possible withdrawal of the US stokes uncertainty. The collapse of NAFTA would cause severe economic disruption and market turmoil for Mexico. Indeed, a huge drop of the Mexican peso, a jump in foreign currency denominated debt and inflation (estimated at 6% end of 2017), several interest hikes and even a severe recession are in the cards then. This evolution would especially negatively impact the business environment. The possibility of a NAFTA breakdown is driving the Mexican government to diversifying export partners to mitigate the potential negative impact. Nevertheless, as more than 75% of Mexico's total exports are destined to the United States, the end of NAFTA will badly affect the economy because it takes years to build new trade relationships worldwide. While in Mexico roughly all sectors will likely be impacted if the NAFTA renegotiation fails, also certain industries in the US would acutely feel the effects (such as agriculture and the automotive sector). Agriculture groups have already been complaining that due to NAFTA uncertainties, Mexican buyers look elsewhere for commodities (e.g. pork and soya beans). That being said, the baseline outcome remains a successful end to NAFTA renegotiation talks at the end of the road. Also, the IMF foresees a positive outcome and even recently revised its GDP growth forecast for Mexico, from 1.9% to 2.3% in 2018 and from 2.3% to 3% in 2019. It is still unclear when negotiations will end. In the past, the Mexican presidential elections in July seemed like a political deadline. However, it is more and more likely that any kind of agreement will be postponed until after July and even after US midterm senate elections in November.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com