Perhaps after the recent US healthcare reform debacle the realities of political office versus campaign rhetoric are hitting home for Donald Trump as his stance seems, for the moment at least, to be softening on a number of issues. He has repeatedly denounced NAFTA, the North American Free Trade Agreement, branding it a ‘disaster’, and threatened to withdraw from it without meaningful changes being agreed with Mexico and Canada. These comments and the withdrawal of the US from the Trans Pacific Partnership (TPP) earlier this year have seen forecasters elevate protectionism to a key risk to the global outlook. However, the Treasury Department did not name China a currency manipulator after Trump’s recent meetings with Xi Jinping and a draft letter issued to congress on March 30 outlining the administration’s general negotiating objectives on NAFTA suggest a more constructive approach is possible.
Trump’s frustrations of having to follow the correct political process are clear, he said of NAFTA: ‘Like we want to start to negotiate with Mexico immediately, and we have these provisions where you have to wait long periods of time, you have to notify Congress, and after you notify Congress, you have to get certified, and then you can’t speak to them for 100 days. The whole thing is ridiculous.’ Added to this, Trump’s US Trade Representative, Robert Lighthizer, is still to be confirmed by the Senate.
The Trump administration’s draft letter stated: ‘We will be consulting closely with Congress in developing our negotiating positions to ensure they are consistent with Congressional priorities and objectives’. The letter advocates some new and revised rules that can be effectively enforced but it nevertheless contains areas that could become points of contention such as a goal ‘to level the playing field on tax treatment’. The letter promotes the administration’s ‘Buy American’ preference seeking ‘rules of origin that ensure that the Agreement supports production and jobs in the United States’ and ‘to establish rules that require government procurement to be conducted in a manner that is consistent with US law and the Administration’s policy on domestic procurement preferences’.
The letter also addresses ‘Trade Remedies’ with a proposal to ‘seek a safeguard mechanism to allow a temporary revocation of tariff preferences, if increased imports from NAFTA countries are a substantial cause of serious injury or threat of serious injury to the domestic industry.’ Another more contentious stance proposes to ‘Eliminate Chapter 19 dispute settlement of antidumping and countervailing duty determinations in light of U.S. experiences where panels have ignored the appropriate standard of review and applicable law, and where aberrant panel decisions have not been effectively reviewed and corrected.’
But on an encouraging note, Ildefonso Guajardo, Mexico Economy Minister and the main trade negotiator, is reported to be hopeful an agreement can be reached by early 2018 if negotiations start before the end of July. Given 2018 is an election year in Mexico the sooner an agreement can be reached the better.
Since the January lows the Mexican peso and bonds have repriced from extremely oversold levels as fears of a trade war and souring of relations with the US have eased: at the time of writing the peso is trading around 18.83 to the US dollar which is close to the levels seen at the end of October 2016 ahead of Trump being elected and well off 21.96 reached in January this year. The United Mexican States sovereigns and Pemex, one of our favoured quasi sovereign holdings, have also been stellar performers: at the time of writing the US dollar denominated issues of United Mexican States 4.6% 2046 and the Pemex 5.5% 2044 have rallied over 8.4 points and 9.8 points respectively from their January lows.
As Warren Buffet famously advised ‘Be fearful when others are greedy and greedy only when others are fearful.’