Trump Seeks Speedy NAFTA Conclusion, but Threatens 'Different Route'; Trilateral Deal Seen as More Likely Than Bilateral

President Donald Trump responded to a letter from Mexico's President-Elect Andres Manuel Lopez Obrador (see 1807230011) by emphasizing the importance of the deal while threatening to take alternate paths, in a July 20 note released on July 24. "Successful" NAFTA renegotiations would help the U.S. and Mexican economies, "but only if it can go quickly, because otherwise I must go a much different route," Trump said. "It would not be my preference, but would be far more profitable for the United States and its taxpayers." Trump said a strong relationship between the two countries "will lead to a much stronger and more prosperous Mexico, which frankly would make me very happy!"

An eventual deal between the three NAFTA countries remains the most likely scenario for an updated deal, though continued "bumpy and lengthy negotiations" are expected, said Carlos Capistran, Canada and Mexico Economist at Merrill Lynch, in a July 24 research report. "Trump has said there is a possibility that the US advances a bilateral deal with Mexico," but "we see this as an attempt to divide and conquer or at least to put pressure on Canada to accept the conditions the US has put on the table such as a sunset clause or elimination of investment protection measures in NAFTA," Capistran said. Mexico's president-elect, who is known as AMLO, may see "having a deal with the US before he takes office, even if bilateral or worse than current NAFTA or both," as "more valuable than having to deal with NAFTA negotiations during his administration."

Capistran said "AMLO may accept lower investment protection" and "the tradeoff of a softer sunset clause (maybe ten rather than five years) for a NAFTA deal that ends uncertainty." Such a deal would need approval from U.S. lawmakers after the November elections, which means the Congress could "have different preferences regarding trade than the current one," he said. "A bilateral deal like that will terminate NAFTA and would force Canada to seek its own bilateral deal with the US, with the difficult task of dealing with the sunset clause and investment protection."

Still, "a trilateral deal makes more sense than bilateral deals to preserve and ideally to enhance the current industrial organization across the region that takes advantage of each country’s competitive advantage to co-produce, increasing the region’s competitiveness," Capistran said. Ministers from Mexico and Canada are slated to meet with U.S. Trade Representative Robert Lighthizer in late July, but there's skepticism that any issues will be resolved through that forum (see 1807120042).

While a trilateral deal still appears most likely, "many scenarios are still possible," he said. Merrill Lynch expects "we will have a trilateral NAFTA deal, which implies no steel and aluminum or auto tariffs between the three countries, as the US has said that a NAFTA deal would exempt Canada and Mexico from these tariffs (the retaliation by both countries was also conditional)," he said. "But other scenarios with vastly different implications are still possible. Bilateral deals can happen, which would also imply no tariffs between the two involved parties. And a full trade war in North America cannot be discarded either, with no NAFTA deal and with tariffs on steel and aluminum across the three countries and potentially with auto tariffs, which would decelerate the Canadian and Mexican economies significantly (more the latter than the former) and would require significant real exchange rate depreciations in both countries."