NAFTA could soon morph into 'HALFTA' unless Canada comes on board

Key Points
  • NAFTA is about to become "HALFTA" unless Canada signs on by Monday, according to an analysis by Cowen Washington Research Group.
  • Cowen's Chris Krueger sees four scenarios: missing the deadline and negotiating with Mexico's next president; going ahead with Mexico now and hoping Canada comes in later; blowing up the whole NAFTA agreement; and Canada capitulating by the Sept. 30 deadline.
  • President Donald Trump has bemoaned the multilateral trade deals the U.S. has negotiated and particularly loathes NAFTA.
President Donald Trump sits behind his desk as he announces a bilateral trade agreement with Mexico to replace the North American Free Trade Agreement (NAFTA) at the White House in Washington, August 27, 2018.
Kevin Lamarque | Reuters

The deal once known as NAFTA could effectively become "HALFTA" assuming the U.S. and Canada don't make any trade negotiation progress over the next three days, according to an analysis of likely outcomes.

There are four "endgame scenarios" in the trilateral talks between the U.S., Mexico and Canada, wrote Chris Krueger, managing director at Cowen Washington Research Group.

None paint a particularly rosy outcome, with the bleakest outlook one that Krueger called "blow it up and make America an island" as President Donald Trump hardens his desire to reduce the swelling U.S. trade deficit.

"There exists the uncomfortable reality of Trump's view of NAFTA and the potential that this all ends in a raging dumpster fire," said Krueger, who titled his note, "Helpless: NAFTA Still HALFTA With AMLO Deadline Looming & 232 Tariffs." Krueger is fond of using musical allusions in his notes, and this one references the song "Helpless" by Canadian folk rocker Neil Young.

"Trump has an instinctive hatred for multilateral deals with a special venom reserved for NAFTA first among all others," he added. "If we take Trump literally and seriously, this is the logical outcome that is hiding in plain sight."

Trump has made it a priority to re-examine the multinational trade deals in which the U.S. has engaged, and has targeted the pact with Canada and Mexico as one of his least favorites. The administration in August announced that it had reached an accord with Mexico across multiple areas and was hoping Canada would come on board as well.

However, there remain deep disagreements about U.S. access to the Canadian dairy market, as well as issues over supply management, steel and aluminum tariffs the White House implemented earlier this year and on autos.

Aiming for Monday

Complicating the matter is that the U.S. and Mexico badly want to get their side of the deal done by Monday, which would give Congress 60 days to review it and then approve it just before Mexican President Enrique Pena Nieto leaves office at the end of November. Nieto will be succeeded by Andres Manuel Lopez Obrador, or AMLO, a populist who may not sign on.

Krueger sees three other scenarios: missing the Sept. 30 deadline and waiting for AMLO to take office and renegotiating; signing a deal with Mexico now and hoping that Canada comes on board later; and looking for Canada to capitulate and meet the deadline ahead of a pivotal general election in Quebec on Oct. 1.

"If Canada comes to the table and agrees to a deal by September 30, it makes passage in the U.S. a lot easier, but still hugely dependent on the [U.S.] midterms," Krueger said. "If the GOP holds the majority (in our opinion a low probability), the deal will likely be approved. If the Democrats win the House, it is going to be a lot tougher."

Multiple administration officials have said the Sept. 30 deadline is not negotiable and are willing to do a bilateral deal, though they think Canada will come into the fold later. However, Congress is unlikely to sign off on a deal only with Mexico, increasing the likelihood that no agreement will happen by Monday.

"We have lost track of how many deadlines have been missed with NAFTA," Krueger wrote. "One more won't really matter too much, though it definitely brings more risk."