NAFTA Watch: Trump’s MUSTA Passed, Cows-for-Cars Choice Ahead for Canada — Panjiva
Más

Panjiva_research_logo

NAFTA Watch: Trump’s MUSTA Passed, Cows-for-Cars Choice Ahead for Canada

Ags - Meat/Dairy 138 Canada 338 Cons. Discr. - Autos 661 Cons. Staples - Food/Beverages 395 Energy - Conventional 272 Energy - Refined Oil 149 Mexico 505 Trade Deals 702 U.S. 3297 USMCA 373

The U.S. and Mexico have reached agreement on a series of components of a revised NAFTA according to U.S. Trade Representative filings on technical terms, manufacturing and agriculture. Notably an agreement has been reached for automotive rules of origin which, as outlined in Panjiva research of August 13, have been a major sticking point so far.

In the context of the Trump administration’s key trade metric – the trade-in-goods deficit – this resolves uncertainties relating to $56.8 billion of the goods deficit in the 12 months to June 30. On a naive basis that’s equivalent to 96.6% of the total trade deficit with Mexico, Panjiva data for U.S. exports and imports of cars and auto-parts shows. Rules of origin for the steel, chemicals and other manufacturing industries have also reportedly been agreed but not yet published.

THE DEFICIT IS A HUGE CAR PLANT IN MEXICO

Chart segments U.S. trade-in-goods deficit (exports less imports) with Mexico between cars, auto-parts and all other goods on a monthly (dotted) and an annual average (solid) basis.   Source: Panjiva

The automotive sector will remain in focus as the Canadian government was not party to this round of negotiations. The baseline changes – content requirements set at 75% for duty-free treatment with 45% of vehicle content produced by workers paid $16/hour or more – seem unlikely to prove controversial in Canada.

Yet, President Trump has indicated that if it does not join the deal then there will be “a tariff on cars”. That could indicate a minimum of section 232 duties being applied and a maximum of NAFTA being unwound and a stand-alone “U.S.-Mexico Trade Agreement” being struck.

The latter may not be possible from a technical perspective given, under Trade Promotion Authority rules, the President can only present a revised NAFTA deal for an “up-down” vote in Congress. Anything else – including a withdrawal-and-replace – would be subject to a full vote.

Clarity in that regard should come by Friday August 31, when USTR Robert Lighthizer has indicated the statutory 90 days notice to Congress to sign a deal will be given. That gives a signing deadline of November 29 (i.e. by the current Mexican government) though the final text needs to be provided to Congress by September 30 (60 days notice).

Prime Minister Trudeau has indicated that a deal needs to “get to the right place for Canadians” according to Politico, which doesn’t necessarily mean making a quick deal. A central contention in that regard will likely focus on agriculture where Canada has resisted U.S. calls for increased dairy market access.

The scale of the potential win for American farmers in Canada could be significant. Exports of all dairy products to Canada were just $348 million in the 12 months to June 30, or 7.5% of America’s total exports. For reference Canada accounted for 40% of butter exports and 48% of chicken eggs, indicating a significant uplift is possible. In particular increased shipments of milk powder where Canada represented just 0.7% of America’s $1.31 billion exports, and cheese (4.2% of $1.51 billion) could be a significant opportunity.

GOT (AN OPPORTUNITY IN) MILK? BUTTER SHOWS THE WAY

Chart segments U.S. exports of dairy products by product (HS-6) and destination for the 12 months to June 30.   Source: Panjiva

While most of the focus has been placed on U.S.-Mexico and U.S.-Canada challenges it’s also important to note that Mexico and Canada may also have issues to agree. One complexity is that both are signatories to the CPTPP trade deal which will mean at a minimum a complex “legal scrub” of new NAFTA terms to ensure consistency with CPTPP.

Mexico’s exports to Canada are currently dominated by the automotive industry with mid-engined vehicles ($2.11 billion of exports in the 12 months to July 31, or 16.5% of total Mexican exports to Canada) and heavy trucks ($1.13 billion) being the largest two products. As a result the details of the automotive deal will matter as much in the Canada-Mexico axis as in the U.S.-Mexico.

Outside commodities, products where Mexico has significant exports to the world excluding Canada (and the U.S.) where its shipments to Canada are currently minimal include larger engined vehicles (4.4% of Mexican exports, just 0.4% of those to Canada), telecoms network gear (6.2% vs. 3.6%) and vitamins (1.6% vs. 0%).

CPTPP NORTH AMERICA ALSO AN AUTOMOTIVE DEAL

Chart segments Mexican exports to Canada by product (HS-2 and HS-6) for the 12 months to July 31, denominated in dollars.   Source: Panjiva

Finally, it isn’t clear that all the areas of outstanding contention between the U.S. and Mexico have been nailed down. While the controversial “sunset” clause has been addressed via a “6+10” process, S&P Global Market Intelligence reports, there is no mention in the USTR factsheets of energy-related provisions.

While the U.S. ran a trade surplus in energy with Mexico of $15.4 billion in the 12 months to June 30 the incoming Mexican government is set to try and reduce its imports of petroleum products from the U.S., worth $27.5 billion in the 12 months to July 31, and may review existing provisions for liberalizing the energy industry in Mexico.

ENERGY CUTS COULD REVERSE AUTOS’ HARD WORK

Chart segments Mexican imports of refined oil products (HS 2710) by country of origin.   Source: Panjiva

PANJIVA RESEARCH is a service provided by Panjiva, Inc. ("Panjiva") to relevant global subscribers, and are deemed to be Panjiva "Services" subject to the Panjiva Terms & Conditions of Use. Information contained within or made available via the Services is for informational purposes only and nothing in the Services shall constitute or be construed as an offering of financial instruments, or as investment advice or recommendations by Panjiva, Inc. or its affiliates of an investment strategy or whether to "buy", "sell" or "hold" an investment. The Services may include views and commentary about customers of Panjiva. No aspect of the Services is based on consideration of your individual circumstances, and you should determine on your own whether you agree with the information contained within or made available via the Services. Employees involved in Panjiva Research may hold positions in securities analyzed or discussed in the Services. Panjiva does not make any express or implied warranties, representations, endorsements or conditions with respect to the Services and the information contained within or made available via the Services, including without limitation, warranties as to the usefulness, completeness, accuracy, currentness, reliability or sufficiency of any information (including, without limitation, conclusions, statements, opinions, estimates, forecasts or projections of any kind) and expressly disclaims any implied warranties. Neither this disclaimer nor any of its contents may be forwarded or redistributed without the prior written consent of Panjiva. © 2019 Panjiva, Inc. All Rights Reserved.