It’s Mexico upfront, Canada in the back and China on the horizon

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

It’s Mexico upfront, Canada in the back and China on the horizon

This week, relations between the US and Mexico reached a high point after a new bilateral trade agreement was signed by the two nations. This agreement involved a compromise on autos, labour rules and some additional provisions.

In the build-up to the US election and after the post – election result, relations between Donald Trump and Mexico soured with Trump looking to plug the $58bn overall trade deficit (the US importing more goods than it exports) it had with Mexico. This started when President Trump signed an executive order to build a wall running across the Mexican border to control illegal immigration and expected Mexico to pick up the estimated $8bn bill. Furthermore, Trump warned of high tariffs to be placed on car manufacturers if they did not move jobs and production back to the US from Mexico. Clearly relations had become fragile.

The preliminary deal has seen the North America Free Trade Agreement (NAFTA) updated, although the third member, Canada, has recently been excluded from the party. The US and Mexico agreed that 75% of a product must be formed in either of the two countries to receive tax-free treatment, a 12.5% increase. In addition, both nations will require 40% to 45% of each vehicle to be made by workers that earn at least $16 per hour in order to repel manufactures looking to exploit low paid Mexicans.

The new agreement moves the United States closer towards the type of agreements that were already in place before Trump became President. This is another example of his ‘provoke’ then ‘negotiate’ tactic which was used with Europe and to an extent China. With trade agreements between the US and Mexico almost settled, Trump can concentrate on China, a much bigger battle worth fighting with a $375bn trade deficit, highlighted by the chart below.

US Trade Deficit

Source: Bloomberg, August 2018

If Mexico are sitting upfront with the US and China is on the horizon, where does this leave Canada? In the back! Canada will most likely have to offer concessions in order to resume talks with the US. Trump, using the rules from his very own negotiating bible (“The Art of The Deal”) freezed Canada out and threatened the termination of the current NAFTA agreement which would see tariffs placed on imports from Canada in order to shrink its current £17.6bn deficit.

Following the announcement on Monday US stock markets, global currencies and commodities all rallied with investors more at ease given the growing trade tariff rhetoric. If Trump can finalise an agreement with Canada and Mexico it may be politically savvy move with the November mid-terms around the corner.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

Global Markets