Latest NAFTA Talks End In Disappointment As Attendees Question Lack Of U.S. Engagement

President Trump has threatened a quick termination of NAFTA a countless number of times, with the latest coming just last weekend via twitter:

We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada.Both being very difficult,may have to terminate?

— Donald J. Trump (@realDonaldTrump) August 27, 2017

Of course, like with most Trump deals, it"s often very difficult to differentiate between bombastic rhetoric utilized for establishing negotiating power and actual desired results.  According to Bloomberg, so far the speed of U.S. negotiations, led by Trade Representative Robert Lighthizer, have failed to live up to the President"s rhetoric leaving many to question whether a "deal" is the desired outcome for this administration.

The latest Nafta talks are nearing conclusion without a major breakthrough or agreements on even the least-contentious topics, officials familiar with the negotiations say, fueling doubts among observers that a deal can be reached this year.

U.S. Trade Representative Robert Lighthizer is scheduled to speak publicly alongside Mexican Economy Minister Ildefonso Guajardo and Canadian Foreign Minister Chrystia Freeland Tuesday to conclude the second round of talks toward a new North American Free Trade Agreement. Their appearance will cap a five-day session in Mexico City.

While negotiators have made some progress, they have yet to agree on any major contentious issue and are far from a deal on individual Nafta chapters, the officials said, asking not to be identified discussing private matters. On some topics, discussion has been verbal with no specific text proposals submitted, they said.

The talks came after U.S. President Donald Trump threatened outright withdrawal from the agreement. While slow progress is normal in most trade negotiations, the nations have been seeking an unusually quick timeline for Nafta, and officials expressed doubt a deal could be reached by the target date of December. That sentiment is shared by many observers and stakeholders who say the U.S. has been slow in detailing its actual demands.

Meanwhile, folks from all sides attending negotiating sessions in Mexico City have been surprised by the lack of U.S. engagement with one trade strategist from Canada predicting that the earliest date for a possible deal would be February or March 2018.

David Wiens, a farmer and vice president of the Dairy Farmers of Canada, said he’s been surprised by the lack of written and firm policy proposals put forward by the U.S. government. That makes him believe it’s "a bit unrealistic" to get a deal by December.

"What we’re hearing on the ground here is the Americans have still not posted all the texts for the different chapters," Wiens said in an interview in Mexico City. "If there’s a strategy behind all of that, I’m certainly not recognizing it.”

"They can’t possibly finish. The Americans haven’t started negotiating yet," said Peter Clark, a trade strategist and former Canadian official. Jerry Dias, a Canadian labor leader, said he’d "be shocked if it gets done before Christmas."

Clark said the earliest possible date for a deal is February or March, and even then it would likely be an agreement-in-principle that wouldn’t be finalized until after Mexican and U.S. elections. "It’s not really a negotiation. What you have is a president who says he’s been robbed for years," Clark said. "He wants to break a contract without any penalty."

Finally, the most critical component of the NAFTA negotiations (or at least the component that gets all the media attention), auto manufacturing, apparently hasn"t even been touched yet. 

One key issue without a firm policy proposal is what threshold the U.S. is seeking for the so-called rules of origin on the auto sector -- the share of a vehicle that must be sourced within Nafta countries to receive the pact’s benefits. The current level is 62.5 percent and Dias said U.S. Secretary of Commerce Wilbur Ross wants a "significantly" higher figure.

The auto threshold is "the heart of the American objective," said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association in Canada. "Negotiators will be very careful before pegging a rate that would drive assessments of success or failure.

The outlook isn’t entirely gloomy. One official described a two-track process -- a political one dominated by Trump’s threats, and a more constructive and technocratic track with negotiators plodding forward in search of agreement.

So what say you?  Is this all a clever charade from a White House that has no real interest in negotiating and would rather withdraw from NAFTA altogether, or is it all just another sign of a woefully unprepared, chaotic administration?

Trump-Appointed Manufacturing Tzar Backfires - Supports NAFTA, Backs Mexico

In an apparent snub to the administration"s trade policy plans, GE CEO Jeff Immelt - who sits on the Trump-appointed manufacturing council - said he "very supportive" of NAFTA adding that he was "optimistic about Mexico."

Just a day after we showed Mexico"s Manufacturing industrial production surge 8.5% year-over-year - the greatest surge since August 2010...

And expectations for employment in US manufacturers are tumbling...

Reuters reports that GE Chief Executive Officer Jeff Immelt said on a visit that Mexico had great potential and was not properly understood. He touted the conglomerate"s Mexican operations and the trade deal binding Mexico, Canada and the United States.

"GE as a company, we"re very supportive of NAFTA," Immelt told employees at an event to mark the expansion of operations in the northern city of Monterrey. He said the trade accord could be modernized, as Mexico has argued.

The GE boss said trade meant "win-win" opportunities across North America.

"We will continue to work constructively in the context of wanting to see a close relationship between the U.S. and Mexico," he said, noting that GE"s exports to the rest of the world from Mexico were worth $3 billion.

"We"re optimistic about Mexico, we"re optimistic about what we can do here," Immelt added, saying Latin America"s no. 2 economy would be a "big part" of GE"s future.

As a reminder, Immelt sits on a Trump-appointed manufacturing council (that Mexico has targeted for lobbying as Mexico and Canada push U.S. business leaders to defend NAFTA).

While Trump touts a "Buy American" policy and has railed against U.S. companies moving operations to Mexico (threatening to ditch NAFTA, a lynchpin of the Mexican economy, if he cannot rework it to secure better terms for the United States), unlike some U.S. companies, GE has not backed off plans in Mexico, risking broadsides from Trump on Twitter.

How long before Mr. Immelt gets a tap on the shoulder?

Yen, Peso Pop After Ross Targets NAFTA, Japan For Trade Deals

The yen and the peso jerked higher after President Trump"s commerce secretary Wilbur Ross commented that he expecte to start renegotiating NAFTA within two weeks and that Japan will be high on the list for trade agreements.

As Bloomberg reports, discussions are under way with the Finance, Ways and Means committees and the expectation is that “in the next couple weeks” the U.S. will issue the 90-day notice trigger legally required consultations with lawmakers, Commerce Secretary Wilbur Ross tells journalists in Washington. Ross spoke at a press briefing with Mexican Economy Secretary Ildefonso Guajardo Villarreal. The revamping of Nafta could result in either two bilateral agreements with symmetrical conditions or a fresh trilateral deal, says Ross, adding the U.S. is less concerned with the form than trying to get the right substance, and that it is premature to discuss specific details of Nafta talks. The border adjustable tax is still a concept, and there’s been no formal proposal; whatever is decided will probably be a “large component” of the House tax bill.

Additionally, Ross said that Japan was to be a high priority with regard a new trade agreement. 

The result was a kneejerk higher in the Yen and peso...

These Are Mexico's Top Exports

While readers are aware by now of the intricate trade link that binds Mexico to the US, it is more than merely autos and avocados. As the chart below shows, of the $302 billion in total Mexican exports (offset by $179 billion in imports), the largest two categories were electrical machinery & equipment, followed by nuclear reactors, boilers machinery & equipment, with motor only coming in third spot. But no matter the breakdown in categories, one thing is clear: Mexico needs the US - which imports over 80% of Mexico"s net exports - and the NAFTA agreement far more than the US does (which is not to say that the US won"t be impacted once NAFTA is eliminated).

Here are some further thoughts from SocGen"s Dev Ashish on the trade relationship between Mexico and the US:

Apart from the rhetoric coming out of the US in the past two-three months, particularly after the US election results, this week’s executive order by President Trump, essentially pulling the US out of the TPP trade agreement, has removed some of the uncertainty over the trade and investment outlook for Mexico. To a large extent this was already priced in by the market and few were hopeful of the deal going through under the new US regime.

What has become a greater uncertainty now is the likely path and shape of NAFTA. As we have said in the past, NAFTA has considerable value for the Mexican economy. Mexico’s exports to the US over past 12 months were at USD302bn or 81% of its total exports. During the same time, however, Mexico’s imports to the US were USD178.9bn or 46% of Mexico’s total imports. Mexico runs a trade surplus of nearly USD123bn with the US while it runs significant trade deficit with rest of the world.

Put simply, trade with the US has profound implications for Mexico’s investment and overall growth outlook. In a situation when the rhetoric is fast threatening to become reality, the impact of a possible change in the NAFTA provisions for Mexico can’t be overstated.

This is precisely what Trump was relying on when he called Pena Nieto"s bluff yesterday. And despite the fireworks, eventually, Mexico will have to come to the negotiating table as otherwise a substantial percentage of Mexico"s total annual exports, shown below, will suddenly find themselves with no willing buyer. Here is a list of the Top Mexican exports in the past year:

Five Dead, 15 Wounded After Gunman Opens Fire At Mexican Nightclub

A lone shooter fired on a crowd at a nightclub in Playa del Carmen, site of the BPM electronic music festival in Mexico early Monday, leaving at least five people dead and at least a dozen more injured, according to a statement released by festival organizers. Local news reports suggest that the shooting came after a "disagreement" and is connected to ongoing drug cartel wars in the area.

The rampage occurred inside the Blue Parrot nighclub in Playa del Carmen at about 2:30 a.m. local time, according to a statement by the attorney general of the Mexican state of Quintana Roo.

Playa del Carmen is a popular tourist destination not far from Cancun. Among the dead are four men and a woman. Two of those who died were part of a security team, the statement said. According to preliminary reports, three of the dead are foreigners.

People ducking for cover as security scanned the area following the shooting

A Forensic Medical Service van is parked outside the Blue Parrot nightclub

Police guard the entrance of the nightclub later Monday morning

According to the Mail, London-based promoter Elrow was hosting a closing "This Is The End" party at the Blue Parrot when the shooting occurred, and it is believed that many attendees at the event were British and American tourists.

Tourists at the scene have revealed the chaos that ensued during the shooting, and how many initially believed that they heard fireworks or music - not gunshots.

The government of the Caribbean coast state of Quintana Roo, where Playa del Carmen is located, said four men were shot to death and one woman died in a fall during the confusion and stampede that ensued. An additional 15 people were wounded, and one of them was in very serious condition.

People wait outside the club where a shooting took place in Playa del Carmen

"It is with great sadness to share that police have confirmed reports of a lone shooter outside the Blue Parrot nightclub in Playa Del Carmen earlier today, which resulted in four fatalities and twelve injured. The violence began on 12th street in front of the club and three members of the BPM security team were among those whose lives were lost while trying to protect patrons inside the venue." a statement early Monday by the BPM festival said.

The BPM Festival is an annual 10-day electronic music festival started in 2008. This year, it was scheduled to last from Jan. 6 to Jan. 15. The shooting occurred on the last night of festivities.

The Blue Parrot is one of the venues at the 10-day festival in Playa del Carmen, a tourist destination that has largely been spared the violence that has hit other parts of Mexico. Several festivalgoers took to Twitter to post videos and document the attack as it unfolded.

BREAKING NEWS: Mass shooting reporting in the popular Mexican resort town of #PlayaDelCarmen. pic.twitter.com/semRlEdCxW

— kendis gibson (@kendisgibson) January 16, 2017

"The #blueparrot security at #bpmfestival stood up for us when there was gunfire they are the real heroes," wrote user @DonsLens.

Dubfire wrote that they were in the DJ booth at the time and that it was "total chaos" but that they are "ok." Adding, "Hope everyone else is..."

DJ Mauro MC posted a video from outside the club after the shooting and said "most of us made it out ok, hurts my heart knowing people didn"t make it safe."

#BPMFestival #BlueParrot so sad :( most of us made it out ok, hurts my heart knowing people didn"t make it safe. pic.twitter.com/t8hpT5DnVt

— MauroMC (@DJMauroMC) January 16, 2017

He added that the shooting occurred inside and not from the beach, which is where the nightclub opens up to.

Rodolfo Del Angel, director of police in the state of Quintana Roo, told the Milenio TV station that he shooting was the result of "a disagreement between people inside" the nightclub and said security guards had come under fire when they tried to contain the dispute.

"For the moment we have indications that one person opened fire," Mayor Torres added. She said the shooting appeared to have taken place inside the club, causing people to flee in panic. Other witnesses said it happened outside the club.

The streets of Playa del Carmen were packed with tourists and festival attendees
after the shooting early Monday morning

Hector Escardo Steck, from Los Angeles, California, told MailOnline that the club was full when the gunman attacked. He said: "It was awful, the club was completely full and at around 2am we heard ten successive gunshots and people immediately hit the floor. Just after that the music stopped and everyone started running in a panic.

"There is a tall fence between the club and the beach and everyone started trying to climb over that. A lot of people got hurt in the attempt top club over, because people were panicking and trying to get away. It was terrifying.

"I was at the back of the club, so I didn"t see anyone get shot, but 20 minutes later in the streets I saw a lot of dead bodies being guarded by police officers. People were running everywhere, jumping, punching, running. "The party had been going since noon, and everyone in the club was either drunk or on drugs, and there was a lot of confusion. "In Playa del Carmen you see drugs in quantities that you have never seen before, and everyone is drugged up so it was a very confusing experience that no one was expecting. People were very angry and confused, but mainly angry."

Local news reports suggest that the incident is connected to ongoing drug cartel wars in the area, and the gunman is believed to still be at large. 

Partier George de Menezes told The Independent that he and his friends were just two meters from the gunman when the shooting occurred. He said: "No one took it seriously, but I knew straight away that it was a gun and dropped to the floor, then everyone dropped with me. "The music stopped and so did the shots, so we got up and one man was down on the floor and looked dead, and another man had been shot but was trying to stay on his feet." De Menezes said that people in the club tried to escape by running to the beach, but shots kept being fired

"Finally got out from there and got up to the Main Street and there was another man dead on the street, so everyone started running for their lives," he said. The reveler said that he and friends heard more shots when they finally got back to their hotel.

Los Angeles resident Jake Lubelski wrote on Facebook that he was 20 feet away from the gunman when the shooting took place.  "I was standing outside of a club on an insanely crowded street when it happened; I was maybe 20 feet away from the shooter," he wrote. "As soon as I heard gun shots, everyone started bolting and we nearly got trampled by the frantic herds of people.

"As soon as I turned around the corner and got a look at the scene, I saw a man lying on the floor in his own blood. it could have been me."

Scottish DJ Jackmaster issued a warning on Twitter saying, "Stay in your f*****g hotels" following the shooting. The DJ, whose real name is Jack Revill, tweeted about the incident just after 3am local time.

"Someone has come into the club in Playa Del Carmen and opened fire. 4-5 dead and many wounded. Stay in ur f****n hotel if you"re here at BPM," he wrote. "Apparently now more shots fired at another club in the area."

A worker at CostaMed hospital in Playa del Carmen told NBC News that a man and a woman were admitted to the hospital at 3.39am local time.

A second shooting was reported at the club The Jungle, where another BPM closing party featuring John Acquaviva, Stacey Pullen and David Berrie was taking place. Videos on Instagram show people running through the streets of Playa Del Carmen following the shooting.

Images shared on social media showed people cowering or running down the street.

Mexican police have confirmed the mass shooting but have not given motive for the gunfire. They have not reported any arrests.

"We are seeking information from emergency services in Mexico, following reports of a shooting in Playa del Carmen," a Foreign Office spokesman said.  Neither US nor Canadian officials could immediately confirm if any of their citizens were among the victims in the shooting.

Silver Dumps, Peso Jumps As Mexican Central Bank Intervenes (Again)

If at first you don"t succeed, intervene again! For the second time today (at midnight ET), Banxico officials confirmed the central bank entered the market to sell US dollars in an attempt to strengthen the peso. Now we await the next Trump tweet to take the peso back down...

As Bloomberg reports, according to a Banxico official who asked not to be identified, the central bank is looking to strengthen Mexican peso.

For now the move is far less impressive - which is odd given the lack of liquidity and an irrational peso buyer...

We have one other question... Is Banxico dumping its silver to receive dollars to sell to buy pesos?

Around $200mm notional of Silver was dumped in those few minutes.

As we noted at their earlier attempt, we can"t really blame Banxico for intervening: with the local population, of which over half lives in poverty, angry and protesting the recent "Gasolinazo", or 20% increase in the price of gas, the crashing currency is sure to send many other prices, especially of imported goods, through the roof while sending much of the population over the edge. Which is why Goldman"s Alberto Ramos agrees that the central bank had to do something:

"In our assessment, some FX market intervention at this juncture is justified since market liquidity conditions became somewhat tighter, the MXN entered overshooting territory (excessively undervalued) and from current levels, significant additional exchange rate weakness, while making exporters even more competitive, can threaten two valuable public goods: price and local financial market stability. A very weak currency can have significant medium-term costs for the broader economy as it is likely to add pressure on inflation and wages (which would over time reduce the cost-competitiveness of the Mexican exporters) and prompt to a tighter monetary stance. Overall, higher inflation/wages and higher rates would be a clear negative shock to the non-tradable sectors of the Mexican economy, for they would not enjoy the exporters (tradable sectors) benefit of a weak currency.

So much for a "brave new world" in which global trade imbalances can be resolved without central bank intervention. If anything, the events from the first 4 days of 2017, in which we first saw a dramatic indirect intervention by the PBOC which sent the overnight CNH deposit rate to the highest ever in a desperate attempt to crush shorts, and then the Mexican direct intervention, have confirmed that 2017 will be very much like 2016 when it comes to central bank intervention, if not more so.

However, as Goldman admits, Banxico made one mistake which explains why virtually the entire post-intervention move has been faded:

In our assessment, if the MXN remains under pressure the authorities should entertain the possibility of using different intervention instruments, such as USD Dollar swaps, for they are not a direct claim on reserves and offer valuable FX hedging protection to the market in a period of significant uncertainty but no large spot market outflows.

There is a problem with using reserves to fight a currency war, one which China is very familiar with:

On the other hand, using USD swaps is precisely what the PBOC shifted to late in 2015 (perhaps as advised by Goldman then too) when it too realized that using reserves was a very rudimentary (if effective) attempt at intervention. The only problem is that it eventually catched up to the central bank, and just like in the case of China which used swaps for about 3-4 months even as the capital outflows persisted, it ultimately had to return to draining reserves for a full blown intervention.

Ironically, even that has failed, and as we have documented extensively in the past 2 months, the PBOC is now scrambling with intraday gimmicks like crushing shorts using deposit rates. That too only works for a while.

Meanwhile, Mexico is caught between a rock and a hard place, because while the currency is depreciating, and the "MXN is now visibly undervalued versus theoretical fundamental fair-value under any of the three model metrics we use" Goldman warns that any further depreciation can undermine the inflation backdrop and/or risk unleashing destabilizing financial forces.

Which is all Trump needs: a several economic crisis just south of the border.

Actually, there is another thing Trump "needs": Mexico launching an all out currency war against the US, whether through reserve draining (which would hit US assets) or USD swaps. Should the central bank intervene on a few more occasions to offset today"s failed revaluation attempt, which the market is now openly mocking, we eagerly await the barrage of tweets that will be launched by the Trump account as the president-elect, having slammed the occasional stock, shifts to FX.

Trump aside, what happens next? Once today"s intervention fails, the Peso is looking at a lot more downside, and as Rabobank"s Christina Lawrence writes,the MXN could fall as far as 23, as there "is little room for MXN relief as Banxico is highly unlikely to provide any lasting support for peso as market is too liquid and Mexico’s reserves will start to evaporate very quickly." Putting trading volumes in context, MXN is the 10th most liquid currency globally with an average daily volume in the spot market of $43b and $112b when including options.

Rabo says that it “expects volatility to rise further and for the skew to continue moving to the right as market participants move to protect themselves from further USD/MXN upside”

Finally, the real message here is that the Banxico’s intervention "may also be seen as sign of greater underlying problems." Bingo.

Why The Mexican Currency Intervention Failed: Goldman Explains

Following the MXN rough start of the year, which saw the Mexican currency tumble to its lowest level ever, the central bank stepped into the FX market this morning by selling about $1 billion USD spot, hoping to break the destabilizing MXN relentless depreciation trend. According to the central bank market operations manager, the authorities are not just seeking to stabilize but to “strengthen the Peso”.

Putting the recent move in the peso in context, the MXN"s Real Effective Exchange Rate (REER) has depreciated 41% since mid-2013 and is now at its weakest level in more than 20 years. In fact, the only time the REER was weaker than it is currently was in the aftermath of the ravaging 1994-1995 "Tequila" economic and banking crisis. That is, the current MXN weakness is unprecedented outside the grip of a major crisis and is also visibly weaker than the level reached during the 2008-09 GFC.

There is just one problem: so far they have failed dramatically, with the peso sliding ever since the intervention, and moments ago almost filling the entire gap.

To be sure, one can"t really blame Banxico for intervening: with the local population, of which over half lives in poverty, angry and protesting the recent "Gasolinazo", or 20% increase in the price of gas, the crashing currency is sure to send many other prices, especially of imported goods, through the roof while sending much of the population over the edge. Which is why Goldman"s Alberto Ramos agrees that the central bank had to do something:

"In our assessment, some FX market intervention at this juncture is justified since market liquidity conditions became somewhat tighter, the MXN entered overshooting territory (excessively undervalued) and from current levels, significant additional exchange rate weakness, while making exporters even more competitive, can threaten two valuable public goods: price and local financial market stability. A very weak currency can have significant medium-term costs for the broader economy as it is likely to add pressure on inflation and wages (which would over time reduce the cost-competitiveness of the Mexican exporters) and prompt to a tighter monetary stance. Overall, higher inflation/wages and higher rates would be a clear negative shock to the non-tradable sectors of the Mexican economy, for they would not enjoy the exporters (tradable sectors) benefit of a weak currency.

So much for a "brave new world" in which global trade imbalances can be resolved without central bank intervention. If anything, the events from the first 4 days of 2017, in which we first saw a dramatic indirect intervention by the PBOC which sent the overnight CNH deposit rate to the highest ever in a desperate attempt to crush shorts, and then the Mexican direct intervention, have confirmed that 2017 will be very much like 2016 when it comes to central bank intervention, if not more so.

However, as Goldman admits, Banxico made one mistake which explains why virtually the entire post-intervention move has been faded:

In our assessment, if the MXN remains under pressure the authorities should entertain the possibility of using different intervention instruments, such as USD Dollar swaps, for they are not a direct claim on reserves and offer valuable FX hedging protection to the market in a period of significant uncertainty but no large spot market outflows.

There is a problem with using reserves to fight a currency war, one which China is very familiar with:

On the other hand, using USD swaps is precisely what the PBOC shifted to late in 2015 (perhaps as advised by Goldman then too) when it too realized that using reserves was a very rudimentary (if effective) attempt at intervention. The only problem is that it eventually catched up to the central bank, and just like in the case of China which used swaps for about 3-4 months even as the capital outflows persisted, it ultimately had to return to draining reserves for a full blown intervention.

Ironically, even that has failed, and as we have documented extensively in the past 2 months, the PBOC is now scrambling with intraday gimmicks like crushing shorts using deposit rates. That too only works for a while.

Meanwhile, Mexico is caught between a rock and a hard place, because while the currency is depreciating, and the "MXN is now visibly undervalued versus theoretical fundamental fair-value under any of the three model metrics we use" Goldman warns that any further depreciation can undermine the inflation backdrop and/or risk unleashing destabilizing financial forces.

Which is all Trump needs: a several economic crisis just south of the border.

Actually, there is another thing Trump "needs": Mexico launching an all out currency war against the US, whether through reserve draining (which would hit US assets) or USD swaps. Should the central bank intervene on a few more occasions to offset today"s failed revaluation attempt, which the market is now openly mocking, we eagerly await the barrage of tweets that will be launched by the Trump account as the president-elect, having slammed the occasional stock, shifts to FX.

Trump aside, what happens next? Once today"s intervention fails, the Peso is looking at a lot more downside, and as Rabobank"s Christina Lawrence writes,the MXN could fall as far as 23, as there "is little room for MXN relief as Banxico is highly unlikely to provide any lasting support for peso as market is too liquid and Mexico’s reserves will start to evaporate very quickly." Putting trading volumes in context, MXN is the 10th most liquid currency globally with an average daily volume in the spot market of $43b and $112b when including options.

Rabo says that it “expects volatility to rise further and for the skew to continue moving to the right as market participants move to protect themselves from further USD/MXN upside”

Finally, the real message here is that the Banxico’s intervention "may also be seen as sign of greater underlying problems." Bingo.