Goldman: NAFTA deal is now less likely after Trump's tariffs on Mexico, Canada

• The new U.S. tariffs on Canadian and Mexican steel and aluminum make it less likely the three countries will reach a near-term agreement to revamp the North American Free Trade Agreement, Goldman Sachs economists said.
• Goldman says the economic impact of the tariffs, also slapped on Europe, should be modest but they are also a modest negative signal about U.S. trade policy.

Canada's Foreign Minister Chrystia Freeland (C) speaks before the start of a trilateral meeting with Mexico's Economy Minister Ildefonso Guajardo (L) and U.S. Trade Representative Robert Lighthizer during the third round of NAFTA talks involving the United States, Mexico and Canada in Ottawa, Ontario, Canada, September 27, 2017.

Chris Wattie | Reuters

The Trump administration's decision to slap tariffs on Canada and Mexico makes it less likely there will be a new NAFTA deal in the near term and sends a modestly negative signal on U.S. trade policy, according to Goldman Sachs economists.

The U.S. Thursday announced 25 percent tariffs on steel and 10 percent tariffs on aluminum imported from the European Union, as well as Canada and Mexico. Commerce Secretary Wilbur Ross said, on CNBC Thursday, that negotiations with Canada and Mexico were not far enough along to extend their exemption from the tariffs, which expired Friday.

The U.S., Canada and Mexico have been negotiating a revamp of the North American Free Trade Agreement, but trade experts have been saying the outlook for an agreement is no longer as optimistic as it had been just a few weeks ago. Goldman economists say the tariffs now make the outlook even worse.

"The decision to impose tariffs on Canada and Mexico suggests that prospects for a NAFTA agreement in the near-term are fading," the Goldman economists wrote. "The Administration's negotiating stance is often unpredictable so there is a risk of over-interpreting any single event. That said, this represents another signal that prospects for a near-term NAFTA deal are fading, just a few weeks after it had appeared fairly likely that a "skinny" agreement involving the auto sector might be reached."

House Speaker Paul Ryan had requested a deal by May 17 so that the current Congress could vote on it. But U.S. Trade Representative Robert Lighthizer warned that an agreement was not close.

Goldman economists said the tariffs, as well as new quotas on South Korea, Australia and Brazil, should have only a modest economic impact.

"The incremental inflation effect of these tariffs should be small. We estimate that adding Canada, Mexico, and the EU to the countries facing a tariff of 25% on steel and 10% on aluminum could boost core PCE by roughly 1bp. Imports from NAFTA and EU countries make up just under half of steel and aluminum imports," the noted.

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