Canada Seen Likely to Join US-Mexico Agreement 'Soon,' Merrill Lynch Analyst Says
Remaining risks that could derail the momentum toward replacing NAFTA include legislative uncertainty and Canadian inflexibility, said Carlos Capistran, Canada and Mexico economist at Merrill Lynch, in an Aug. 28 research report. There's a possibility that an insistence on a trilateral deal in the U.S. Congress or that a Democratic takeover in the House could prevent approval, Capistran said. "There is also a risk that the Mexican Congress does not approve the deal, for instance on the grounds that the energy sector is too open, but we see this as a low risk given the participation" of the incoming Mexican president's team in the negotiations.
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The major risks preventing a trilateral deal would be if "Canada does not show any flexibility and hence the US does not extend the same concessions it gave to Mexico with respect to the sunset clause and investment protection," Capistran said. "Canada may find politically that it is better to avoid any concession in dairy, as this could lead to liberals losing the incoming election in Quebec, a province which benefits from the supply management system. Although we believe this risk is relatively low because Canada would have significant economic losses if it does not reach an agreement with the US. Trump has threatened again with tariffs to autos, which if imposed could decelerate Canada significantly." Still, "we expect Canada to join negotiations immediately and a trilateral agreement to be announced in August."
The U.S. will likely seek Canadian concessions "in particular in dairy but in general to its supply management system (dairy, chicken, turkey and eggs), in order to reach an agreement," he said. Capistran expects Canada to agree to the 16-year sunset clause and "to find a way to finish the negotiation of Chapter 19 in a way that it finds acceptable as well." If the U.S. is flexible on Chapter 19, "Canada would have no big reason to remain outside the agreement." Also, "if an agreement, either bilateral or trilateral, is approved by the legislative branches, the US is likely to exempt Mexico and Canada, respectively, of steel and aluminum tariffs and quotas," he said. "In turn Mexico and Canada would terminate the retaliatory tariffs. The risk of potential high auto tariffs would also be eliminated if an agreement is implemented."