The North-American Free Trade Agreement (Nafta) was executed in 1994 between the United States, Mexico and Canada.
The agreement specifically relates to the lifting of tariffs (taxes on exports and imports) on all goods traded among the countries under the said agreement.
Technically Nafta’s aim has always been to encourage economic activity between the three major economies of North America by making it easier for companies to do business across borders.
Despite the agreement has its shortcomings over the years, it has proved to be an important preposition for good relations between the countries involved.
On the other hand, one of the pre-electoral promises, by now the US President Donald Trump, was the renegotiation of the agreement or possibly its abolishment.
It is no secret that he has an opposing view on Nafta, in fact calling it “the worst trade deal in history”. As a matter of fact, in April 2017, Trump threatened to withdraw from the agreement, but backed down only to start again in the beginning of 2018.
At the start of the month, Trump announced that the US will institute a 25% tariff on steel and a 10% tariff on aluminum, in order to further trash the free-trade agreement that he accuses has hurt American workers.
Indeed yesterday he pressed ahead with the aforementioned tariffs, but surprisingly enough he has exempted Mexico and Canada, while he offered the possibility of excluding other allies. A U-turn indeed from the previously no exceptions stance.
Undoubtedly, this gave some sort of respite to Mexico since it is a major steel exporter, while Canada is the biggest exporter of both steel and aluminum to the US.
That being said, the uncertainty surrounding the Nafta agreement is still in place, with the president’s actions that have ignited concerns about an increase in prices for consumers and retaliation from other countries which could damage the US economy.
In fact, EU and Chinese officials have already considered retaliating by targeting American products with tariffs. Thus, interrupting trade reactions and possibly delaying Nafta negotiations.
Mexico and Canada did hope to be exempt from Trump’s planned tariffs, with yesterday’s news being welcomed by both countries. That said, it is yet to be seen how the renegotiations will evolve, given that recently Trump stated that the US has large deficits with Canada and Mexico, and that these need to be settled presumably with a new and fair Nafta agreement being signed.
It is a known fact that Trump could easily withdraw from Nafta, but even if the United States did, the other two parties could retain the agreement between each other; meaning tariffs on trade between the United States and Canada, and the United States and Mexico.
Nowadays, it is a known fact that Trump’s tweets and/or announcements are creating market volatility.
The market is being very responsive to such news despite the awareness that he might re-track from his announcements. In this regard, as market participants, let’s accept the fact that volatility going forward might prevail. This year should be a volatile year; however, such volatility will create opportunities for investors to record abnormal returns.
Disclaimer: This article was issued by Maria Fenech, CCIM Intern at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.