NAFTA: US may be planning to pull out of NAFTA? - Rabobank

Analysts at Rabobank explained that the negotiations of NAFTA, the free trade agreement between Canada, the US and Mexico that came into effect in 1994, have been far from smooth. "There are more and more indications that the US may be planning to pull out of NAFTA."

Key Quotes:

"In a hard NAFTA breakup scenario, Canada and Mexico would take the heaviest losses in terms of gross domestic product (GDP) up to and including 2025. The two countries would lose 2% and 2.6% respectively when compared to a situation where NAFTA remains in place (our benchmark scenario). For Canada, economic growth in 2019 would fall to 0.2% compared to an expected growth rate of 2.0% in our benchmark scenario."

"The US would face total GDP losses of 1%. US economic growth in 2019 would drop to 1.6% compared to an expected growth rate of 2.2% in our benchmark scenario. This implies that any positive impact from the recent tax cuts could be wiped out completely by a trade conflict with the two neighboring countries that have become integral parts of US supply chains."

"In absolute terms, the economic fallout in a hard NAFTA breakup scenario is roughly USD 30bn to USD 33bn in Canada and Mexico respectively. In the much larger US economy, the absolute losses would add up till USD 195bn by 2025. These absolute losses imply that the average Canadian worker would miss out on USD 1,800 of additional wealth up to and including 2025 and the average US worker would miss out on USD 1,250 USD. The price tag for each Mexican worker could be as high as USD 575, which is less than in its Northern neighbors, but in relative terms it is much higher given the much lower level of wealth per capita in Mexico."

"In our soft NAFTA breakup scenario, the economic fallout in the US and Mexico are roughly as high as in a hard breakup scenario. In the US, the less severe negative trade effects in the soft scenario are counterbalanced by higher inflation. In Mexico, the negative trade effects in both a hard and soft NAFTA breakup scenario are roughly equal as the impact on export prices of higher trade barriers in the hard scenario is counterbalanced by a much steeper depreciation of the Mexican peso against the USD (17.5% in hard against 10% in soft) which consequently lowers Mexican export prices."

"Canadian GDP losses up till 2025 in a soft NAFTA breakup scenario are lower than in our hard breakup scenario: 1.3%."

"It is important to note that scenario studies involve much in the way of uncertainty and there are many other potential outcomes and effects that could occur but are not captured by our analysis. Indeed, the actual impact of a NAFTA breakup could vary significantly as adverse effects on labor productivity have not been taken into account, nor have disruptions to internationally integrated supply chains, and potential geopolitical ramifications that could emerge have not been considered."