US Mexican trade deal update: can’t go forward without Canada’s agreement, may the saga continue

  • There have been no recent breakthroughs between the U.S. and China on trade.
  • Trump’s victory Monday and a trade deal with Mexico has raised many questions as it has answered – Mexican peso heavily on the backfoot.
  • US Senator Cardin has stated that a trade deal can’t go forward without Canada’s agreement.
  • U.S. Commerce Secretary Ross argues that there is “no way that Congress can even pass a deal before the midterms” in Autumn. 

According to US Commerce Secretary Ross speaking earlier today, there have been no recent breakthroughs between the U.S. and China on trade. At the same time, Trump’s declaration of victory on Monday in reaching a preliminary deal with Mexico to replace the North American Free Trade Agreement (NAFTA) has raised many questions as it has answered and has jeopardized the 24-year long trilateral agreement between Canada, Mexico and the U.S. whereby literally millions of jobs are at stake across the three nations.

As one of Trump’s campaign pledges, the NAFTA agreement is about to be scraped whereby for months, the negotiations between Mexico, the U.S. and Canada were held up by the Trump administration’s insistence on a “sunset clause” whereby a renegotiated NAFTA would end after five years unless all three parties to the agreement signed up for a continuation of it of which both Canada and Mexico rejected.

However, yesterday, Mexico agreed to a compromise with the U.S. whereby a deal that should include Canada would remain in force for 16 years. During the term, and after six years, the countries would review the agreement and decide whether it needed to be updated or changed. They would then either agree to a new 16-year deal or the pact would expire.

Risk-on markets

The markets cheered this progress on Monday, US benchmarks made fresh record highs and the peso rallied to 18.60 whereby Foreign Minister Luis Videgaray told reporters that “Mexico will have a free trade agreement regardless of the outcome” of U.S.-Canada negotiations. However, there is a massive amount of movement of goods between the three NAFTA countries and it is clear that there needs to be the integration of operations and it is therefore imperative that a trilateral agreement is inked and that is where the uncertainties now lie.

Just today, US Senator Cardin has stated that a trade deal can’t go forward without Canada’s agreement, and in any case, there is no way that Congress can even pass a deal before the midterms in Autumn – U.S. Commerce Secretary Ross was arguing that point earlier today.

At least for now, progress has been made and Canada’s NAFTA negotiator, Foreign Minister Chrystia Freeland, was cutting short a trip to Europe to fly to Washington today to try and restart talks with the Trump administration. (U.S. Commerce Secretary Ross was also confirming earlier today that the U.S. is asking Canada to consider joining U.S.-Mexico deal).

However, the uncertainties are priced back into the FX on Tuesday with the peso on the backfoot, currently trading in the 18.90’s – While there is a preliminary handshake deal between the U.S. and Mexico, it is far from finalized. Even after being formally signed, it would have to be ratified by lawmakers in each country and there are still questions over whether it is even politically feasible or legal, for that matter, to leave Canada out of a deal. For Trump to reach a replacement trade deal with Mexico alone, which will be determined in the weeks ahead, it will need to meet the trade priorities set out by Congress. Congress wouldn’t vote on it until next year and after the November midterm elections. For now, at least, it looks like a tentative public-relations victory for Trump (good timing ahead of the midterms, and just as well as such a bill would require a Republican victory in the House of Representatives in order for anything to pass easily),  which has instilled some confidence in the markets again the week after Trump’s former campaign manager was convicted on financial crimes – (… may the sagas continue).