NAFTA Trade Update

Fundamental Analysis, NAFTA, Trade, Update, Trump Administration, OECD, fx trader, forex

26 Apr 2017

The Trump Administration has switched gears.  During the campaign through the inauguration, Trump picked on Mexico. The rhetoric and threats drove the peso to record lows. By the OECD's calculation the peso more than 150% undervalued.

The re-opening of NAFTA negotiations was supposed to be aimed more at Mexico than Canada. Sentiment turned about the peso, The central bank hiked rates and changed their intervention tactics so it would not drain reserves. Since January 11, the peso has appreciated by more than 15.5% after pulling back nearly one percent this week.

It turns out despite insisting that Mexico will pay for the border wall, Trump's demand that Congress authorize the funding while cutting other programs is one of the issues that is pushing the US government again to the brink of its spending authorization. Some reports suggest that President Trump is prepared to seek to fund for it in the FY18 budget that will be negotiated later this year. Also, the controversial border adjustment tax does not look like it will be incorporated into the tax reform that the White House proposes.

The US wrath has turned to Canada. Commerce Secretary Ross took on the lumber dispute which arose in the Obama Administration. The issue is subsidized logging. The US will impose countervailing duties (ranging from 3% to 24%) on five Canadian companies that export lumber to the US. Moreover, the duties are retroactive, because, as Ross explained, Canada knew that it was being investigated and continued with its practice.

The US National Association of Home Builders estimates that the duty will increase the price of building a home by $1000, which would be enough apparently to make another 150k American families unable to afford home ownership. Canada argues that the US has challenged Canada's practice since 1983 (before NAFTA) and various international tribunals have found against the US claims. Ross dismisses the findings under NAFTA's conflict resolution mechanism because Canada names three of the five members. This would likely be one of the things the US seeks to change when NAFTA negotiations begin.

President Trump tweeted about Canada's unfair dairy practices. It is true that Canada protects its dairy farmers with tariffs and domestic output controls. Canada exported about $112.5 mln of dairy products to the US last year, while the US exported $631.5 mln of dairy products to Canada. In fairness, US complaints about Canada's dairy practices are not new. They go back several years. However, in 2016, Canada implemented new policies to facilitate a new class of milk prices, for a liquid concentrate that could be used to make cheese and yogurt. It lowered the price for this milk product to encourage domestic production and compete with the US-sourced product.