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Peso suffers as reports say US to leave NAFTA

Canada believes Trump planning imminent pullout: sources

A report adding to speculation that the United States plans to announce its intention to withdraw from NAFTA was met with renewed assertions from Mexico that such a move would lead it to walk away from the negotiating table.

The news agency Reuters reported yesterday that two Canadian government sources said Canada was convinced that President Donald Trump would soon announce that the United States intends to pull out of the 24-year-old trilateral trade agreement.

The news also placed further pressure on the already ailing Mexican peso.

The currency dropped 0.5% to trade at just over 19.3 pesos to the US dollar soon after the report broke and has continued to slide further today. The Canadian dollar also briefly lost ground against the greenback.

A White House spokesman said that “there has been no change in the president’s position on NAFTA,” in response to the Reuters claim but a source close to the administration contradicted that position, quoting Trump as saying, “I want out.”

A Canadian government official also labeled the Reuters report as “inaccurate,” stating instead that “progress on NAFTA was made during previous rounds . . . and we expect more progress to be made in January.”

Nevertheless, whether a U.S. withdrawal is imminent or not, the damage to the peso was already done and many analysts believe that while uncertainty about the future of the agreement remains, the currency will remain vulnerable to volatility.

Three Mexican sources familiar with the talks told Reuters that if Trump were to announce a NAFTA withdrawal, Mexico would be forced to walk away from the discussions.

Their statements reiterate what Foreign Affairs Secretary Luis Videgaray already said in August last year.

“I think it’s indisputable that if Trump announces a U.S. withdrawal from NAFTA, well at that moment the negotiations stop,” the head of international trade for the Agriculture Secretariat, Raúl Urteaga, told the news agency.

The two other unnamed sources echoed the position.

However, while a letter from Trump announcing the intention to terminate NAFTA would trigger a six-month process to end the agreement, it would not necessarily guarantee a U.S. withdrawal.

Some analysts believe that the U.S. could be contemplating using the strategy as a way to gain leverage and bargaining power over Mexico and Canada. The sixth and penultimate round of renegotiation talks will take place in Montreal from January 23 to 28.

“He can gain political mileage out of a big announcement to quit NAFTA without actually doing it,” said Gary Hufbauer of the Petersen Institute for International Economics.

Canadian Foreign Affairs Minister Chrystia Freeland was cautious and diplomatic about the future of the agreement.

“I think we need to take our neighbors at their word, take them seriously, and so Canada is prepared for every eventuality,” she said.

Speaking at the American Farm Bureau Federation Convention in Nashville, Tennessee, Monday, Trump told farmers that his administration was working hard to achieve a better deal for the agricultural and manufacturing sectors of the U.S. economy.

“It’s under negotiation as we speak,” he said, adding that “when Mexico is making all of that money, when Canada is making all of that money, it’s not the easiest negotiation.”

Some observers in both Mexico and Canada interpreted his remarks as a sign of optimism given that he has made far more provocative comments about the agreement in the past, including repeated threats to pull out if it is not reworked to better favor the U.S.

Urteaga said that Trump’s speech was an “interesting signal” and that “no news means good news sometimes.”

If the agreement is to survive, a number of contentious issues still need to be agreed on.

They include rules of origin as they apply to auto manufacturing, a so-called sunset clause that would automatically terminate the deal if it is not renegotiated every five years and the future of the dispute resolution mechanism which rules on complaints about illegal subsidies and dumping cases.

Source: Milenio (sp), The Hill (en), Reuters (en)

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