How NAFTA renegotiation will play out and impact the USD

I previously thought that the U.S.’ renegotiation of NAFTA with Mexico & Canada would result in a trade war, which would push the U.S. Dollar up.
That case now seems unlikely.

  1. NAFTA will not be successfully renegotiated.
  2. Trump can yell all he wants. But he cannot start a trade war because he doesn’t have Congress’ approval.

NAFTA renegotiation timetable.

There are 7 rounds of negotiations. All the easy stuff was said in the first 4 rounds. The 5th round was concluded on November 21, 2017 , which resulted in an impasse between the U.S. and Mexico/Canada. The U.S. has 5 demands that neither Canada nor Mexico will agree to.
The details of these demands aren’t important. Basically, these 5 demands will shrink the U.S. trade deficit and hurt Canadian/Mexican exports. America’s gain is Canada’s/Mexico’s loss.
The next round of talks will take place from January 23-28, 2018. The final round is expected to take place in late-March 2018.
All 3 parties have to agree to the new NAFTA deal. If Mexico and Canada walk, then NAFTA stays as is.
I don’t think Mexico and Canada will agree to any meaningful change to NAFTA. America’s gain (more exports) is Mexico’s/Canada’s loss (less exports).
But let’s assume that the U.S., Mexico, and Canada all agree to a deal in late-March 2018. Here’s what happens next (the key dates).

  1. 6 months before signing the deal, Trump must submit a report to Congressional committees on potential changes to U.S. trade law. This means that Trump can sign the deal EARLIEST in late-September 2018 (assuming a deal is worked out in late-March).
  2. After Trump signs the deal, the administration has to go through a ton of formalities and procedures before Congress can look at the new NAFTA deal. In short, Congress won’t be able to look at the new NAFTA deal until the midterm elections.
  3. This presents a huge challenge for Trump. The Republicans stand to lose many seats in the House and some in the Senate. Democrats will likely oppose Trump. In addition, not all Republicans in Congress will support the NAFTA deal because e.g. U.S. automakers will be hurt by this deal.
  4. Congress has approximately 2 months to vote “yes” on the new NAFTA deal. This drags the deal into early-2019.

Let’s assume the longshot: If Congress approves the new NAFTA deal, both the Canadian and Mexican governments have to ratify NAFTA. If not, then there is no deal. It’s unlikely for Canada and Mexico to ratify the agreement. As I said, the U.S.’ gain is Mexico’s/Canada’s loss.

Can Trump unilaterally (without Congress) withdraw the U.S. from NAFTA?

Trump will try this in late-March/April if the 3 countries don’t agree to a deal. But is it legal? Here’s a very good article from The Conversation.

The Constitution is oddly silent on the question of how the United States ends its international commitments. Most foreign relations lawyers believe that the president has the authority to withdraw from treaties without congressional consent, and presidents of both parties have acted on that basis.
But trade agreements are different from, say, defense agreements, where the courts have declined to restrain the president’s unilateral termination power. The Constitution plainly assigns power over the policy areas covered by trade agreements – foreign trade and tariffs (taxes levied on imported goods) – to Congress, not the president……
Even if the United States leaves NAFTA, the president will still be bound to implement the agreement’s rules on the terms dictated by Congress until Congress says otherwise.

In other words, Trump’s threat to leave NAFTA is a hollow one. Congress is pro-free trade. Even if Trump “withraws” the U.S. from NAFTA (which will result in a Supreme Court showdown), the U.S. still has to abide by NAFTA’s rules.

How it will impact the USD

A Trump trade war would be a medium term bullish factor for the U.S. Dollar. This bullish factor now seems unlikely.
Please comment below if there’s a mistake in my understanding of NAFTA renegotiation.

2 comments add yours

  1. Sounds about right. I think NAFTA is largely misunderstood. There is the myth of a ‘giant sucking sound’ of jobs moving south. But the vast majority of NAFTA trade is between US and Canada. If anything, the sucking sound comes from the north. I can’t imagine congress giving the finger to one of our closest and dearest allies.

    • NAFTA touches too many interests in the U.S.. The Democrats won’t support this. And too many Republicans will oppose it as well. Trump stands alone on this issue.

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