Friday, April 28, 2017

NAFTA: Its been 23 years; time for a divorce?

NOTE:  In the hours following this announcement, Trump announced that he's changed his mind -- for now.  If I were Canada and Mexico, I would start investigating the availability of Wheat & other grains from Brazil..

Well it looks like Trump is getting ready to kill NAFTA. Since he's probably not aware of the full ramifications of the agreement it will come and bite him in the ass, but for now he sounds tough. He's even claimed that its at the urging of Mexico and Canada that he's about to "try" to kill NAFTA.

Should NAFTA survive?  The short answer is yes it has been good for all three trading partners, in fact it has been very very good for the US.  However, and as usual, its the squeaky wheel that gets the notice.  For most US companies (and consumers) trade with Mexico or Canada has been good, but not for dairy farmers who feel that Canada is an unexplored opportunity -- they are right, but the introduction of of more American milk will kill Canada's dairy industry -- the costs of production are much lower in the the US.

So despite the fact that Canada runs a US$ 400 million dairy deficit with the US, America's President believes that American farmers have been treated unfairly.  Killing NAFTA will have the strange impact for American dairy farmers of completely cutting off US milk from Canadian markets.  Two other examples of unforced errors:  (a) Mexican grain buyers are buying from further afield for new supplies; the US had a $ 1.6 billion grain surplus with Mexico, and (b) Fruit & vegetable farmers are seeing their "cheap labor" disappear, courtesy of ICE (America's immigration police).

The list of "winners" in America is long, but they've got what they want so they don't need to voice their opinion.  American pork farmers have very healthy sales to Mexico (maybe now Mexicans will consider Canadian pork instead?).

Now, can Trump kill NAFTA -- probably not directly, but he certainly can disrupt trade with his two principal trade partners?  There is a school of though that believes that because NAFTA was approved via a new law adopted by Congress, it is the only body that can terminate the agreement. However, there is a very simple process for Trump, like Theresa May in England, he can invoke the termination clause, and within 6 months America will be able to withdraw from the agreement.

Again Congress can stand in the way of Trump, Iowa farmers are already voicing their displeasure at the disappearance of Mexican grain buyers, but will this be enough?  It is hard to say.  There is a huge wave of protectionism gripping America -- the media (especially FOX) has been playing boogyman to all the worse fears of American blue collar workers.   That its those pesky foreigners that are taking all their jobs.  Killing NAFTA will have a similar impact than Britain's exit from Europe.  The economics costs of such decision are hard to quantify, but a certainly substantial.

This morning, Trump indicated that being President was very hard, and much harder than he anticipated.  Imagine how he will react when a real crisis occurs -- and not one created by his twitter account!


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