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By Yali N'Diaye
     OTTAWA (MNI) - Escalating trade tensions between the United States and its
allies have reduced the chances of a deal on the North American Free Trade
Agreement before year-end, but experts still see a possibility.
     The U.S. imposed tariffs on steel and aluminum imported from Canada,
Mexico, and the European Union, which have decided to retaliate with duties on
U.S. imports. It is against this backdrop of an isolated and protectionist U.S.
president that the heads of the Group of Seven industrialized countries are
meeting in the province of Quebec starting Friday.
     Trade experts told MNI they believe the potential for a deal this year is
low, but not zero.
     While the Trump administration is in a better economic position than its
two partners, and could declare a deal anytime that would carry over the main
provisions of the original NAFTA with some compromises, Americans might prefer
to take advantage of their strong economic position to drag the process and make
its partners' economies feel the pain, potentially pressuring them for more
concessions, experts said.
     --NAFTA NOT DEAD
     While President Trump has expressed his preference for bilateral deals in
matters of trade, experts don't see the three-country NAFTA treaty as dead just
yet.
     "I do believe that we will successfully conclude the NAFTA renegotiation,"
said Christopher Sands, senior research professor and director at the Center for
Canadian Studies at Johns Hopkins University Paul Nitze School of Advanced
International Studies.
     He told MNI the fact that Trump has not committed to specific changes gives
flexibility to the U.S., while its two partners support the status quo despite
being open to changes.
     "So, if President Trump is satisfied that the terms of a new draft
agreement are an improvement, and Canada and Mexico do not feel the new terms
are ruinous, then we'll have a deal," Sands told MNI.
     "I do believe there is a chance," agreed Robert Murray, a managing director
of the Government Affairs and Public Policy Practice Group at Dentons Canada.
     The question, he told MNI, is whether Trump wants a deal. Murray, also a
senior fellow at the Ottawa-based Macdonald-Laurier Institute Foreign Policy
Centre, pointed out that Trump has consistently rejected proposals sent for
consideration, adding clauses unacceptable by Canada and/or Mexico.
     "The domestic political variables in all three countries, including the
timing of the Mexican elections and U.S. midterm elections, also complicate
things in the short term," added Murray.
     So do heightened tensions in the wake of the imposition of Trump's steel
and aluminum tariffs.
     Should tensions escalate, Moody's said in a commentary Thursday, they could
strain bilateral relationships between the U.S. and its allies, potentially
resulting "in further delays to the NAFTA 2.0 negotiations and increase the
likelihood of a dissolution of the agreement."
     --US-CANADA RELATIONSHIP PRESERVED
     Recent comments from Trump and Trudeau reflect the tension between the two
countries, with Trump reportedly said to be leaving the G7 taking place in
Canada earlier than initially planned.
     Yet, the relationship between the two countries will be maintained both in
the short term and the long term, experts said, despite recent tensions.
     "The strain in the relationship seems to be mainly focused at the
leadership levels," said Murray. "I believe the longevity and essential nature
of the relationship can be maintained in the short-term and over the long-term,
but the president is consciously willing to risk the White House's relationship
with Canada for the sake of domestic political considerations and promises made
on problematic information," he added.
     Sands expects the relationship to remain "tense" until 2020 and possibly
2024 in light of domestic political dynamics in the U.S. and Canada.
     Should a NAFTA 2.0 deal or a bilateral deal be reached, "Canada will fall
back off the U.S. radar, and relations will improve," Sands said. Besides,
Canada has little options.
     "The best thing for the relationship is to resolve conflicts quickly," he
said. On that font, the tense start to the G7 summit in Quebec was not
encouraging.
     
--EVERYBODY COULD LOSE
     If conflicts escalate, and protectionism rises even more, everybody loses.
For instance, the U.S. would be hurt just as much as the Canadian economy by the
steel and aluminum tariffs, according to the Conference Board of Canada.
     While Canada is the largest exporter of steel to the U.S., "many industries
use steel and aluminum as an input". In fact, Bank of Canada Governor Stephen
Poloz stressed Thursday that with high tariffs, "everybody loses".
     The U.S. will be hurt by retaliatory measures by Canada, but also Mexico
and the European Union.
     "The U.S. tariffs and Mexico's retaliatory measures, combined with similar
measures announced by Canada and the European Union (Aaa stable), may ultimately
give rise to macroeconomically significant and disruptive trade barriers,"
Moody's said in a note Thursday.
     According to a survey of 913 economists across 120 countries by Ifo
Institute published Thursday, U.S. tariffs would negatively impact the world
economy, with 78% of participants expecting a negative impact in their own
country.
     "A clear majority of 66% also reported that this trade policy would also
have a negative effect on the USA itself," the survey said.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$,MC$$$$,MI$$$$]