Economics: No Cataclysm if NAFTA dissolves
The fourth round of Nafta renegotiation talks proved to be the most acrimonious to date as the United States pressed ahead with proposals that Canada and Mexico have described as red lines that they will never agree to cross, and U.S. President Donald Trump reiterated his disdain for, and willingness to withdraw from the treaty.
The proposals Washington has made in the past two rounds, including a rebalancing designed to specifically shrink US trade deficits, assurance that the bulk of North American automotive manufacturing takes place within US borders, and tearing up dispute resolution mechanisms, have drawn the ire not only of other Nafta members, but also of the US private sectors and legislators who favor open trade and who can be expected to step up their lobbying efforts in the coming months as talks are currently scheduled to last until March.
It is unclear if the Trump White House is determined to scuttle the treaty – it could theoretically withdraw after giving six months’ notice, although considerable legal and political responses would likely extend that timeline considerably – but with Canada and Mexico adamant they will not accept US demands, the prospect of an end to Nafta must be seriously assessed.
Although there appears to be a consensus that the ramifications would not be cataclysmic, GEA does not anticipate even the relatively severe consequences that some, such as Moody’s Analytics, are currently predicting.
The Mexican economy would obviously take a hit – we at GEA expect an end to Nafta would cap Mexico’s GDP growth between 1.5-2.5% for 2018-2020, keep inflation above 6.0%, and add no more than 150 basis points to interest rates – as would those of Mexico’s northern neighbors and industry supply chains throughout the region. But the breadth of sources of FDI in Mexico, the country’s extensive network of trade alliances, and the extent to which WTO rules limit Washington’s ability to impose discriminatory trade barriers on goods and services of Mexican origin, all favor a containment of damage. As WTO signatories, both Mexico and the United States have signed free trade agreements with other countries in recent years that limit their options for cancelling certain policies and trade openings with other countries.
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