Itaú BBA - Reshaping NAFTA

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Reshaping NAFTA

August 1, 2017

NAFTA will live on, with changes in favor of the U.S. but without transformational implications for Mexico

Please open the attached pdf to read the full report

 The U.S. is Mexico’s top trading partner, so the escalation of protectionism north of the border poses a substantial risk to the Mexican economy. While cancelling the 23-year-old North American Free Trade Agreement (NAFTA) – and, by default, trading under the framework of the World Trade Organization (WTO) – would not mean significantly higher tariffs, losing some aspects of NAFTA could have longer-term consequences on the economy.

 In our view, incentives are set up in a way such that Mexico is likely to renegotiate NAFTA, even if the terms of the new agreement are somewhat worse. In a nutshell, Mexico sees protectionism (even retaliation) as self-defeating, while the U.S. apparently has a neo-mercantilist perspective – focused on eliminating trade deficits – in which trade is at least somewhat similar to a zero-sum game.

 NAFTA’s renegotiation points, recently put on the table by the U.S. authorities, are still taking form, so we analyze them qualitatively. Stricter rules of origin would be harmful, to the extent that Mexican exporters and importers would face higher administrative costs and further restrictions on sourcing from the most efficient suppliers. Other potentially negative changes in the agreement could be: more discretion for the U.S. judiciary in the implementation of trade remedies (safeguards, anti-dumping, and countervailing duties); the ramping-up of “Buy American” exceptions whereby domestic firms obtain preferences in the government procurement markets (previously liberalized by NAFTA); and deep changes to NAFTA’s dispute settlement system – such as the elimination of the investor-versus-state mechanism (prized by the private sectors of both the U.S. and Mexico, but strongly disliked by U.S. legislators) – which would weaken Mexico’s legal investor-protection framework.   

 Our base case is that NAFTA will live on, with some changes in favor of the U.S. (to satisfy their demand for so-called “fair trade”) but without transformational implications for the Mexican economy. Timing, however, is a crucial risk. Negotiation rounds are scheduled to begin on August 16, but the proximity of Mexico’s presidential election (July 2018) and the U.S. Congress mid-term election (November 2018) will put pressure on negotiators. If electoral dynamics


 

João Pedro Resende
Alexander Müller


 

Please open the attached pdf to read the full report

 



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