Trump NAFTA Deal: This Big Shoe Has Yet To Drop On Stock Market
President Donald Trump loves walls, and the Trump NAFTA deal with Mexico aims to build one to protect the U.S. auto sector. The surprise for stock market investors is that the wall will only stand if it comes with a big hike in U.S. auto tariffs on the rest of the world.
Trump touted a "very good deal" with Mexico on Monday. He said the pact will be called the United States-Mexico Trade Agreement, dropping the NAFTA name. He said he hopes Canada will join the bilateral accord, but "we'll see." Yet most analysts believe that the name change is symbolic and that there is little chance that Canada will be excluded. They noted that the terms reached by the U.S. and Mexico are meant to apply to the broader North American trade bloc.
Sen. Orrin Hatch, a close ally of the president, dismissed Trump's talk that the deal might be bilateral in a statement. "Today's announcement by the United States and Mexico is an important step toward modernizing NAFTA, the largest free trade zone in the world." Congress, he noted, must OK any revamped NAFTA.
The Trump deal with Mexico fueled stocks. The Dow Jones industrial average, S&P 500 index and Nasdaq composite all rallied solidly. The S&P 500 and Nasdaq composite hit record highs, with the latter topping 8000 for the first time. Shares of General Motors(GM) and Ford (F) rose 4.8% and 3.2%, respectively, in afternoon trading on the stock market today. Rail stocks also moved solidly higher, including Canadian-based operators. Foreign auto stocks also rallied, likely on hopes that a NAFTA deal means that Trump is backing off harsh trade threats. That could be a misreading.
"A big deal looking good with Mexico!" Trump tweeted about the NAFTA agreement early Monday.
Auto Tariffs Outside North America
A North American trade deal, whatever the ultimate name, will significantly shrink the risk that Trump will get the U.S. into a full-scale global trade war. Yet the Trump NAFTA deal's terms appear to confirm that higher U.S. auto tariffs are on the way.
In fact, a key reason Mexico likely agreed to some, though not all, of Trump's auto demands is that it will largely escape the Trump tariff sledgehammer that may hit other auto-producing countries.
"The only way the NAFTA revision would not hurt U.S.-based automakers is if the United States were to raise the cost of imported cars by imposing a stiff new tariff on imported cars from Europe, Japan and South Korea," wrote Jeffrey Schott, senior fellow of the Peterson Institute for International Economics.
In fact, Trump has been talking about — and the Commerce Department studying — a 25% tariff on U.S. auto imports.
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