October 1, 2018 / 2:35 PM / 16 days ago

Analyst View - In Trump win, Canada, U.S. deal saves NAFTA as trilateral pact

(Reuters) - The United States and Canada forged a last-gasp deal on Sunday to salvage NAFTA as a trilateral pact with Mexico, rescuing a three-country, $1.2 trillion open-trade zone that had been about to collapse after nearly a quarter century.

FILE PHOTO: Robot welders on the floor of Alfield Industries, a subsidiary of Martinrea, one of three global auto parts makers in Canada, in Vaughan, Ontario, Canada April 28, 2017. REUTERS/Fred Thornhill/File Photo

COMMENTS:

JOHN BODE, PRESIDENT AND CEO OF THE U.S. CORN REFINERS ASSOCIATION:

“This is a milestone. Mexican and Canadian markets are very important to American farmers, ranchers, and agribusiness. We commend President Trump for his efforts to conclude this trilateral agreement. We look forward to reviewing the agreement text released today.”

RANDY GORDON, CEO NATIONAL GRAIN AND FEED ASSOCIATION (NGFA) AND GARY MARTIN, CEO NORTH AMERICAN EXPORT GRAIN ASSOCIATION (NAEGA)

“Given the integrated nature of the North American economy, including within the food and agricultural sector, it was extremely important to reach a trade agreement that included all three countries. “Our industry is encouraged about reports that the final agreement takes steps to modify some existing impediments to agricultural trade, including dairy, and will preserve some form of the trilateral Chapter 19 tariff dispute-settlement mechanism contained in the North American Free Trade Agreement.

PRESIDENT AND CEO MATTHEW SHAY, THE NATIONAL RETAIL FEDERATION:

“We are pleased a deal has been reached that preserves NAFTA’s trilateral framework, which is critical to protecting North American supply chains that support millions of American jobs. The administration, as well as officials from Canada and Mexico, should be applauded for months of hard work aimed at modernizing NAFTA for the 21st century — a goal retailers have shared from the start.”

GEOFF FREEMAN, PRESIDENT AND CEO, THE GROCERY MANUFACTURERS ASSOCIATION (GMA)

“U.S. consumers rely on the high-quality ingredients and affordable products made possible through trade with our closest neighbours. This trade has quadrupled since NAFTA went into effect more than two decades ago, totalling nearly $18 billion in 2017. Canada and Mexico buy about half of all U.S. processed product exports, and this agreement will expand that success.

MICHAEL DYKES, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE INTERNATIONAL DAIRY FOODS ASSOCIATION, A WASHINGTON GROUP THAT REPRESENTS DAIRY PROCESSORS:

“Having this agreement be trilateral is very important. We are pleased to see the negotiators preserved access with our number one customer, Mexico. For Canada, our priorities included increased market access and my understanding is we did get that.

“We are pleased with the negotiators and are pleased with the priority they placed on the dairy industry.”

EDWARD R. HAMBERGER, CHIEF, THE ASSOCIATION OF AMERICAN RAILROADS:

“The free flow of goods across North America without burdensome tariffs is a net positive for U.S. workers, bedrock industries and the economy.”

ERIC MEYER, PRESIDENT OF HIGHGROUND DAIRY, CHICAGO:

“Nothing but good news here for the US dairy industry. Class 7 milk pricing in Canada caused problems for US manufacturers in two different ways. First, it stopped the flow of ultra-filtered milk, a concentrated skim solids ingredient that was used to boost protein content in cheese and yogurt made in Canada.

“Second, the pricing system allowed for Canada to be competitive to export their excess skim milk powder, taking away market share from the US. Eliminating the Canadian Class 7 pricing system could open these markets back up to US processors. Lastly, any further opening of the Canadian market to general imports is helpful to the US dairy industry. While exact details of the agreement between Canada and the United States have yet to be released, there is nothing at the core of the agreement that looks bearish to the US dairy industry and should lead to a boost in export demand for US dairy products.”

DON ROOSE, PRESIDENT OF U.S. COMMODITIES, AN IOWA-BASED AG BROKERAGE AND ADVISORY FIRM:

“It opens up the trade for a lot of different agricultural products. I don’t know if (the USMCA) was a surprise; it was definitely a positive for all the ag markets, for the psychology of the markets. Pushing forward to the EU and Japan talks – those are probably as dominant (for the market) as NAFTA.”

SHAUN OSBORNE, CHIEF FX STRATEGIST, SCOTIABANK, TORONTO

“Looking at the price action last week the Canadian dollar outperformed, so there may have been some inkling in the markets that with this sort of self-imposed deadline that we had at the end of September that we could get something or should get something, but we have run into a lot of those soft deadlines before and nothing of consequence has happened. I don’t know that anyone was overly convinced that we would get something necessarily this weekend but I think most people viewed a trade arrangement would be bound at some point.

“The good news is that the risk of bad news has been removed. I don’t think there’s anything here that really changes the medium term outlook for the Canadian dollar or the Canadian economy, it’s just removed an uncertainty.”

DAVID KELLY, CHIEF GLOBAL STRATEGIST, JPMORGAN FUNDS, NEW YORK:

“The most significant thing about this new deal is that they changed the name. Reading it, it really is tweaks to NAFTA, but at least some of them in a positive direction from the economic perspective. It really is very small changes to the underlying framework of North American trade, but that’s a positive. There’s only downside to a trade war. To the extent we avoided a trade war in this hemisphere at least that is a positive.

“The fact that having made a very big deal about Nafta during the elections but then agreed to a deal which only changes small parts of it does say something about the potential end game for trade talks with China. There is a limit to how much China will compromise in the end, a limit to how much we will need them to compromise in the end. After all the U.S. trade deficit is primarily caused by a too-high U.S. dollar and a big deficit.”

OLIVER PURSCHE, CEO OF BRUDERMAN BROTHERS IN NEW YORK:

“Obviously this is a positive step forward, it’s one more box to tick. Overall, markets and investors are very much focussed on economic policy and the upcoming earnings season and ignoring everything coming out of Washington. But given that last week it was looking to be more of a Mexico-US deal as opposed to a trilateral deal, it’s a positive development. It shows investors that in spite of an unconventional approach, the President’s hard tactics seem to be working.”

MIKE LORIZIO, SENIOR FIXED INCOME TRADER AT MANULIFE ASSET MANAGEMENT IN NEW YORK:

“There is a pretty significant risk-on tone following the new NAFTA agreement.

“However, an eventual agreement was priced in, or at least a non-disaster scenario was priced in. The market was more focussed on the risk of a trade war with China than any other area and the market has been positioned accordingly. And even with China, the market has discounted what impact any trade negotiations will have on the fundamentals of the U.S. economy.

“This is a positive, and you’ve seen risk assets respond, and you’ve seen Treasuries respond a bit, but U.S. fundamentals are so strong right now that the effects of these negotiations had already been priced in. 

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS:

“Anything positive relating to trade has always buoyed the markets so it’s not surprising to see a bounce. Generally those things are relatively short lived but the economics in the market are very strong and really only the concerns about the trade issues have been holding the market back from moving higher.”

ALEC YOUNG, MANAGING DIRECTOR OF GLOBAL MARKETS RESEARCH, FTSE RUSSELL IN NEW YORK:

“Stocks are rallying on the back of a last-minute deal Sunday that allows Canada to join the revised NAFTA Trade deal agreed to by the US and Mexico in late August. Despite all the handwringing over trade, the bark is proving far worse than the bite for U.S. stocks.

“Although the trade outlook with China remains uncertain, overall trade uncertainty has been receding for months helping propel stocks to record highs. And even when it comes to China many investors are betting there’s room for a market friendly compromise after the U.S. midterm elections in early November when the Chinese will have an incentive to deal to avoid the 25 percent tariff rate that kicks in on $200 billion in Chinese exports on January 1, 2019. That rate is currently only 10 percent. International stocks have even more to gain from trade breakthroughs than their U.S. counterparts because they have been held back too far by trade worries due to their economies’ increased sensitivity to trade.”

MARKET REACTION:

STOCKS: Stocks were ahead, with the S&P 500 .SPX up 0.7 percent in early trading.

FOREX: The Canadian dollar CAD=D4 strengthened to a four-month high against its U.S. counterpart. The U.S. dollar index was flat.

Americas Economics and Markets Desk; +1-646 223-6300

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