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Peso Tumbles After Mexico Hints May Balk On NAFTA, “Preparing Alternatives”

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by August 31, 2017 General

Mexico’s Economy Minister Ildefonso Guajardo sent the Mexican peso reeling Thursday afternoon after he hinted Mexico may balk on trade talks with the US, telling lawmakers from Mexico’s ruling PRI that Mexico’s trade representatives would not negotiate with the US “under threat,” highlighting the intensifying tensions between the US, Mexico and Canada a day before the second round of Nafta negotiations is set to begin.

A day after he hinted that Mexico was working on a “Plan B” should the talks fail and Nafta be allowed to dissolve, Guajardo unveiled that Mexico is in advanced negotiations with Europe, and that talks with Latin American neighbors Brazil and Argentina are moving forward. He also said that the Pacific Alliance, a Latin American trade bloc, is in discussions to admit New Zealand and Singapore.

The strongly worded speech came after Trump repeatedly threatened to “terminate” the US’s Nafta membership – something that’s allowed under the treaty, given 180 days’ notice, with the most recent threat coming during yesterday’s speech in Missouri. Details from the meeting were released on one PRI’s twitter accounts.

This is how  Bloomberg summarized the comments:

  • MEXICO NEEDS TO PREPARE ITS ALTERNATIVE: GUAJARDO
  • EUROPE, BRAZIL, ARGENTINA TALKS ADVANCED: GUAJARDO
  • MEXICO LOOKS TO INCORPORATE AUSTRALIA IN NEW TRADE DEALS: MIN

Guajardo’s comments sent the dollar higher against its Mexican rival…

Guajardo’s comments echoed similar remarks made by Meixco’s Foreign Minister Luis Videgaray, who threatened to “walk away” from the negotiating table if Trump decides to withdraw the US from the trade bloc.

Here’s Reuters:

“Asked in Washington if Mexico would continue negotiating if Trump pulled the trigger on the six-month process of withdrawing from the trade deal, Videgaray responded with an emphatic ‘No.’”

According to Reuters, the first five-day round of talks between the three countries concluded in Washington on Aug. 20, with all sides committing to follow an accelerated process in revamping the agreement. Unsurprisingly, the talks appear to have already hit a snag. As we reported shortly after the conclusion of the first round, Mexico, the US and Canada already disagree over the US’s demand that the revamped agreement require that a “substantial” portion of autos and auto parts produced under the pact be manufactured in the US.

A clause in the NAFTA agreement allows any of the three countries to withdraw from the deal after giving 180 days notice, and Trump has proven more than willing to use this as a cudgel.

Of course, this kind of tough rhetoric fits in with the US negotiating strategy outlined in a 17-page document that was released back in July. In it, Lighthizer lays out a simple objective: “improve the U.S. trade balance and reduce the trade deficit with Nafta countries.”

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 a team of economists from Citi, was its only notable surprise:

“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.”

Seeing as unilaterally withdrawing from the agreement risks igniting a global trade war – something the Trump administration, for all its bluster on trade, has appeared hesitant to do – Trump’s threats are probably just that. However, with the administration increasingly desperate for a ‘W’, walking away isn’t out of the question.

Given Trump’s history of maintaining a hard line during negotiations, we imagine he will instruct his people not to relent until they’ve wrung a few face-saving concessions from the US’s “partners.”

For his part, Canadian Prime Minister Justin Trudeau has said only that his government will work “seriously” to improve Nafta.

One former Mexican diplomat offered some perspective for US investors that we thought was interesting. Jorge Guajardo, a former Mexican ambassador to China, said that people in the US don’t understand how politically unpopular the appearance of collaboration with the Trump government might be for Mexico’s ruling party – this could suggest that the talks might be futile, because Mexico’s politicians, nor Trump, can afford to lose face with the public.

Whatever the outcome, it appears currency traders aren’t willing to give the Trump administration the benefit of the doubt, just like the T-bills market appears to be taking the threat of a debt-ceiling breach seriously.
Yet, oddly, none of this has meaningfully translated to stocks.

Whatever the outcome, it appears currency traders aren’t willing to give the Trump administration the benefit of the doubt. A similar pattern of behavior has been playing out in the T-bills market, which appears to be taking the threat of a debt-ceiling breach seriously.  Of course, none of this has had any impact on stocks…

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