Clock's ticking on NAFTA revamp

E*TRADE Securities2


Canada, Mexico, and the U.S. saddled up and went to the negotiating table in Washington last week, looking to remake the now 23-year-old North American Free Trade Agreement (NAFTA). A smooth go may be difficult, especially with the U.S. talking tough right out of the gate and President Trump saying he would withdraw from the agreement should U.S. demands not be met. But now that formal talks have opened, it appears there’s at least one thing all sides agree on—they’re on the clock.

A trilateral statement at the end of the first round of negotiations said talks will continue at a “rapid pace”.1 Round two of seven is in sight already, and set to be held in Mexico City from September 1–5. Mexico’s upcoming presidential election next July and congressional midterm elections in the U.S. next November are likely two reasons for the push to have an agreement by early 2018.

The outcome of this “comprehensive negotiation process”1 will likely have investment implications for many sectors, particularly those prominently embedded in NAFTA’s economics.

Companies that could be affected by a new NAFTA

Expected U.S. objectives

It appears the U.S. is not interested in mere tweaks. Among the Trump administration's main goals is to give the so-called “rules of origin” a makeover. The rules state that a certain percentage of goods produced must occur within NAFTA’s borders. Broadly, the U.S. would like those rules tightened, along with a provision that protects U.S. production—the latter at which Canada and Mexico have already balked.

In addition, the U.S. has suggested doing away with a panel that settles trade disputes and instituting “Buy America” provisions for businesses that bid on U.S. government procurement contracts.

Ironically, some observers see potential for provisions that could resemble the Trans-Pacific Partnership (TPP)—the trade proposal that the new administration abandoned.2 Notable TPP-style provisions that could be included relate to digital trade and intellectual property protections.

Keeping tabs

Interested investors may want to monitor how U.S. multinationals in particular respond to a new NAFTA. Notably, cheaper labor and production costs have spurred a significant increase in U.S foreign direct investment to Mexico, making the stakes greater for certain industries than others. A modernized NAFTA may also create new opportunities given shifts in the commercial landscape since the deal’s inception. Sectors to watch include:

  • Automakers—The rules of origin hit home for all aspects of the auto business. Currently, 62.5% of the parts that comprise a car must be made within NAFTA’s borders to avoid tariffs. The U.S. wants a NAFTA that allows for more U.S.-produced auto parts that qualify for duty-free trade. The American Automotive Policy Council, a trade group representing Ford (NYSE: F), General Motors (NYSE: GM), and Fiat Chrysler Automobiles (NYSE: FCAU), disagrees with the call for higher U.S. content, saying it could hinder auto and auto-parts makers’ ability to benefit from NAFTA.3
  • Food producers—NAFTA has been a positive catalyst for U.S. food and agriculture companies, giving them access to a Mexican market that’s ripe for investment. Any change to the deal’s terms could have a significant impact on those exporting food products, including meat and produce. The likes of food processor Tyson Foods (NYSE: TSN) may be affected depending on the outcome of the negotiation.
  • Energy companies—Mexico lifted a number of energy regulations in 2014, and a more open energy market in Mexico could mean continued interest from U.S. companies. Natural gas producers with significant exposure to Mexico, including Sempra Energy (NYSE: SRE), as well as those specializing in liquefied natural gas, such as Cheniere Energy (NYSE: LNG), could be affected by a reorganized NAFTA.              

Tick tock

Though there appears to be early optimism for collaboration, the timetable for a deal seems ambitious, especially given how interdependent the NAFTA economies have become. The negotiations are likely to ebb and flow before a resolution, and could touch more sectors than those seemingly in the crosshairs currently. For now, interested investors may want to follow the negotiations in the name of due diligence should a new NAFTA have investment implications for their portfolios.   


Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.  

1. Trilateral Statement on the Conclusion of NAFTA Round One, Office of the United States Trade Representative, 16 Aug. 2017.

2. WSJ Graphics. “Remaking NAFTA,” The Wall Street Journal, 16 Aug. 2017.

3. Lawder, David and Esposito, Anthony. “Auto groups side with Canada, Mexico on NAFTA origin rules,” Reuters, 17 Aug. 2017.