Every insurer needs to ascertain the potential risks of the sudden termination or modification of international trade agreements. The havoc wreaked by the Brexit vote in the UK demonstrates the vast damage and great confusion that sudden changes in trade policy can cause.
A paradigm shift in trade policy that has the potential to be as dramatic and as disruptive as Brexit is possible on the other side of the Atlantic. There is growing speculation that US President Donald Trump might try to pull out of the North American Free Trade Agreement (NAFTA).
NAFTA is a free trade zone consisting of the United States, Canada, and Mexico. Ending it would disrupt international trade because Canada and Mexico are the second and third largest trading partners of the United States. Canada accounted for 16.4% of US foreign trade worth $636 billion (£458 billion), and Mexico accounted for 15% of America’s trade with an estimated value of $582.4 billion (£419 billion) in 2017, the US Census Bureau estimated.
NAFTA’s end would harm Mexico
Even speculation about the end of NAFTA can affect the international economy.
News that Canadian officials believed Trump would try to end NAFTA caused the value of US stock indexes to fall and the prices of Canadian and Mexican currencies to drop in the markets on 10 January 2018, Reuters reported. The S&P/BM IPC stock index in Mexico fell by around 1.8% because of NAFTA speculation.
The possible effects of NAFTA’s end are widely debated. Damage in Mexico might be vast because that country is heavily dependent on US trade. The economic crisis of 2008 caused the Mexican economy to contract by 9% in 2009, Luis Rubio of the Wilson Centre’s Mexican Institute noted. Mexico’s domestic economy nearly collapsed because of the fall in US trade.
“That event demonstrated that the NAFTA is the only engine of growth of the Mexican economy,” Rubio wrote. “Modifying the economic framework that is inherent to NAFTA would imply putting the engine of the Mexican economy at risk.”
NAFTA’s end a ‘Manageable Risk’ for Canada
The effects of NAFTA’s end in Canada would be a bad but “manageable risk,” a Bank of Montreal (BMO) study named The Day after NAFTA observed. The BMO concluded that ending NAFTA would cause Canada’s economy to contract by 0.7% to 1%, The CBC reported.
The major damage would be done by a weaker exchange rate which can lead to a cheaper Canadian dollar and inflation. That would benefit Canadian industry by lowering the price of its’ products on the world market – but hurt average Canadians by raising prices for imported consumer goods.
Canada would lose $15 billion (£10.79 billion) worth of buying power and between 25,000 and 55,000 jobs if NAFTA ended, Don Ciuriak of the C.D. Howe Institute told the CBC. Ciuriak also predicted that the US economy would be hurt.
“The United States suffers about as large a drop in its bilateral exports to NAFTA partners as it reduces imports from them,” Ciuriak is predicting.
Can Trump really end NAFTA?
The greatest risks presented by sudden changes in trade policy were demonstrated by the fallout from Brexit in the UK. Those risks are the fear, uncertainty, and doubt (FUD) generated by such an unprecedented event.
Uncertainty from NAFTA’s potential end would be greater because it is not unclear if Trump would be able to make good on such a threat. Current law gives Trump the power to end or renegotiate NAFTA by giving six months’ notice.
America’s Constitution gives the US Senate to simply override Trump’s decision at any time. The Senate has the power to undo any Trump decision on NAFTA with a vote of 60 of its 100 members. Any vote of less than 60 US Senators can be blocked by an arcane legislative stratagem known as a filibuster.
NAFTA’s fate in US Senate hands
What is unknown is whether 60 US Senators can be convinced to overturn NAFTA’s end.
Most members of the Senate are conservative Republicans and moderate Democrats that strongly favour free trade. There are a few outspoken critics of NAFTA in that body, including leftists Bernie Sanders and Jeff Merkley.
Something to keep in mind is that Border States like Texas and California, which benefit from NAFTA, each have two Senators. At least two influential border-state senators; John McCain and Jeff Flake are open political enemies of Trump.
A decisive factor in Senators’ votes will be Americans of Mexican descent. There are around 36 million Mexican Americans, who make up more than 10% of the nation’s population (327 million), Pew Research calculated. Senators from states with large Mexican populations are likely to vote for NAFTA and against Trump.
The probable risk from an effort to end NAFTA is a high level of FUD that will be made greater by a vicious and protracted political battle in the Senate. It is not known if Trump is willing to risk such a battle which would split his party, the Republicans, along ideological and regional lines.
Is Trump bluffing about NAFTA?
An outside event that might delay a NAFTA action is the US Congressional election scheduled for November 6, 2018. Some observers have predicted that the Republicans might lose their majority in at least one house of Congress in that contest.
Therefore it is unclear if speculation of NAFTA’s end is real or a bluff by Trump. Trump’s pushing of a decisive issue like NAFTA during such an election seems improbable.
The greatest risks created by speculation about NAFTA’s end or renegotiation are the FUD that talk of such an event generates. The high levels of FUD are likely to have negative effects on all three North American economies for the foreseeable future.