The road to a final agreement remains rocky. Several thorny issues must still be ironed out once Canada rejoins discussions.

Donald Trump announced from the Oval Office Monday that he’s reached a “very special” deal for American manufacturers and farmers in a bilateral trade arrangement with Mexico which he envisions as a replacement for the North American Free Trade Agreement (NAFTA) that previously included Canada.

NAFTA, Trump repeated, was a “ripoff,” and Canada would have to scramble to negotiate to join the new deal–which he dubbed the US-Mexico Trade Agreement—or face tariffs on all vehicles it exports to the US.

“We’ll give them a chance to have a separate deal, or we could put it into this deal,” Trump said. It sounds bad for Canada, but what, exactly, have the US and Mexico committed to? Less than initially appears, trade experts say.

The White House press event was another Trump presidency trade moment that was heavy on threats and light on substance (not to mention marred by a glitchy conference call with Mexican president Enrique Peña Nieto.)

Advances were achieved in areas such as manufacturing – rules of origin for auto producers in particular – agriculture and intellectual property. Trump announced that the NAFTA moniker would be substituted with a trade deal name carrying a more positive connotation. In his own words “We’re going to call it the United States-Mexico Trade Agreement” (USMTA).

However, a deal is still yet to be reached with Canada, and the country’s trade negotiators were traveling to Washington DC for talks as of this writing. Although President Trump made clear that a bilateral deal with Mexico is a possibility, President Peña Nieto emphasized he hoped Canada would be incorporated into the revised agreement.

Yesterday’s developments constitute a step in the right direction towards a revamped and modernized NAFTA, yet the road to a final agreement remains rocky. Several thorny issues must still be ironed out once Canada rejoins discussions. The most important of these involve the dispute resolution mechanism, government procurement, and agriculture. In addition, a final deal will have to be approved by each country’s legislature.

Although the exact timing is uncertain, we should expect the countries to ultimately reach a trilateral deal, avoiding the serious consequences that would have resulted from President Trump carrying out his threat to withdraw from NAFTA.

The recent series of headlines on NAFTA negotiations have had a positive impact on global equities and Mexican assets in particular. Although further details on the deal could continue to support Mexican assets in the short term, markets will soon start to focus on incoming president Andrés Manuel López Obrador’s populist agenda and the delivery of his campaign promises.

We also shouldn’t expect the announced trade agreement by itself to trigger a sharp change in investor sentiment towards emerging markets more broadly.

Importantly, we should be cautious against extrapolating NAFTA optimism to the realm of US-China bilateral relationships. Trump administration documents demonstrate that current concerns about China reach beyond the narrow issue of trade, suggesting they are not going to be resolved easily. Talks between China and the US have yielded little progress in recent days, and the US is still on track to impose 10–25% tariffs on $200bn of trade with China while continuing to threaten more.

Nevertheless, while US-China tensions are likely to persist over the medium term, a near-term de-escalation cannot be ruled out. In the months ahead, a reduction in trade risks or improving valuations may increase the risk/reward equation for global equities. But given both the unpromising state of US-China trade negotiations and current market valuations, investors are advised to maintain broadly risk-neutral portfolio positioning.


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