Goldman Expects Trump To Withdraw From NAFTA, Congress Readies For A Fight

With NAFTA negotiations going badly, Goldman Sachs has published a report, “Thoughts on the Potential US Withdrawal from NAFTA”, that concludes that the US is likely to withdraw from the trade agreement next year “At this point, efforts at revising the agreement look likely to be unsuccessful, though a deal is still possible, in our view. If the talks do not result in a revised agreement by early 2018, we believe that the Trump Administration could announce its intent to withdraw from NAFTA.” The NAFTA agreement calls for a six-month notice period before a nation can withdraw and “we believe it would follow a similar pattern to the strategy the White House has used in recent decisions on immigration (the DACA program), Iran, and health subsidies. Each involved a disruption to the status quo pursuant to a campaign pledge, with delayed implementation and an expectation that a new arrangement might be negotiated in the interim.”

Trump has threatened to pull out of the pact several times if “America First” demands are not met. Following an unsuccessful fourth round of discussions, the parties have accepted that end 2017 timeframe for reaching agreement will no longer be achieved and talks will extend into Q1 2018.

According to Goldman, major sticking points in the talks are:

5-year sunset: The US has proposed that NAFTA would be terminated after 5 years unless all three parties agree to keep it in force. As a practical matter, this would result in a prescheduled renegotiation every ?ve years and increase uncertainty while the agreement is in effect, decreasing the bene?ts of the agreement on investment and cross-border trade ?ows.

 

Chapter 19: NAFTA allows member countries to settle anti-dumping and countervailing duty disputes through binational arbitration, which has been a priority for Canada in particular.  The US has called for Chapter 19 to be non-binding.

 

Investor-state dispute settlement (ISDS): The US has called for the ISDS program to exist on an opt-in basis. ISDS allows companies to seek recourse against policy changes in NAFTA countries that infringe on property rights, such as expropriation of assets.

 

Government procurement: The Trump Administration is seeking “dollar for dollar government procurement, which would mean that Mexican or Canadian companies could bid on US government contracts equal only to the amount of Mexican or Canadian contracts open to US companies. This would reduce the amount of US government contracts open to NAFTA partners to a fraction of the current amount.

 

Rules of origin: NAFTA currently requires auto imports to include at least 62.5%n regional content, i.e., parts from NAFTA countries. The Trump Administration has proposed raising this threshold to 85%, and requiring 50% US content.  These levels seem unattainable, in our view, since the US applies only a 2.5% tariff on cars imported from outside NAFTA, and with such high content requirements auto companies would be better off paying the tariff instead.

While Goldman acknowledges that some of the demands might be merely part of a negotiating strategy, it cautions that some of them are of a binary nature, with little room for compromise versus the current agreement.

It sees three reasons for expecting the talks to fail:

First, the recent proposals suggest that the Trump Administration is not concerned about the possibility of a failure to revise the agreement.

 

Second, an announcement to withdraw from NAFTA would be in keeping with the strategy the White House has recently followed on other issues.  The Administration’s recent decisions regarding the Iran agreement, the DACA program, and ACA subsidies have followed the same pattern: The White House has announced that it will end the status quo, against expectations, but that it will allow for an interim period where a new arrangement could be negotiated.  In these examples, the White House has left Congress with the responsibility for establishing a replacement.

 

Third, it is far from clear that there would be suf?cient support in Congress to pass a revised NAFTA agreement at this point.  We believe most trade-skeptic lawmakers might not want to be associated with even a revised version of the agreement, and most pro-trade lawmakers might prefer the status quo, although they might be more supportive of a revised agreement if the US has already announced a withdrawal from NAFTA.

On that basis, it expects the White House to give notice of US withdrawal.

Meanwhile, the risk of a US withdrawal is galvanising efforts by Congress and the business sector to thwart Trump if he does, indeed, serve notice. A legal challenge is thought to be certain from both sides of the House and the auto industry. As the WSJ notes  “Congressional trade lawyers and attorneys from private firms in Washington have begun meeting informally to come up with ways to challenge any decision by President Donald Trump to pull out of the North American Free Trade Agreement.”

While contingency planning is in its early stages, the WSJ acknowledges that it has thrown up a critical question“ How much authority does the president actually have to scuttle an existing trade agreement? ‘This is sort of uncharted territory where no one really knows,’ said Warren Maruyama, a former trade official in the Reagan and two Bush administrations…Mr. Maruyama agreed that the president probably has the power to cancel or gut Nafta, but he expects challenges—with a chance of success—if Mr. Trump attempts to kill the deal unilaterally. “There are people who are desperately scouring [key provisions of trade law] on Capitol Hill and law firms and at the U.S. Chamber of Commerce right now to try to create some kind of argument that Trump can’t do this,” said Mr. Maruyama, now partner at Hogan Lovells LLP in Washington.”

The potential avenues for challenging a withdrawal appear to be twofold, either on the basis that it is unconstitutional, or that a President can’t reverse laws which were passed by Congress with regard to its implementation. Should Trump serve notice, any parties, such as lawmakers or businesses, with standing could seek an injunction in a Federal court. If that fails, the WSJ reports that Congress could still take further measures to exercise leverage over the White House “The Congressional Research Service said in a 2016 report that a final notice of withdrawal from the president ‘appears sufficient’ to release the U.S. from its international obligations under Nafta, but that Congress might wield a variety of powers to dissuade a president from canceling the deal, including through its control over the budget. Congress in theory could also pass a law reinstating Nafta or a similar agreement, but lawmakers are divided on the issue and unlikely to advance legislation protecting a trade agreement, especially if they don’t have a veto-proof majority.

For a moment, let’s assume that the US leaves NAFTA, what would it mean in economic terms?

Goldman explains that besides short-term uncertainty if the US does withdraw from NAFTA, Goldman predicts that the economic fallout will likely be relatively modest.

“A NAFTA withdrawal announcement would create near-term uncertainty but would likely have relatively modest economic effects, as the US-Canada trade would be likely to be covered under a prior free trade agreement, and exports to Mexico constitute only 1.2% of GDP. Most estimates of the trade gains from NAFTA suggest that it raised the level of US GDP by less than 0.2%, and some of these gains might have occurred anyway as Mexico has substantially lowered tariffs for non-NAFTA countries since the deal was implemented. That said, tariffs would rise, non-tariff barriers would increase, and some industries could face more substantial disruption. The auto sector would be most affected, as tariffs on some vehicles are still quite high outside of trade agreements and supply chains have been integrated across borders.  Agricultural trade, while not as large, would face important constraints given high protective tariffs on certain products.”

NAFTA Talks Heat Up As Trump Administration Takes Aggressive Stance On Autos

Trump"s NAFTA negotiators in recent days put forth a string of bold proposals on everything from auto rules of origin, a sunset clause, government procurement, and gutting dispute panels seen by the other nations as core to the pact. The moves were long-signaled, as was Canadian and Mexican opposition to them, but with a more aggressive stance taken by U.S. negotiators in the 4th round of talks, which will continue today in Washington D.C., many are beginning to question whether a deal is ultimately feasible.  Per Bloomberg:

The fourth round of Nafta talks will continue Monday at a Washington-area hotel, before a ministerial-level meeting on Tuesday. People familiar with the proceedings describe essentially a two-track process: legitimate progress being made to modernize the pact in less contentious areas, including topics like regulations and services, with essentially no progress on the most divisive U.S. proposals.

Nafta’s fate may now hang on how flexible the U.S. is about its demands heading into the fifth round of talks, scheduled for Mexico City around the first week of November. While the parties had wanted to reach a deal by December, officials familiar with the negotiations say the talks are likely to drag on for months.

Of course, hanging over the negotiations are Trump’s regular threats to walk away.

One official familiar with the proceedings, who wasn’t authorized to speak publicly, said on Sunday that it seems more likely Trump will give the mandatory six months’ notice required to leave Nafta, though not necessarily end up backing out. Others were less sure.

“He’s unpredictable, so I don’t know,” said Stephen Moore, a senior economic adviser during Trump’s campaign and chief economist at the Heritage Foundation. “I do feel, though, that his bark has been worse than his bite on trade. That doesn’t mean that he’s retreating. But I think we’re going to see a Nafta 2.0 that will find areas that will give the U.S. even greater benefits, while protecting American workers.”

Mexico has signaled that it won’t negotiate during the six-month window if Trump announces he’ll walk away, and it’s unclear what the next steps would be were that to happen. Congress and others are vowing legal and political fights if the president tries to pull out. If Trump manages to, though, Canada could still fall back on an existing bilateral deal with the U.S.; Mexico has no such previous deal.

That said, as Richard Neal of Massachusetts, the top Democrat on the House Ways and Means committee, said over the weekend, a full withdrawal from NAFTA would require a vote from Congress...a hurdle which Trump has had some difficulty clearing in his first 10 months in Washington D.C.

The proposals have spurred public warnings from prominent U.S. lawmakers and the private sector about the perils of scuttling a deal that over more than two decades has broken down trade barriers, including tariffs, for industries like manufacturing and agriculture.

Warnings are growing from Congress. Richard Neal of Massachusetts, the top Democrat on the House Ways and Means committee, said he prefers a Nafta renewal to a pull-out, which he said Congress would probably block.

If Trump “even suggests that the United States should leave Nafta, to undo that relationship, you would have to go back to Congress. And that would be a much more difficult task for him,” Neal said in a Canadian TV interview with The West Block that aired on Sunday.

The U.S. Chamber of Commerce has issued its own warning. Last week, Chief Executive Officer Tom Donohue visited Mexico City and pledged to fight “like hell” to preserve Nafta. The largest American business lobbying group plans to send an “army” of representatives to Capitol Hill to demonstrate support for the deal, Donohue said.

Of course, as Boston Consulting Group pointed out in a recent presentation to the Motor & Equipment Manufacturers Association, any success in imposing tariffs on imported parts could mean large price increases for American consumers as roughly $2,000 worth of content on each U.S. assembled car is sourced from Mexico.

Meanwhile, Mexico is just one small component of a truly global automotive supply chain with $3,500 worth of imported parts on each car assembled in U.S. plants.

For those reasons, Mexico’s negotiators said they’re still optimistic a deal can be reached because they expect pushback from the U.S. private sector.

Here is the full presentation from Boston Consulting Group:

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?

White House Lays Out Nafta Renegotiating Strategy

The US today released a 17-page outline of a "tough negotiating strategy" to revise the 1994 North American Free Trade Agreement, meant to reduce trade imbalances with Mexico and Canada and boost exports of everything from farm goods to financial services while for the first time saying it would seek to deter currency manipulation by trading partners. The outline comes in advance of preparations to kick off heated negotiations to revamp Nafta.

The much anticipated document (press release and link to full document) released by U.S. Trade Representative Robert Lighthizer said the Trump administration aimed to reduce the U.S. trade deficit by improving access for U.S. goods exported to Canada and Mexico and contained the list of negotiating objectives for talks that are expected to begin in one month. Topping Trump’s list is a "simple" objective: “improve the U.S. trade balance and reduce the trade deficit with Nafta countries.” Lighthizer said that the negotiations would begin no earlier than Aug. 16, 2017.

Among other things the document makes the unexpected assertion that no country should manipulate currency exchange to gain an unfair competitive advantage, which according to Citi"s economists was the only notable surprise in the entire document:

That line of focus centers on FX: “Through an appropriate mechanism, ensure that the Nafta countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.”

Citi Economics highlighted this as one of the most controversial risks of inclusion in these guidelines. However, it also cited belief that if included in the principles, this issue may need to be addressed separately. Specifically for countries like CAD and MXN.

While Canada and Mexico are not formally considered currency manipulators by the US Treasury, the reference in the list of objectives will likely set a template for future trade deals such as the pending negotiation to modify a 5 year old free trade deal with South Korea, a country in far greater risk of being branded a currency manipulator as it sits on the Treasury"s monitoring list for possible signs of currency manipulation.

Specifics aside, the brief position summary offers a glimpse into what a Trump administration trade agenda could look like which until now, Reuters notes, "has been shaped by campaign rhetoric and tweets." Indeed, the demands made by the Trump administration in the NAFTA talks will have far-reaching implications for U.S. trade relations across the globe, especially with China eager to make inroads with Mexico and Canada if the United States is seen to be retreating.

Among the list of general priorities, the administration will seek to eliminate a trade dispute mechanism that has largely prohibited the United States from pursuing anti-dumping and anti-subsidy cases against Canadian and Mexican firms. It also seeks to eliminate a range of non-tariff barriers to U.S. agricultural exports to Canada and Mexico. These include subsidies and unfair pricing structures

USTR said it would seek to strengthen NAFTA"s rules of origin to ensure that the pact"s benefits do not go to outside countries and to "incentivize" the sourcing of U.S. goods. It offered no details on such incentives and did not specify how much of a product"s components must originate from within North America.

Ironically, the topic of trade is one where Trump has found support from both labor union leaders and Democratic lawmakers, both of whom weighed in on the issue early, reminding Trump they expect him to keep 2016 election campaign promises to protect American workers in NAFTA talks (it was not clear if the Democratic lawmakers, or labor unions for that matter voted for Trump). According to Reuters, they stopped short of demanding termination of the 1994 trade pact with Canada and Mexico. Slamming the trade agreement, AFL-CIO president Richard Trumka said NAFTA had been an "unequivocal failure" and should be completely renegotiated. It is safe to say that the 12.5 million mostly democratic members of the labor unions represented by Trump agreed.

"We will do everything we can to make this a good agreement and to hold the president at his word and make sure we get a renegotiation," he told a conference call with reporters. "If it comes out that it is not a good deal, no deal is better than a bad deal," Trumka said.

Seen as a poster child of globalization, NAFTA has quadrupled trade among the three countries, surpassing $1 trillion in 2015 however over the decade stretching 2010 the United States lost nearly 6 million manufacturing jobs. At the same time, the U.S. trade balance with Mexico also swung from a small surplus in 1994 to deficits that have exceeded $60 billion for most of the past decade.

In its primer and preview of "NAFTA 2.0", Citi economist Sergio Luna said that the bank expects "NAFTA to be successfully renegotiated in its current trilateral format even though ratification would take longer (by early 2019)." Citi said that it views the renegotiation process as an opportunity to modernize the agreement, which was a major innovation in global trade when it came into force back in 1994, and expects NAFTA 2.0 to include a digital chapter and other uncontroversial ‘updates’ that were previously agreed upon during the TPP negotiations. That said the bank also expects some “tougher sell” items that could complicate the renegotiations, including stricter rules of origin and changes to the dispute settlement mechanism, a proposal which has made its way into the final draft.

Finally, looking at the three possible outcomes for Nafta ratification, Citi"s three scenarios take into account the binding legal timeline the US Administration would face ahead of tight calendar and 2018 elections, and are as follows:

1. The renegotiated trade agreement is signed by early 2018 and the ratification stage is completed using a fast-track process by mid-2018 (40% probability);

2. The agreement is ratified by early 2019 following a “time out” called by all three parties after signing the agreement (50% probability);

3. The renegotiation process is derailed (10% probability). This outcome might prompt the US to withdraw from NAFTA and negotiate two bilateral agreements.

For a graphic on NAFTA"s effects, click here.

US-Mexico Reach Sugar Trade Deal...There's Just One Problem

US Commerce Secretary Wilbur Ross announced Tuesday that he had reached “an agreement in principle” with his Mexican counterpart, Economy Minister Ildefonso Guajardo, on a new trade deal governing the trade of raw and refined sugar between the US and Mexico.

There’s only one problem: The US sugar industry has said it’s unable to support the agreement in its current form, according to Reuters.

Ross said that Mexico met nearly every request by the US sugar industry to fix problems with a 2014 sugar trade agreement.

"Unfortunately, despite all of these gains, the U.S. sugar industry has said it is unable to support the agreement in its present form," Ross said without elaborating on their objections.

Ross added that the agreement will now go through a final “drafting” stage during which he hopes the US sugar industry would come on board. He added that “it should be days, not weeks” before the final agreement is reached, Reuters reported.

The American Sugar Alliance said in a statement that the exiting agreement could allow Mexican producers to exploit a “loophole” allowing them to continue to dump subsidized sugar into the U.S. market.

“This loophole takes away the existing power of the U.S. government to determine the type and polarity of any additional sugar that needs to be imported and cedes that power to the Mexican government,” the Alliance said in a statement.

“We will work with Secretary Ross in the coming days to see if that loophole can be effectively closed so that the basic provisions of the agreement are not undermined and USDA can effectively manage the sugar program”

The "deal," in its current form, leaves Mexico’s overall access to the US market essentially unchanged: The biggest difference is that refined sugar must fall to 30% of overall imports from Mexico, down from a previous limit of 53%. Thanks to protections granted to the US sugar industry by Nafta, sugar prices in the US are higher than anywhere else in the world.

The US sugar industry late last year pressured the Commerce Department to withdraw from an agreement with Mexico that set a fixed system of prices and quotas on imported Mexican sugar. Mexico struck back in March by canceling export permits for sugar being shipped to the US, putting the squeeze on US refiners who were struggling with high prices and tight supplies.

Iowa Sen. Chuck Grassley said that the deal between Mexico and the US “bodes well” for Nafta talks. We imagine that"d be true...if the two sides can reach an honest-to-god agreement, not...whatever this is.

Trump Talks "Trumponomics" With The Economist

President Trump sat down with The Economist last week to talk trade, immigration, taxes, and health care and the transcript is chock-full of "Trumpisms" that should not go unnoticed.  Here are just a few of our favorite exchanges:

On NAFTA, apparently "big" is not an appropriate adjective to describe the renegotiation that will take place..."massive" and/or "huge" are far better descriptors:

It sounds like you’re imagining a pretty big renegotiation of NAFTA. What would a fair NAFTA look like?

Big isn’t a good enough word. Massive.

Huge?

It’s got to be. It’s got to be.

What would it look like? What would a fair NAFTA look like?

No, it’s gotta be. Otherwise we"re terminating NAFTA.

Some people think this is a negotiating tactic—that you say very dramatic things but actually you would settle for some very small changes. Is that right?

 No, it’s not, really not a negotiation. It’s really not. No, will I settle for less than I go in with? Yes, I mean who wouldn’t? Nobody, you know, I always use the word flexibility, I have flexibility. [Goes off the record.] [Our] relationship with China is long. Of course by China standards, it’s very short [laughter], you know when I’m with [Xi Jinping], because he’s great, when I’m with him, he’s a great guy. He was telling me, you know they go back 8,000 years, we have 1776 is like modern history. They consider 1776 like yesterday and they, you know, go back a long time. They talk about the different wars, it was very interesting. We got along great. So I told them, I said, “We have a problem and we’re going to solve that problem.” But he wants to help us solve that problem.

On the discussion of the new tax plan we discover that Trump coined the phrase "priming the pump."

Another part of your overall plan, the tax reform plan. Is it OK if that tax plan increases the deficit? Ronald Reagan’s tax reform didn’t.

 Well, it actually did. But, but it’s called priming the pump. You know, if you don’t do that, you’re never going to bring your taxes down. Now, if we get the health-care [bill through Congress], this is why, you know a lot of people said, “Why isn’t he going with taxes first, that’s his wheelhouse?” Well, hey look, I convinced many people over the last two weeks, believe me, many Congressmen, to go with it. And they’re great people, but one of the great things about getting health care is that we will be saving, I mean anywhere from $400bn to $900bn.

But beyond that it’s OK if the tax plan increases the deficit?

 It is OK, because it won’t increase it for long. You may have two years where you’ll…you understand the expression “prime the pump”?

Yes.

 We have to prime the pump.

Priming the pump?

 Yeah, have you heard it?

Yes.

 Have you heard that expression used before? Because I haven’t heard it. I mean, I just…I came up with it a couple of days ago and I thought it was good. It’s what you have to do.

It’s…

Yeah, what you have to do is you have to put something in before you can get something out.

Meanwhile, CNN will be even more eager to track down Trump"s taxes after he seemingly admitted to taking deductions for "birds flying across America."

But the biggest winners from this tax cut, right now, look as though they will be the very wealthiest Americans.

Well, I don’t believe that. Because they’re losing all of their deductions, I can tell you.

But something like eliminating the estate tax.

I get more deductions, I mean I can tell you this, I get more deductions, they have deductions for birds flying across America, they have deductions for everything. There are more deductions…now you’re going to get an interest deduction, and a charitable deduction. But we’re not going to have all this nonsense that they have right now that complicates things and makes it…you know when we put out that one page, I said, we should really put out a, you know, a big thing, and then I looked at the one page, honestly it’s pretty well covered. Hard to believe.

On the merits of a VAT Tax:

Would you consider a VAT for the United States?

Well the concept of VAT I really like. But let me give you the bad news. I don’t think it can be sold in this country because we’re used to an income tax, we’re used to a…people are used to this tax, whether they like it or don"t like, they’re used to this tax. I fully understand because I have a lot of property in the UK. And it’s, sort of, not a bad tax. And every time I pay it, they end up sending it back to me. In fact, my accountant is always saying…

That’s a good tax.

 No, it’s really not so bad. Like, I own Turnberry in Scotland. And every time I pay they say, “Yes sir, you pay it now but you get it back next year.” I said, “What kind of tax is this, I like this tax.” But the VAT is…I like it, I like it a lot, in a lot of ways. I don’t mean because of, you know, getting it back, you don’t get all of it back, but you get a lot of it back. But I like a VAT. I don’t think it can be sold in this country, I think it’s too much of a shock to this system. I can tell you if we had a VAT it would make dealing with Mexico very much easier. Because it could neutralise. And I really mean that. Part of the problem with NAFTA, the day they signed it, it was a defective deal. Because Mexico has almost a 17% VAT tax and it’s very much of a hidden tax, people don’t see it. So, but these guys, instead of renegotiating the following week…many years ago, how old is that? 35?

On Healthcare, we"ll never know what brand/model of car was used to describe cheap inurance plans but we did learn that Trump is friends with key executives at the major insurers..."you know, the head people."

One of the things that was so different about your campaign message compared to other Republicans was, you said things like “I want everyone to be covered”.

We’re not going to let people die on the streets.

Look, Obamacare was a disaster. Under Obamacare, you get your doctor; that was a lie. You get your plan; that was a lie. With us, you get your doctor. You get your plan. With us you’ll get hundreds and hundreds of plans. You know, one of the insurance companies, one of the big ones came to see me yesterday. They’re so anxious to start going crazy and you know it’s going to be like life insurance. People that buy life insurance they’re inundated with carriers. All different plans. That’s what this is going to be like. And I said to them, “What do you think the good plans are going to look like?” He said, “Mr President, we’re going to have so many plans. We’re going to have the low version, the high version”, he used the word Cadillac. I won’t tell you what car he used for the low version because I don’t want you to write it because they happen to be friends of mine, you know, the head people. [Goes off the record.]

On Immigration:

Do you want to curb legal immigration?

Oh sure, you know, I want to stop illegal immigration.

And what about legal immigration? Do you want to cut the number of immigrants?

Oh legal, no, no, no. I want people to come into the country legally. No, legally? No. I want people to come in legally. But I want people to come in on merit. I want to go to a merit-based system. Actually two countries that have very strong systems are Australia and Canada. And I like those systems very much, they’re very strong, they’re very good, I like them very much. We’re going to a much more merit-based system. But I absolutely want talented people coming in, I want people that are going to love our country coming in, I want people that are going to contribute to our country coming in. We want a provision at the right time, we want people that are coming in and will commit to not getting…not receiving any form of subsidy to live in our country for at least a five-year period.

On releasing his tax returns, Trump says that he may release them after he"s out of office because he"s "very proud of them actually.  I did a good job."

Mr President, can I just try you on a deal-making question? If you do need Democratic support for your tax plan, your ideal tax plan, and the price of that the Democrats say is for you to release your tax returns, would you do that?

 I don’t know. That’s a very interesting question. I doubt it. I doubt it. Because they’re not going to…nobody cares about my tax return except for the reporters. Oh, at some point I’ll release them. Maybe I’ll release them after I’m finished because I’m very proud of them actually. I did a good job.

American Jobs Once Again Flowing Into Mexico After Brief, Trump-Induced Pause

After Ford scrapped plans for a new facility in Mexico and continues to flood the White House with press releases detailing normal course capital expenditures to be made on domestic plants, investments that would have been made irrespective of their outsourcing ambitions, it seems as though economics are making a comeback in  guiding the capital allocations of other companies as "outsourcing" is once again picking up steam among American companies.

Big announcement by Ford today. Major investment to be made in three Michigan plants. Car companies coming back to U.S. JOBS! JOBS! JOBS!

— Donald J. Trump (@realDonaldTrump) March 28, 2017

As Bloomberg points out today, after a brief pause, consultants who help American companies relocate to Mexico are once again finding themselves flush with business.

But now the pace is picking back up. Illinois Tool Works Inc. will close an auto-parts plant in Mazon, Illinois, this month and head to Ciudad Juarez. Triumph Group Inc. is reducing the Spokane, Washington, workforce that makes fiber-composite parts for Boeing Co. aircraft and moving production to Zacatecas and Baja California. TE Connectivity Ltd. is shuttering a pressure-sensor plant in Pennsauken, New Jersey, in favor of a facility in Hermosillo.

While Trump hasn’t stopped pounding his America First bully pulpit, and the future of Nafta remains uncertain, “there’s cautious optimism and a hopeful attitude that cooler heads will prevail in Washington,” said Ross Baldwin, chief executive officer of Tacna Services Inc., which facilitates relocations.

Baldwin has seen the evidence: After business ground to a halt back in November, he’s now juggling two Mexico-bound clients. San Diego-based Tacna helps manage 4,500 workers in Mexico, where factory wages are about a fifth of those in the U.S. That may explain why Mexican manufacturing jobs rose 3.2 percent in January from a year ago as they dropped 0.3 percent in the U.S.

In the end, of course, the massive wage divide between the U.S. and Mexico means that, even with a border tax, it"s still cheaper to manufacture certain products in Mexico.

Moreover, we suspect that the renewed wave of outsourcing has been sparked, at lease in part, by Trump"s early failures to implement healthcare reform or impose his travel ban as companies grow increasingly comfortable that an import tariff will be harder to implement than the President once thought.

Businesses haven’t dismissed a Nafta renegotiation or policies being considered in Washington that might prove costly. A plan by House Republicans to implement a 20 percent border adjustment tax has raised concerns, especially among retailers such as Wal-Mart Stores Inc. that import many of their wares. The tax would be applied to sales of imported goods to reduce the U.S. trade deficit, which reached $734 billion in 2016.

Trump repeated to a joint session of Congress last month his refrain that that he will make it “much, much harder for companies to leave our country.” But his recent stumbles -- travel bans blocked by courts and a health-care bill scuttled by his own party -- underscore the limitations on presidential power and the difficulty he may have punishing companies or overhauling Nafta.

While shocking, we suspect it"s simply never going to make sense to pay a UAW worker a fully-loaded wage $70 an hour to perform a low-skill task that someone else will do for less than $5 per hour.

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...

Mexico Prepares Plan To Ditch U.S. Grain Imports As NAFTA Showdown Looms

America"s Midwest farmers can"t seem to catch a break.  First, an epic collapse of grain prices over the last couple of years have threatened to wipe out family farmers (see "Midwest Farm Bubble Continues Collapse As Farm Incomes Expected To Crash In 2017") and now, thanks to the pending NAFTA showdown threatened by President Trump, Mexico, the single largest importer of U.S.-grown corn, has announced plans to find alternative grain sources in South America.  Per Bloomberg:

The Consejo Coordinador Empresarial, one of the nation’s top business chambers, is examining countries such as Brazil and Argentina to add new sources for soy, corn and wheat, according to Juan Pablo Castanon, the group’s president. Exports from those countries could help Mexico adjust to the difficulties that a Nafta renegotiation might present, he said.

“The renegotiation might bring increased costs to imports, and our own exports might be hurt, so we need to find new markets,” he said in a phone interview, adding that the group’s efforts are still in the initial stages. The chamber, established in 1976, represents the country’s main agricultural, industrial and financial industry organizations, among others.

"We’d like to keep the trade deal as it is, but right now we have to look for alternative producers and Brazil and Argentina could work,”
Castanon said.

Of course, any move by Mexican businesses to import raw materials from other countries could hit U.S. farmers hard. Mexico is the largest buyer of U.S.-produced corn, spending $2.5 billion in the 2015-2016 season, ahead of Japan’s $1.8 billion, according to the U.S. Grains Council. Moreover, Mexico has spent $800 million on U.S. corn so far in the current season. 

Of course, grain imports aren"t the only raw materials for which Mexico is actively looking for alternative sources as Sigma Alimentos SA, Mexico"s meat-packing conglomerate, is also looking to Brazil and Chile as alternative supply sources.

The push is not limited to grains, Castanon said. Other imports such as meat are also being considered. “An economy as important as Mexico’s needs to have secure supply sources on many fronts,” he said.

Sigma Alimentos SA, the meat-packaging unit of Mexican conglomerate Alfa SAB, is looking into countries such as Brazil and Chile as new sources of raw materials, Chief Financial Officer Eugenio Caballero said on a call with investors last week.

Switching suppliers isn’t as easy as flipping a switch. Mexico depends heavily on rail for imports from the U.S. and Canada, which wouldn’t work for goods from South America. But Mexico’s ports could handle imports from the south, and the benefits would outweigh the costs, Castanon said.

“We need to open new doors,” he said. “As the trade talks progress, we’ll see how we need to make use of them.”

So where does that leave the American farmer? Well, not in a great spot given the already dire position they"re in.  For those who missed it, below are some stats from the USDA detailing the financial condition of the American farmer.

* * *

Real farm incomes in 2017 are expected to sink below 2010 levels which represents a 36% decline from the recent peak and a 14% decline since 2015.

Meanwhile farm debt continues to rise at an astonishing rate...

While farmer leverage has spiked to the highest level since at least 1960.

And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 35% compared to 2015.

And finally, farmer returns have crashed to the lowest levels ever.  We"re not sure about you but a 2.1% ROIC seems a "little low" even in our current rigged interest rate environment.  So, there"s only a couple of ways to fix that problem...either commodity prices have to recover quickly or farmland prices need to come down substantially.  Which do you think will happen first?

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:

Trump to Renegotiate NAFTA with Mexico and Canada

The days of the American homeowner competing against the Mexican guy living in a cardboard shack made from garbage is coming to an end -- God willing. While no one deserves to live in cardboard shacks made from garbage, it is not the burden of the American people to uplift the lifestyles of the Mexican people. If Mexico is unable to do that, they should permit our armies to take control of their cities and properly build their economies the way Alexander Hamilton intended.
 
source: Reuters/Bloomberg

U.S. President Donald Trump said on Sunday he plans talks soon with the leaders of Canada and Mexico to begin renegotiating the North American Free Trade Agreement.
 
"We will be starting negotiations having to do with NAFTA," Trump said at a swearing-in ceremony for his top White House advisers. "We are going to start renegotiating on NAFTA, on immigration and on security at the border."
 
Trump pledged during his presidential campaign that if elected he would renegotiate the NAFTA trade pact to provide more favorable terms to the United States.
 
NAFTA, which took effect in 1994, and other trade deals became lightning rods for voter anger in the U.S. industrial heartland states that swept Trump to power this month.
 
Trump has said little about what improvements he wants, apart from halting the migration of U.S. factories and jobs to Mexico.
Since winning the Nov. 8 election, Trump has singled out and threatened to impose tariffs on U.S. companies that move any production to Mexico.
 
He has also intends to build a wall along the U.S. southern border to deter illegal immigration and insisted that Mexico will pay for it.
 
“We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength,” Trump said in Friday’s inaugural address.

 
This, of course, is bound to have massive ramifications on U.S. equity markets -- which have done nothing but ignore Trump and the seriousness of his massive policy changes. For those of you who are too young to remember, there was once a man named Ross Perot (Presidential run 1992) who warned us about NAFTA and how it wreak havoc across the American industrial landscape.
 

 
Here is an article published by the NY Times in 2003, after 10 years of NAFTA.
 

The pain, he said, is concentrated in places like the Midwest, where manufacturing jobs have been lost to Mexico and Canada, and now to China. ""Nafta-related job loss and lower income may be small, but the echo is very large because of all the other jobs lost to globalization,"" he said. ""Nafta is the symbol for all of that pain.""
 
""It has definitely created export-related job growth,"" said Bill Richardson, the governor of New Mexico. As the Democratic whip, he helped pushed through passage of Nafta in the House.
 
""On the whole Nafta"s been a plus, but still, with a lot of alarmingly bad follow-up on commitments made on the border,"" he said. Promises to protect workers" rights and the environment have ""failed alarmingly."" So have pledges to close the economic gap between the United States and Mexico.
 
""The whole idea that Nafta would create jobs on the Mexican side and thus deter immigration has just been dead wrong,"" he said. ""That was oversold.""
 
""We"re the losers,"" said Bonnie Long, one of at least half a million American manufacturing workers who lost their jobs due to Nafta, despite the surge in trade. ""We lost our health care, our living wages. The winners are the corporate executives who don"t even live here and can locate their factories wherever they find the cheapest labor.""
 
Chester F. Dobis, speaker pro tem of the Indiana House of Representatives, held four meetings this year around the state to gauge feelings toward free trade. Mr. Dobis, a Democrat from Merrillville, said he had thought the only problems would be in his own district, a steel-producing region.
 
""Boy, was I wrong,"" he said. ""These trade pacts have had a devastating effect on every part of the state. The companies deserted Indiana for Mexico a couple of years ago and now they"re heading for China.""
 
The warning signs were there and evident. Our politicians knew, but did not care enough to do anything about it.

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