Whiplashed?
Last weekend, President Trump threatened again to walk away from NAFTA.
Within 48 hours, reports suggest he wanted an agreement at next week's Summit
of the America (April 13-14 in Peru).
The art of the deal is getting to the
deal. After 15 months in office, some political commentators suggest
Trump is feeling more comfortable as President. Investors also becoming
more familiar with his style. Bold demands. Compromise.
Deal.
One of the stickiest issues is about the US
demand to lift the domestic content threshold from 62.5% to 85% for car parts
to be qualify for duty-free trade. Some producers as this is
impossible to achieve currently, which is a way to say that the US demand was
over the top.
Reports suggest the US has signaled a
compromise. The idea is to break down the car parts into five
categories. Each would have a different domestic content
requirement. The 85% threshold may apply only to the major components,
like engines and transmissions. The simplest of the 30,000 parts in a
car, like a nuts and bolts, might not have any threshold.
US Trade Representative Lighthizer has urged
that a deal be found before the July 1 Mexican elections, but neither the
approaching election nor the fact that the leftist AMLO is still ahead in the
polls has been a factor for investors. The peso itself is the
strongest currency in the world since the end of last year, rising 8.75%
against the greenback and nearly 9.5% against the Canadian
dollar.
The US does not want to deal for Mexico sake.
July 1 is also when the President's trade-promotion authority
expires. The White House made a formal request to extend the
TPA at the end of March. It is not clear whether Congress will renew
it. Neither chamber is required to affirmatively approve the renewal, but
either can prevent it from being extended.
The White House could be seeking an agreement
next week, at least in part, because the rules under TPA require that the
president gives Congress at least 90 days advance notification and to publicly
release the text of the renegotiated agreement 60 days beforehand.
With TPA authority to end at the end time is of the essence.
With the US seeming to push hard for a deal,
Canada seemed less enthusiastic. Canada's ambassador to the US was
skeptical, saying he did not know was an agreement in principle looks
like. The devil is the details. He suggested that an agreement in
principle with the details to be worked out later is dangerous.
Still, a NAFTA deal, following the heels of
KORUS, would be a success for the US President. Also, it would
strengthen his hand in dealing with China by showing he is reasonable and is
not being provocative just to be provocative.
If the administration's goal is to get rid of
the US trade deficit, it is bound to fail. The broad measure of US
trade, the current account balance, is a function of numerous forces, including
growth differentials, and of course, savings and investment. The large
dollop of fiscal spending when the economy is already growing near trend is
expected to spur a widening of the US trade deficit. Earlier today,
the US reported the sixth consecutive wider trade deficit. The $57.6 bln
shortfall is the largest since October 2008 and it comes despite the
improvement in the energy trade balance. The US bilateral deficit with
Canada fell (to $400 mln from $3.69 bln deficit in January, not seasonally
adjusted), while the deficit with Mexico rose (to $6.06 bln from $4.05 bln in
January).
Will A NAFTA Deal Be Struck (in principle) Next Week?
Reviewed by Marc Chandler
on
April 05, 2018
Rating: