Northern Exposure: What Wall Street Thinks Of Trump’s NAFTA Replacement Deal

The Prime Minister had a constructive conversation today with President Trump regarding the North American Free Trade Agreement. The leaders welcomed the progress that has been made in discussions with Mexico and look forward to having their teams engage this week with a view to a successful conclusion of negotiations.

That’s the readout of a call between Trump and Justin Trudeau that apparently took place on Monday afternoon following the announcement of a bilateral trade deal between the U.S. and Mexico.

The U.S. administration is spinning things a bit differently, with an eye towards making Trump appear strong and Trudeau weak. “Trudeau congratulated Trump on the Mexico pact”, the White House said, describing the same call mentioned above.

The two-party agreement between the U.S. and its southern neighbor was basically sealed over the weekend, but given how unpredictable this administration is when it comes to trade, the market still needed proof and that proof came in the form of a somewhat bizarre conference call between Trump and Mexican President Enrique Pena Nieto.

“We’ll get rid of the Nafta name [and] call it the U.S.-Mexico trade agreement”, Trump said, while waiting on Pena Nieto to be patched through on speaker phone. “We’ll get rid of the name. It has a bad connotation to it”, the President added, for good measure.

Canada has been absent from the negotiations for weeks and Monday’s deal, while positive, raises at least as many questions as it answers. “We believe this is intended to accomplish two goals”, Goldman wrote on Monday evening, referencing Trump’s express intention to characterize today’s deal as the “termination” of NAFTA. “First, the President has long discussed the potential termination of NAFTA and doing so would allow for a sharper break with the prior agreement from a political perspective”, the bank writes, adding that it also “presents Canada with a ‘take it or leave it’ choice.”

Larry Kudlow did his best to introduce some antagonistic rhetoric into the equation on Monday, telling CNBC that “if we can’t get a good strong fair deal with Canada, the U.S. might have to resort to auto tariffs.” Ahh, yes, Larry Kudlow the self-described “free trader” strikes again. Here’s the video:

While Trump has certainly put Trudeau in an awkward spot, Goldman thinks it’s unlikely that Congress is going to go for a deal that doesn’t include the Canadians. Here are a few additional excerpts from the note mentioned above:

On its face, the US negotiating stance appears to create some risk for Canada, as it leaves Canada with three choices: 1) sign on to the just-announced agreement with Mexico, 2) negotiate a separate bilateral agreement, or 3) revert back to pre-NAFTA trade policies. However, the risk that US-Canada trade will be left without any trade deal appears low, in our view, for two reasons. First, Canada’s 1988 trade agreement with the US precedes NAFTA and trade policy might revert back to that agreement in the event that NAFTA terminates. Second, while we have long viewed a NAFTA termination announcement to be possible, we do not believe that termination would take effect without a replacement policy. Congress is unlikely, we believe, to approve a US-Mexico agreement unless Canada is party to that deal or something similar, which would leave the White House with a choice between a revised pact among the US, Canada, and Mexico, or no trade agreement at all.

There’s that whole “separation of powers” issue throwing a monkey wrench in Trump’s plans again.

“There appear to be some dark clouds on the horizon in the form of a new hurdle that may have been introduced by US President Donald Trump, who said his intention was to kill NAFTA and replace it with a new deal — which may, or may not, include Canada”, BNP wrote on Monday, adding that “as any deal on NAFTA renegotiations will require the approval from the legislatures of both Mexico and the US, signing of a new deal could see additional delays, given the protracted negotiations” among lawmakers. Here’s a visual from BNP’s note:

(BNP)

In any event, I suppose the takeaway here is that while Monday’s deal is most assuredly a step in the “right” direction (where that just means it’s not a further escalation in the ongoing global trade war), this is far from over, considering a trilateral deal requires the signatures of three parties and only two are on board right now.

In the meantime, all that appears to matter for markets is the dollar, which fell on Monday for a seventh session in eight, supporting risk sentiment and catalyzing the best day for emerging market equities since June.

(Bloomberg)