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An agreement between Canada, Mexico and the United States on a new North American free-trade agreement is within reach, according to reports. It sounds like good news, but don’t be surprised if the Canadian stock market shrugs, and then moves on to other concerns.

The S&P/TSX Composite Index has been lagging the S&P 500 this year, and it’s tempting to blame this underperformance on trade tensions between Canada and the United States, given Canada’s dependence on exports.

In U.S.-dollar terms, the Canadian benchmark index is down about 3 per cent in 2018, or 10 percentage points behind the S&P 500.

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The good news: The United States and Mexico may be nearing a breakthrough in their trade talks, paving the way for a successful three-way deal with Canada, perhaps as soon as next month. If the NAFTA threat disappears, the S&P/TSX Composite Index could jump – closing that 10-percentage-point gap with the S&P 500 as investors stop fretting over duties and interrupted trade flow.

The bad news: This could be wishful thinking, given the stellar performance of several trade-sensitive Canadian stocks.

Look at Magna International Inc. The auto-parts giant relies upon the integrated North American auto market to help drive more than US$10-billion in quarterly sales worldwide, which suggests its stock should have wilted over the past year as investors questioned whether the auto market’s integration can survive U.S. protectionism.

Magna warned investors about this threat in its second-quarter report, released earlier this month: “Further escalation of international trade disputes could, among other things, weaken consumer confidence, reduce demand for and production of vehicles, disrupt global supply chains, distort commodity pricing.”

In reality, Magna’s stock has done remarkably well. The share price hit a record high in June after rallying 45 per cent since September, 2017, even as reports that the United States was mulling hefty tariffs on car imports were making headlines. Why? Profits were booming, unemployment rates were falling and investors were no doubt betting cooler heads would prevail in trade talks.

Yes, Magna’s share price has since slipped about 20 per cent from its June high. But this decline is probably related to news well beyond NAFTA: North American auto production is flattening out, while U.S. trade disputes with China and Europe are threatening overseas production.

“Even if an updated NAFTA agreement is reached this fall as some now expect, the trade dispute with China is likely to persist for some time,” Todd Coupland, an analyst at CIBC World Markets, said in a research note released on Aug. 8.

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Other export-sensitive Canadian stocks have also performed well, despite the NAFTA overhang – similarly suggesting that the removal of this overhang could be disappointing.

Canadian National Railway Co. has surged about 25 per cent since March, and the shares are near record highs. Canadian Pacific Railway Ltd. shares touched a fresh record high on Thursday, after rallying about 40 per cent over the past year.

As for tariff-enduring lumber stocks, West Fraser Timber Co. Ltd. saw its share price rise to a record high of about $98 in early June, up 62 per cent year-over-year, in spite of tariffs imposed since 2017. Although the share price has since stumbled about 9 per cent, the decline coincides with a correction in softwood-lumber prices.

If NAFTA is saved, lumber prices – rather than duties – will continue to be a big driver of the stock. Same goes for other companies in other sectors.

Lastly, a new NAFTA deal doesn’t have to be a good NAFTA deal. This is what Ian de Verteuil, an analyst at CIBC World Markets, gets at with his recent commentary on trade.

He noted the United States may present Canada with a “take-it-or-leave-it” scenario following its negotiations with Mexico this month. That, combined with Mr. Trump’s “America First” philosophy, could undermine the strength of any trade deal.

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Rather than celebrating a new trade deal, then, investors could be scouring it for flaws, and then focusing on other headwinds such as rising interest rates and concerns about subsiding economic growth.

“Even in a NAFTA 2.0, Canada has lost,” Mr. de Verteuil said. “Any positive sentiment shift to Canada will likely be brief.”

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