PMC Weekly Review - January 27, 2017
A Macro View – Repeal of NAFTA – Winner or Loser?
As one of his first acts as President, Donald Trump signed a memo directing the US Trade Representative to withdraw from the Trans-Pacific Partnership (TPP), a trade deal between the US and 11 other countries that border the Pacific Ocean. At first glance, this was not shocking, as he promised to kill the TPP while campaigning and it was not likely to be ratified by Congress anyway. However, the impact is much more symbolic of things to come, as it demonstrates that President Trump aims to break from decades of US policy favoring free trade.
The next prospective target for President Trump is the North American Free Trade Agreement (NAFTA). NAFTA, which was enacted in 1994, is a three-way trade agreement among the United States, Mexico, and Canada. Its goal was to eliminate barriers to trade and investment among the three countries. President Trump has called NAFTA “the single worst trade agreement ever approved” in the US and promised, both on the campaign trail and as President, that he intends either to renegotiate or break it. This raises a number of questions, including: Does he have the authority to kill NAFTA on his own? What is the likelihood of this happening? Who benefits and who is hurt by changes to NAFTA?
First, it does appear that a President can withdraw from NAFTA without Congress’s approval. NAFTA’s Article 2205 states that a party may withdraw from NAFTA after giving six months’ notice. Whether this will happen is more difficult to determine, as scant precedent exists. The US has not broken a trade agreement since 1866, when it terminated the Canadian-American Reciprocity Treaty. Renegotiation, rather than a full withdrawal from NAFTA, is more probable. What would the US try to gain through negotiations? Trump has been light on details, other than saying he intends to make NAFTA “a lot better,” but his ultimate objective seems to be stopping the flow of jobs and factories to Mexico and bringing back higher-paying manufacturing jobs to the US.
Fundamentally, reshaping NAFTA will change the US economic landscape, with new winners and losers emerging. Protectionist trade policy enables the government to choose those winners and losers. If Trump’s policies work as intended, the American industrial worker potentially has the most to gain. NAFTA has cost the US 850,000 manufacturing jobs, according to some estimates. It also has been argued that NAFTA has put downward pressure on wages and hindered labor’s ability to bargain collectively. Another potential winner is US manufacturing processes that are both labor-intensive and not highly automated. Mexico’s available cheap labor has been blamed for many US manufacturers’ inability to remain competitive. Although much of the US economy has improved, concentrated geographic pockets have experienced significant declines. These areas are hopeful they will reap the benefits of trade policy that protects US industry. Lastly, smaller companies are likely to benefit from a revised NAFTA, as the current deal is not as advantageous to smaller companies that lack resources as it is for large multi-nationals.
There also will be losers, one of the most likely being multi-national corporations that have accessed cheaper labor and less regulation in Mexico. Industries that are particularly vulnerable are airplanes, automobiles, large agri-business, appliance makers, and energy corporations. The US consumer also will face higher prices for many goods, as producers will pass along any additional costs to consumers. In addition, major changes to NAFTA are expected to affect a wide array of jobs, as the US Chamber of Commerce has estimated that trade growth due to NAFTA has helped create five million jobs in the US.
President Trump, in his first week as President, has already signaled that he will not continue the US trade policy of the last several decades that favors fair trade. Rather, he seems to be transitioning to a more protectionist policy favoring US workers and manufacturers, which is apt to play out in a fight over NAFTA in the near future. Whether this ends in withdrawal from the agreement or only in its renegotiation is unknown. What is known is that it will redefine the terms of business for a range of stakeholders and reshape the economic landscape in the US, with new winners and new losers emerging.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2017 Envestnet. All rights reserved.