NAFTA: Trump's Next Target After Tax Reform?

Republicans are on the brink of a historic corporate tax cut deal this week, but optimistic investors will soon be wondering what’s next on the agenda for President Donald Trump's administration. The White House may now turn its attention to a familiar target, according to Height Securities: NAFTA.

Trump will likely provide a notice of intent to withdraw from NAFTA by the end of March, said analyst Stefanie Miller. But investors should be aware of the possibility that Trump is simply attempting to gain negotiating leverage with Canada and Mexico.

All About Leverage

“We continue to expect that any action is intended primarily to force concessions from Canada and Mexico rather than to end the trade protections provided by NAFTA,” Miller said in a Monday note. 

Miller estimates there is a 65-percent chance Trump will announce a NAFTA withdrawal in the first quarter of 2018, but sees only a 35-percent chance the announcement will ultimately result in a termination of North American trade policies.

Silent Opposition

Companies in the auto and manufacturing industries have kept their mouths shut about NAFTA in an effort not to rock the boat in Washington ahead of the tax reform vote, Miller said. Once tax reform is official, though, all bets are off. 

“Passing tax reform, in addition to shifting the White House’s messaging, also opens the door to much stronger lobbying efforts from major Republican constituencies who benefit from NAFTA,” Miller said.

Trump may have a narrow window in which to operate before lobbying efforts turn the NAFTA tide against him.

Market Impact

The NAFTA negotiations could have a huge impact on U.S. companies that produce goods in Mexico and/or Canada or that import goods produced in the two nations. Among the many stocks with a lot on the line are: 

• Ford Motor Company F
• General Motors Company GM
• Fiat Chrysler Automobiles NV FCAU
• Gildan Activewear Inc (USA) GIL
• Chipotle Mexican Grill, Inc. CMG

Investors generally don’t seem to be sweating a potential NAFTA withdrawal. The SPDR S&P 500 ETF Trust SPY is up nearly 20 percent year-to-date.

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