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To bring in Canada and to cement a sufficient trilateral agreement by the Friday deadline is a tall order— JPMorgan Chase
Canada may well be in a position to tell the U.S. to shove it on NAFTA.
At the very least, Ottawa could cause severe headaches for the Americans and Mexicans who decided to cut their own deal, the U.S. then giving Canada an ultimatum to come on board by today or face crippling tariffs on auto exports.
Indeed, as The Globe and Mail’s Robert Fife and Adrian Morrow report, talks soured overnight over the contentious issue of an independent trade dispute mechanism, which the U.S. demands.
All of which is interesting because the widespread sentiment is that Foreign Affairs Minister Chrystia Freeland has a gun to her head, and that two of the onetime three amigos done Canada dirty.
True though that may be, missing from some of the discussion is the fact that Ms. Freeland could, if she chooses, tie everything in knots because of political dynamics in the U.S. and Mexico, among other things.
Prime Minister Justin Trudeau said Canada would take no deal over a bad deal, and we’ll see if that holds true as the clock runs out.
One can assume that Ms. Freeland and Mr. Trudeau have analyzed the dynamics and come to the same conclusions as the analysts.
“Despite the diplomatic tussle between the U.S. and Canada on some of the issues, we do not believe that the U.S. considers a deal without Canada feasible or gainful,” said Dev Ashish, Société Générale’s Latin American economist.
“Apparently, the idea of approving a deal with Mexico is to pressure Canada to ratify the agreement fairly quickly.”
JPMorgan Chase strategists also flagged the type of hiccups you can’t get rid of, even if someone tries to scare you silly, given the timelines involved.
“We take the bilateral announcement with caution given the short timeframe that Canada has to analyze and accept the terms of the agreement in principle, and given the political hurdles that include midterm elections in the U.S. (Nov. 6) and the start of a new presidential term in Mexico (Dec. 1),” they said.
“While our base case scenario is still that NAFTA will prevail, the risk of a derailment in the negotiations is not small, which could result in either bilateral agreements at some point in the future (sub-optimal outcome compared to a refreshed trilateral) or even no agreement at all.”
Indeed, “given that it took about two months to achieve the current U.S.-Mexico terms without Canadian participation, the Aug. 31 deadline imposed by the U.S. Trade Representative is likely unachievable," said Toronto-Dominion Bank chief economist Beata Caranci and senior economists Brian DePratto and Fotios Raptis.
“However, it’s in the economic interest of all three political leaders to forge an agreement, even if it’s only one in principle against the short political timeline.”
So if they’re not bluffing, the Americans are certainly rolling the dice.
That doesn’t mean it’s impossible without Ottawa – some observers believe the Trump administration could pull it off – but analysts cite how hard a trade pact would be without Canada.
Make no mistake, auto tariffs of 25 per cent would deal Ontario a hefty blow, while Canada would be hit hard if the North American free-trade agreement is shredded.
But tariffs would also take a heavy toll on the U.S. companies that own the Canadian companies that export said autos. So how long would that last if it even happened? And the death of NAFTA would affect several state economies with heavy north-south trade.
Most observers believe Canada and the U.S. will strike a deal, despite the roadblocks.
Société Générale’s Mr. Ashish:
“On the legislative side, a deal without Canada will have to go through Congress under an entirely new process, as the Trump administration’s mandate was to renegotiate the trilateral deal and not a bilateral one. With the exclusion of Canada, several provisions and details of the NAFTA will need to be reviewed, in what could well be an extremely lengthy process. The business angle also makes it important to include Canada in the final deal, as the supply-chain in the auto and other manufacturing industries will be greatly affected, thus making it difficult to convince lawmakers about the new scope of the deal. It is also worth noting that Canada is the largest destination for US exports and that, while the end of the trade deal will hurt Canada more, it will also affect US business interests significantly.”
David Rosenberg, chief economist at Gluskin Sheff + Associates:
“My hope is that Canada does not cave in to a bully with a gun against our head (the threat of 25-per-cent auto tariffs) and realizes that nothing is going to get approved in Congress without the ‘true north strong and free’ being involved. This seems to be an area where the legislative branch is starting to show some backbone, at least verbally, and I do sense that the president has underestimated where most of Congress stands on this issue of Canada being excluded from any agreement.”
JPMorgan Chase analysts:
“The U.S. Congress could be a major hurdle, as it could disapprove of the administration trying to shoehorn a separate bilateral deal using the existing Trade Promotion (aka ‘fast track’) Authority initiated in May 2017 covering the tripartite NAFTA inclusive of Canada. In the event the bilateral U.S.-Mexico agreement cannot be fast-tracked, the White House would need to restart the trade negotiation notification and consultation process for bilateral deal(s). Such a process would require new Congressional TPA notification and consultation and would almost certainly extend the potential timeline by 10 months or more, and beyond the Nov. 30 agreement signing window U.S. and Mexican negotiators are trying to achieve.”
Cesar Rojas, global economist, Citigroup:
“The current Mexican administration remains hopeful that Canada will join the agreement, but some officials have stated that Mexico would move forward with a bilateral deal if Canada does not join. We note, however, that the incoming Mexican administration highlighted that Canada is key for the NAFTA renegotiation … If the final negotiations extend further and the agreement is to be signed by the incoming Mexican administration, then there is a risk that an agreement is delayed as the new Mexican negotiation team (which has been an observer over the last few weeks) could review other issues.”
TD’s Ms. Caranci , Mr. DePratto and Mr. Raptis:
“Unless Canada is pleased with what’s on the table and can proceed at a rapid pace of negotiation, it will likely be difficult for the current sitting U.S. Congress to pass any agreement before elections in November. That said, there can still be ‘agreements in principle.’ Doing so, however, does not remove the risk of the ball being placed onto the field of incoming new governments in Mexico and the U.S."
Société Générale’s Mr. Ashish:
“From the Mexican side, a deal with the U.S. seals almost all the gains from NAFTA and, although politically and diplomatically Mexico would continue to support the inclusion of Canada (basically NAFTA), it was always important for Mexico to ensure a continued free-trade relationship with the U.S. Some uncertainties persist with regards to the fate of the trilateral NAFTA, but the bilateral deal with the U.S. should ensure investors that the Mexican trade outlook remains conducive to growth not only in the near term, but also in long term.”
Gluskin Sheff’s Mr. Rosenberg:
“Think about it – we have a Mexican leader who is a ‘lame duck’ and does not have to face the consequences.”
Carlos Capistran, Canada and Mexico economist, Bank of America Merrill Lynch:
“In our view, the main risk to a trilateral agreement is that Canada does not show any flexibility and hence the U.S. does not extend the same concessions it gave to Mexico with respect to the sunset clause and investment protection. Canada may find politically that it is better to avoid any concession in dairy, as this could lead to liberals losing the incoming election in Quebec, a province which benefits from the supply management system. Although we believe this risk is relatively low because Canada would have significant economic losses if it does not reach an agreement with the US. Trump has threatened again with tariffs to autos, which if imposed could decelerate Canada significantly as Canada trades 6.5 per cent of its GDP in autos with the U.S.”
“Canada was not formally included in these recent rounds of negotiations, and the likelihood of pressuring Canada to quickly sign doesn’t seem that favorable, in our view … Equally important is the domestic political considerations of Canada in its optical negotiation performance, in light of coming general elections in Canada, which are only about a year away. Further, it is important to acknowledge that even if an in-principle trilateral agreement is made by Friday, this does not guarantee full success of NAFTA 2.0, nor does it eliminate disorderly outcomes.”
Citigroup’s Mr. Rojas:
“If Canada does not join the [agreement in principle] by Friday 31 August, we would expect negotiations to continue on a U.S.-Canada bilateral basis and later on a trilateral basis so that a final agreement could be wrapped up ahead of the next deadline (30 September, when the USTR needs to post the final text of the agreement; e.g. 60 days before signing).”
TD’s Ms. Caranci , Mr. DePratto and Mr. Raptis:
“The imposition of quotas on Canadian vehicles entering the U.S. would be a negative outcome. Avoiding it may be difficult. The U.S. can use the threat of additional tariffs, including the previously threatened 25-per-cent tariff on autos and auto parts, or non-tariff barriers in an attempt to strong-arm Canada to come to an agreement sooner rather than later.”
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