NAFTA Talks Race Against Mexico's Deadline

Canadian Foreign Minister Chrystia Freeland was in Washington, D.C. Wednesday to continue talks on a trade deal between the U.S. and Canada. The sticking point of the talks relates to Canada’s “Class 7” milk pricing system, but Canada is motivated to get a deal done, according to Height Securities analyst Clayton Allen.

Sticking Point

Mexico has said Sept. 20 is the deadline for completing a deal in time to release the text of the agreement 10 days later. That may not leave enough time for Canada to reach an agreement, Allen said in a Wednesday note.

“However, we expect that Republicans in Congress may give President Trump some flexibility in the TPA process, opening a possibility for more time to work with Canada." 

Canadian Prime Minister Justin Trudeau is fighting hard for the Candian dairy industry, in part because of upcoming Oct. 1 elections in Canada’s largest dairy-producing province, Allen said. 

Two Paths Forward

If a deal is not completed by Sept. 20, two possibilities exist, Allen said.  

First, Congressional Republicans could agree to the terms of a deal without having the text fully finalized, the analyst said. In addition, the U.S. and Mexico could released the unfinished text of the deal Sept. 30 and go back and retroactively amend the details, he said. 

“Both of these scenarios — either a non-final deal text or an amendment of the text after Sept. 30th to include Canada — require that Republicans are willing to differentiate between the requirement for the president to submit text 60 days prior to signing and the requirement for the U.S. to agree to final text (what would be signed by Dec. 1) prior to moving forward with Congressional approval." 

Congressional Republicans would likely be flexible out of a desire to see a new agreement in place heading into 2019, according to Height. 

Market Impact

In the meantime, stocks that benefit from North American trade, including General Motors Company GM, Ford Motor Company F, Kansas City Southern KSU, Constellation Brands, Inc. STZ, Norfolk Southern Corp. NSC, Union Pacific Corporation UNP and others could struggle to gain ground.

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Posted In: Analyst ColorPoliticsAnalyst RatingsGeneralClayton AllenHeight Capital Markets
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