Amexit: What if the US quits NAFTA?

Amexit: What if the US quits NAFTA?

Last week I wrote that the US under President Donald Trump is becoming more and more isolated.

One of the first things he did after settling into the Oval Office was pulling the US out of the Trans-Pacific Partnership (TPP).

He’s also threatened other countries at the United Nations, and he’s publicly criticised his NATO allies for not contributing enough.

But Trump’s isolation may not stop there.

At the end of the month, the US will meet Canada and Mexico to discuss the future of the North American Free Trade Area (NAFTA).

Trump isn’t a fan of NAFTA, just like anything else that implies some sort of partnership with other countries it seems.

The President thinks the free trade agreement has helped bring cheap Mexican labour to the US while US factories have moved to Mexico.

It’s led people to believe there’s a real chance Trump will hand Canada and Mexico the US’s notice this month.

What happens if the US were to actually leave NAFTA?

Playing hardball

Canadian officials are whispering that the end is nigh for NAFTA.

Anonymous government sources broke the news that Canada considers the US pulling out of NAFTA a real possibility.

NAFTA has been in place since 1994. It’s brought down barriers to trade and investment and eliminated most tariffs between the three countries.

“NAFTA has generated benefits,” says Strategic Intelligence editor David Stevenson.

“It’s increased trade, economic growth and investment, created jobs and lowered prices. In turn that has helped to reduce government spending.”

“Trouble is, NAFTA has also curbed wages and been responsible for the loss of hundreds of thousands of US manufacturing jobs. The sufferers here are likely to be Trump supporters – which is one reason why he’s anti-NAFTA.”

Indeed Trump has remarked on multiple occasions that he’s unhappy about the trilateral trade deal.

He wants to make some big changes to the agreement and the US negotiating team is reported to have made some uncomfortable demands.

The US is playing hardball, which is why the talks have so far made little progress.

Canada, Mexico and the US are hoping to reach a deal by March 2018 but that deadline may not be met. It increases the chance of Trump growing frustrated with the talks.

In many cases Trump’s campaign bark has been worse than his presidential bite.

Yet Canada believes the US President might actually follow through and leave NAFTA.

That news didn’t do any of the signatory countries much good, but it hurt some more than others. The Canadian dollar and the Mexican peso immediately weakened.

“On first glance it looks like the US stands to benefit most of all from any withdrawal and to the huge detriment of both other countries,” says currency trader Tom Tragett.

“There will of course be ramifications on both sides. However, on balance I think it’s not so much a positive for the US dollar per se as a real negative for the other two.”

“A totally unnecessary cost”

Trump might be unhappy about Mexican workers moving north and US factories moving south, but Canada and Mexico have their own grievances.

Diplomatic relations between the US and Mexico have cooled since Trump became president.

That’s no surprise after Trump made harsh comments about Mexican workers and his desire to build a wall on the border.

Meanwhile Canada has complained to the World Trade Organisation about Trump’s protectionism, days before the NAFTA states will resume their talks.

Everything isn’t peachy in the North American trade bloc, but a break up is likely to hurt them all.

“The effective end of NAFTA would be bad for Mexico and – to a degree – Canada,” says David Stevenson.

“For the US it could mean increased wage inflation but a boost to manufacturing. 

“That could mean rising bond yields – the US 10-year yield is already approaching its highest level for four years and could climb further. In turn, that could spook the stock market.”

Economists warn that NAFTA has made the region more competitive on the world markets. Low-wage work has moved to Mexico, making products cheaper.

“If we splinter up NAFTA into three separate economies, that makes all of us less competitive and ultimately the whole region will end up losing a bit versus other trading areas like Asia,” Bank of Montreal chief economist Douglas Porter told Reuters in November last year.

“The point here is there would be a cost to the US economy and it’s a totally unnecessary cost.”

What a group of US workers might gain in jobs, US consumers will have to pay for with higher prices.

Everything from cars to fruits and vegetables could become more expensive while NAFTA exports to the rest of the world would become less competitive as well.

In this sense no country seems to gain from the end of NAFTA.

“The end of NAFTA would be an overall negative,” David Stevenson notes.“But Trump and his supporters clearly don’t see it that way.”

Even if Trump wants to leave NAFTA, it might prove a little complicated.

Though he won’t have to bother with an in/out referendum, he does need the support from Congress.

Despite a marginal Republican majority, a Trump win there is rarely a formality.