US Senate Majority Whip John Cornyn has signaled that the deadline for Congress to pass a renegotiated NAFTA treaty this year has now passed. While trade talks with China have dominated headlines, the renegotiation of NAFTA remains the most important trade issue in terms of its direct impact on the US economy. US exports to China totaled about USD 32bn in 1Q18 versus USD 137bn of US exports to Canada and Mexico.
A prolonged delay could make discussions more difficult and potentially having an adverse economic impact:
- The US could end up with a more combative negotiating partner in Mexico if populist presidential candidate Andres Manuel Lopez Obrador maintains his lead into the July 1 vote.
- A longer negotiation risks undermining business confidence, discouraging capital spending plans and disrupting bilateral trade. We already see signs that NAFTA uncertainty is stifling foreign and domestic investment in Mexico, and a weak Mexican economy is not in the interest of the US – especially if it leads to hostility from a likely nationalistic government.
- The US mid-terms could leave Donald Trump with many fewer congressional allies and less bargaining power.
But our view remains that the talks will eventually conclude in a workable trade accord, although the UBS US Office of Public Policy believes that a pause will likely push them into next year. There is still some chance of an agreement this year on a slimmed-down version of the deal that does little to address the most substantive trade issues, but which would allow all sides to declare some degree of victory. We remain overweight global equities and overweight Canadian equities versus Swiss stocks.
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