After some 30 months at the negotiating table, the US and Mexico have agreed terms over a bilateral trade deal that may lead to a re-writing of the North American Free Trade Agreement (NAFTA).
The two countries decided to negotiate directly, without Canada, the third member of North American agreement.
The Mexican government remains hopeful Canada will join the conversation, and that they could have a trilateral deal this week.
“Today’s announcement is a key milestone and should be seen as a positive event for Mexican assets,” said Axel Christensen from BlackRock, but cautioned that “today’s news and an eventual agreement with Canada could face obstacles as they require the approval of each country’s legislature. As such, uncertainty risk – and the accompanying market volatility – are not yet completely ruled out.”
The auto industry is the main sector affected by the bilateral agreement. According to the US Trade Representative office, the changes involve rules of origin for cars, light trucks and auto-parts. One of the points agreed is that 40% to 45% of any auto vehicle needs to be made by workers making at least $16 per hour. Average manufacturing wages in Mexico are below $3.
In a report, S&P Global Ratings said a scenario where the new government “adopts market friendly policies, coupled with a completion of NAFTA renegotiations” the rating bias of Mexican corporations, which is currently negative, could improve.
Jaime Reusche from Moody’s said the agreement would not change their views on Mexico, for now, and doesn’t expect a resolution so soon.
“Regardless of the outcome of negotiations [with Canada], because the US Congress has a very tight window to ratify any new trade deal, there is no guarantee that an agreement will be in place by the end of this year.”
And then there is Canada. US President Donald Trump was asking to “not call it Nafta” and raised the possibility of excluding Canada and replacing the trade agreement altogether.
BNP Paribas said in a report that “setbacks to the talks could still happen” and calls the possibility of scrapping the agreement “a potentially poisonous new issue” adding they believe that “changes could happen overnight.”
Natixis’ chief market strategist Dave Lefferty said the news brings some benefits, such as reducing uncertainty for companies but asks whether this in fact means markets’ worst fears are gone.
Equity investors seemed to rejoice. Mexico’s stock market got a boost from the announcement with the main index up 1.6% at close.