Emerging Markets Insight

NAFTA and the future of free trade

Jan 26, 2018

Emerging market highlights

  • NAFTA is front and center as a source of risk as negotiations approach the end.
  • The balance appears to be leaning towards a positive outcome, which could support Mexican asset prices.

Market overview

As the governments of the U.S., Mexico and Canada meet in Montreal for the 6th and next to last round of negotiations of NAFTA, the rest of the world continues to scratch their heads trying to figure out exactly what the U.S. government want to do with trade policy. The art of the deal approach has already achieved significant headway by forcing Canada and Mexico to renegotiate a free trade agreement that for more than 20 years was a global reference of modernity and source of prosperity for many manufacturing and agricultural corporations in North America

The big question is if the U.S. government will decide to withdraw from NAFTA after the full 7 rounds of agreed negotiations finish around March, as the complexity of the open issues may deny the parties of a new deal just yet. The Mexican electoral calendar will not allow the government to engage further than that as all the attention and energy will be channeled towards the election of July 1st where a new president and both chambers of congress will be elected. If the U.S. decides to continue being part of the agreement, negotiations are likely to be postponed until after the U.S. midterm elections in November. Alternatively, the U.S. government may decide to exercise the right to withdraw from the agreement, leaving NAFTA as a bilateral deal between Canada and Mexico.

The relevance of NAFTA goes beyond the Midwest agricultural producers for whom Mexico is top export destination for corn, cereals, poultry and meat products. It is far more important than just for the manufacturing companies that have developed supply chains across the three countries to produce cheaper cars and electronics. If the U.S. decides to do away with NAFTA, it is very likely that an aggressive stance will continue towards other U.S. trading partners. China would certainly be an important target of retaliatory and protectionist measures. No one knows what the future would depart for the World Trade Organization.

Markets are divided on the potential outcome, but the recent increase in lobbying activities by the U.S. corporate sector and some Republican legislators point in the direction of the U.S. deciding ultimately to stay in the treaty, which would be supportive of risky assets in general and Mexico in particular.

Top U.S. trade counterparts

Top U.S. trade counterparts

Source: U.S. Census Bureau. As of December 2017.

Download report

China's onshore equity markets
China’s onshore equity market may benefit significantly in the coming years from the relatively fast pace of economic activity.
Read more Read more

Ways to invest in EM: