November 21, 2017 / 3:06 PM / a year ago

Fitch: Domestic Politics the Biggest Threat to NAFTA

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Global Perspectives: Domestic Politics the Biggest Threat to NAFTA here LONDON, November 21 (Fitch) The governments of Canada, Mexico and the United States arrived earlier this year at the North American Free Trade Agreement (NAFTA) renegotiations with three different sets of priorities. Positions on some issues are broadly aligned, while others appear further apart, diminishing the prospect of a deal being reached within the allotted - and recently extended - timeframe, says Fitch Ratings in its latest Global Perspectives commentary. "Ultimately, if negotiations fail and NAFTA ends, it is likely to be politics that is responsible, as each government has infused the talks with homespun political considerations that are largely defensive and intended for domestic audiences," said James McCormack, Global Head of Sovereign Ratings at Fitch. None appears willing to tolerate an outcome in which its electorate could perceive political leaders as either surrendering new-found principles or allowing the country to be taken advantage of in reaching an agreement. Negotiating manoeuvrability and the associated room for compromise in this context are limited. The US administration's stated desire to reduce the US merchandise trade deficit with Mexico and return manufacturing jobs to areas from where they have relocated lies at the heart of the American negotiating strategy. Leaving aside the questions of whether these objectives make economic sense and, if so, whether a trade agreement might realistically achieve them, the US position assumes the economic outcomes of a deal are easily measurable, and characterises the negotiating process as well as any resulting agreement as zero-sum propositions. It would be impossible using the US benchmarks alone (a reduced trade deficit with Mexico and more US manufacturing jobs) for all sides to claim victory in negotiating a better deal for their constituents, presenting Canada and Mexico with a difficult, if not intractable, political problem. One consequent tactic Canada and Mexico might consider is to go "all in" at some point in the negotiations, threatening to walk away unless a more balanced deal can be reached that would allow for a "win-win" interpretation of the outcome. But it is highly improbable that Canada or Mexico, together or separately, would use the threat of walking away as a means of trying to shift the US toward a more accommodating position. As both countries understand too well, it is the US that is most likely to abandon NAFTA, and do so claiming victory. An obvious precedent is the US withdrawal from the Trans-Pacific Partnership at the outset of the Trump administration, something the president promised as a candidate. None of the three countries' domestic political considerations that are now interwoven with NAFTA renegotiations necessarily preclude a mutually beneficial agreement being reached. Combined, however, they will make it much more difficult. Trade negotiators are always constrained, bound as they are by national economic interests as well as narrower interests of groups that have already successfully sought trade protection. While it is debatable whether the additional political constraints on NAFTA negotiators serve national or narrower interests, the risk is real that they could scupper the negotiations, as they are likely to be rigidly adhered to, and areas of compromise may be difficult to identify, let alone agree on. The full Global Perspectives commentary, Domestic Politics the Biggest Threat to NAFTA, is available at the above link or at Contact: James McCormack Global Head of Sovereign Ratings Managing Director +44 20 3530 1286 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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