Fitch: Blame Politics For NAFTA Breakdown

Together against Trump? Justin Trudeau, Canada’s prime minister, right, and Enrique Pena Nieto, Mexico’s president, arrive during a welcoming ceremony at the Palacio Nacional in Mexico City, Mexico. Trudeau — whose country is the U.S.’s top export market — has led a sprawling lobbying effort to save Nafta. Photographer: Brett Gundlock/Bloomberg

Back in September, Nomura Securities noted that NAFTA might be stuck in a face-off between two dueling populists. Fitch Ratings weighed in on Tuesday. Only, they’ve added Canada to the mix. While most of the blame was laid on the shoulders of a rather belligerent Trump team, new political scenarios in Mexico also do not favor NAFTA. Andres Manuel Lopez Obrador, aka AMLO, is as much a fan of NAFTA as his arch-rival to the North, Donald Trump. He is poised to win the presidency next summer. And although he will not have a majority coalition, a chunk of his supporters want out of this decades-old trade deal, too, saying that it has only helped large corporations and hurt small Mexican businesses.

“Ultimately, if negotiations fail and NAFTA ends, it is likely to be politics that is responsible, as each government has infused the talks with homespun political considerations that are largely defensive and intended for domestic audiences,” said James McCormack, Global Head of Sovereign Ratings at Fitch.

In London last week, investors and financial media attending a conference run by Schroders agreed that there was backroom chatter from clients and sources in Mexico that are expecting NAFTA talks to fail. Some are now preparing for it and looking at which sectors will be hardest hit.

“If it fails, you go to the World Trade Organization rules, and that’s not a disaster,” says Vladimir Signorelli, founder of Bretton Woods Research, a macroeconomic investment research firm in Long Valley, NJ. “I think if NAFTA does fail it underscores the vulnerability of all free trade agreements conducted under the chaos of floating exchange rates. Because you can’t have fair and free trade where competitive devaluations persist.”

Most Mexico investors will say that Banxico, the country’s central bank, is as rigid as it comes to playing by the rules of global monetary policy. Still, like all central banks around the world, they have the levers to extract liquidity from the system or add to it. The peso is currently weaker today than it was when Mexico’s biggest market — the United States — was in the midst of its Great Recession in 2008-09. In February 2009, a month before the lows in the S&P 500 were reached…

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