Letter:
NAFTA Blowup Risk
(Interview with Wouter Jongbloed)

New York, November 6, 2017

Dear Friends and Colleagues,

We are excited to announce that Wouter Jongbloed will be joining Exante Advisors in a full-time capacity in December. Wouter has recently completed a Ph.D in Law and Economics with Professor Joseph E. Stiglitz (and no less than 4 other advisors) at Columbia University. His academic work has focused on the legal aspects of trade policy, and we have been fortunate to draw on Wouter’s insights on NAFTA and global trade policy in the past.  He will be a crucial resource to guide us through the political and legal minefield that trade policy has become.

I thought it appropriate to share some excerpts of a recent discussion with Wouter regarding the ongoing NAFTA renegotiation:

Should investors worry about a “NAFTA blowup?”

Yes. I consider the chances for a terminal collapse of the NAFTA renegotiation to be around 30-40% by March 2018. While some impact studies on a US withdrawal from NAFTA have indicated limited GDP effects for the US (assuming Mexican exports to US will face a small tariff of around 3 percent), the dynamic effects on the medium term integrity of regional value chains, cross-border investment, productivity and competitiveness would be negatively affected even without retaliation. Moreover, some kind of Mexican retaliation is likely (not only as a reaction to the inevitable “Mexico-bashing” in the US, but also as a function of the Mexican political calendar with a hard-left candidate a serious contender for the Mexican Presidency on July 1).

What does NAFTA withdrawal mean for global trade arrangements?

The collapse of NAFTA could trigger a cascade of tit-for-tat tariffs between Mexico, Canada, and the US, in addition to raising protectionist barriers to trade through other means (non-tariff barriers to trade). There is a scenario where trade tensions from the collapse of NAFTA could spill over into other domains. For example, if the United States were to raise its tariff barriers in violation of its bound tariff levels at the WTO, this is likely to lead to serious global trade tensions. Similarly, the US’s anti-dumping and countervailing measures programs could be a catalyst for such tension. Retaliation by directly and – importantly – indirectly affected countries is a distinct possibility in such a scenario, with significant damage to certain sectors reliant on cross-border supply chains highly likely.

Which countries will be most affected?

Initially, trade between NAFTA partners will be negatively impacted. Mexico is most vulnerable given its trade composition and given Trump’s focus on the southern neighbor. Canada is second in line, but there is a fall-back free trade agreement from the 1980s that will reduce the blow. But the damage does not necessarily stop there. There will be secondary effects on Brazil and Europe, for instance. If the collapse of NAFTA is acrimonious (which is likely) we could see a broader series of protectionist barriers being raised in the United States against a wider category of imports, impacting Korea, China and Russia – even possibly Japan. These barriers may be country or product specific and might especially implicate industries far and wide, such as the automotive sector in the NAFTA region, steel and aluminum production globally, and Chinese solar panels, as well as Central American seasonal fruits and vegetables.

A now a very quick business update: We have signed up a number of high-profile users for our Global Flow Analytics service over the last few weeks. We have not had time to do a formal launch celebration, but the product is very much live and growing. For example, we are currently expanding Global Flow Analytics to include a very precise real-time tracking of aggregate EM portfolio flows. Since client interest in our service is accelerating, we have put together some background material about it in a brief PDF document. If you are interested in looking at this material, let us know here.

Jens Nordvig
Founder & CEO
Exante Data LLC