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NAFTA: Risks of failure rise - BBH

wilhuyt3
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12/11/2017 9:07:08 PM
Posted: 1 month ago
Analysts from Brown Brother Harriman, think that the risk is growing that the attempt to renegotiate NAFTA fails. They noted that Canada has indicated it is willing to consider a bilateral agreement, but they we suspect that while the process may begin, it will unlikely conclude before 2020.

Key Quotes:

"Initially, there was hope that the agreement could be struck by the end of this year, but that was clearly over-the-top ambitious. Now the hope is March, but this too seems overly optimistic. Rather than walking away from the agreement, some suspect the US negotiators made demands that could not reasonable be accepted by Mexico and Canada. There will be primary elections in many states next year ahead of the mid-term elections in November. Mexico holds national elections next July. Initially, officials hoped to have the deal done before the elections risked politicizing the negotiations even more."

"The US bilateral trade relation with Canada and Mexico seems poorly understood, partly because of the focus on trade in goods. Often trade is services is ignored. The US does run a deficit on goods trade with Canada. It was about $12 bln in 2016. However, last year the US ran a nearly $27 bln surplus on service trade, allowing the US to record a $12.1 bln trade surplus with Canada in 2016. The Commerce Dept estimates that trade with Canada supported 1.6 mln jobs in 2015, the latest data available."

"Canada is the single largest destination for US goods. US goods exports were about $266 bln in 2016. The US exports a little more than $52 bln of services to Canada. Of the goods, 18% (~$48 bln) were vehicles and 15% ($40 bln) were machinery and 9% ($24 bln) were electric machinery, 6% ($16 bln) were mineral fuels and 4.5% ($12 bln) were plastics. Over the past decade service exports to Canada rose by 43%. The main service exports were travel, intellectual property (software and audio-visual) and transportation."

"After Canada, Mexico is the second largest market for US goods exports at $231 bln in 2016. The US recorded a goods trade deficit of $63.2 bln last year with Mexico. The US exported about $31 bln in services to Mexico in 2016, and recorded a $7.6 bln surplus. Overall, the US recorded a $63.2 bln trade deficit with Mexico last year. The Commerce Department estimates that exports to Mexico supported US 1.2 mln jobs in 2015 (968k by goods and 201k by services). "

"Looking at the goods trade balance within NAFTA is misleading because service trade is increasingly important. Given the importance of direct investment, local sales by majority-owned affiliates (when adjusted for imported inputs, which is why we broke out services) it makes sense to incorporate them for a more holistic sense of the total market penetration. The trade does not look lopsided is a partial picture may appear."

"Nevertheless, we think that the risk is growing that the attempt to renegotiate NAFTA fails. Canada has indicated it is willing to consider a bilateral agreement, but we suspect that while the process may begin, it will unlikely conclude before 2020. There are several outstanding bilateral issues between the US and Canada, including lumber and dairy, which are not easy to resolve."