The Future of NAFTA - Bank of America Merrill Lynch Future of NAFTA Under the Trump Administration ... • NAFTA basics ... Japan India Brazil China Korea Malaysia Canada Mexico
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BofAML DisclaimerThis presentation was written by a third party not affiliated with Bank of America Merrill Lynch or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Bank of America Merrill Lynch or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
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Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
4
NAFTA basics
• US-Canada-Mexico
• January 1, 1994
• Main provisions– Eliminates import duties
– Protects trade in services
– Liberalizes foreign investment
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Import duty
• Tax on imported goods• Varies by origin of goods• NAFTA effect:
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Average U.S. import duty 2%Average U.S. import duty – NAFTA origin 0%
Services
• Nondiscriminatory treatment
• Protection of cross-border sales
• Guaranteed entry in agreed sectors
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Major effects of NAFTA
US goods imports increased
9Source: Congressional Research Service: https://fas.org/sgp/crs/row/R42965.pdf
U.S. merchandise trade with NAFTA partners
Trade deficit
Major effects of NAFTA
Top 5 goods categories• Crude oil
• Motor vehicles
• Motor vehicle parts
• Motor vehicles for the transport of goods
• Petroleum products
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Major effects of NAFTA
US services exports increased
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$‐
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
Exports
Imports
U.S. services trade with NAFTA partners US$ (Billions)
1993 1996 1999 2001 2004 2007 2010 2013
Source: Congressional Research Service: https://fas.org/sgp/crs/row/R42965.pdf
Trade surplus
Major effects of NAFTA
Top categories of services exports
• Travel
• Transportation
• Computer software
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Major effects of NAFTA
US foreign direct investment increased
13
U.S. / Mexico foreign direct investmentUS$ (Billions)
1993 1996 1999 2001 2004 2007 2010 2013 $‐
$20
$40
$60
$80
$100
$120
US FDI in Mexico
Mexico FDI in US
Source: Congressional Research Service: https://fas.org/sgp/crs/row/R42965.pdf
Major effects of NAFTA
Top categories of FDI in Mexico
• Manufacturing
• Mining
• Retail
• Finance
• Insurance14
Major effects of NAFTA
Supply chains integrated
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Value of U.S.-origin content in imports from trading partners
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
EuropeanUnion
Japan India Brazil China Korea Malaysia Canada Mexico
Source: Congressional Research Service: https://fas.org/sgp/crs/row/R42965.pdf
Major effects of NAFTA
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Statistic 2006 2015
Number of U.S. autoworkers 1.1 million 0.9 million
U.S. auto production 11.2 million 12.1 million
Mexico auto production 2.0 million 3.6 million
Sources: OICA.net; bls.gov
Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Candidate Trump on NAFTA
• Day 1 – Begin reforming NAFTA, order Commerce Department and
International Trade Commission to study ramifications of withdrawing from NAFTA.
– US Trade Representative notify Mexico and Canada that U.S. intends to propose amendments
• Day 200 – Consider formal withdrawal from NAFTA, pursue bilateral FTAs.– Use Trade Promotion Authority: power for the President to get
trade deals through Congress more swiftly
Trump team Transition Memo
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Others on NAFTA
• Canadian Ambassador– Trudeau is willing to sit down at the
bargaining table with the Trump administration
• Mexican Foreign Minister– Willing to “modernize” NAFTA but not
renegotiate.
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Next moves on NAFTA
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• Continue trade for U.S. businesses• Conflicts with campaign promises
Leave in Place
• Needs CAN and MEX cooperation • Does not require congress until after
new trade agreement is arrangedRenegotiate
• Can be done without CAN and MEX• May require congressional support
Change Trade Terms
• May require congressional action• Invites legal challenges with
reasonable chances of successWithdraw
Next moves on NAFTA
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• Continue trade for U.S. businesses• Conflicts with campaign promises
Leave in Place
• Needs CAN and MEX cooperation • Does not require congress until after
new trade agreement is arrangedRenegotiate
• Can be done without CAN and MEX• May require congressional support
Change Trade Terms
• May require congressional action• Invites legal challenges with
reasonable chances of successWithdraw
Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Withdrawal: how would it work?
NAFTA Act
Pres may proclaim
additional duties
Consultation and layover requirements
NAFTA
2205 Declaration
“Party” may give 6 month notice then withdraw
Trade Act of 1974
U.S. FTAs subject to
withdraw or termination
Power to withdraw not
expressly given to Pres
Other Legal Authorities
Constitution: Pres talks with foreign states
IEEPA Powers under a National
Emergency
TEA: Imports threaten
Nat’l Security23
Withdrawal: what will you hear?
NAFTA Act
Section 201(b)
“Reciprocal and Mutually
Advantageous”
NAFTA
2205 Declaration
Trade Act of 1974
Section 125
“Termination proclamation"
Other Legal Authorities
Constitution: “Inherent authority”
IEEPA“National
Emergency”
TEA: Imports “Threat to
National Security"24
Candidate Trump on NAFTA
“If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that
America intends to withdraw from the deal.”
June 28, 2016
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Renegotiation: what is likely
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Declare withdrawal, unless NAFTA renegotiated
Deal with U.S. legal challenges
Bring Mexico and Canada to table
Changes to NAFTA
Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Renegotiation: rules of origin
• Small text change
• Focus on regional value content
• Big effect on trade
• May be said to target China
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Effects: rules of origin change
• Increase cost of Mexican inputs
• Increase price of finished goods from Mexico
• Reduce imports from China
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What to watch for:
Companies with production in or logistics chains through Mexico
• Costs/pricing calculation change
• Reduced profit margins or higher prices reducing sales
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Effects: rules of origin change
What the US could seek
– Change rules of origin– Increase labor standards– Open foreign dairy markets– Limit lumber imports– Change immigration rules– Update telecommunications rules– Simplify Customs clearance– Expand service exports
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Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Effects: border adjustment tax
• May be trade neutral
• Raises revenue for USG
• Less incentive to move HQ abroad
• Simplifies business tax code
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Effects: border adjustment tax
• Disruptive supply chain effects
• Possible violation of WTO rules
• Burden on U.S. businesses with foreign assets
• Burden on low-income consumers
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Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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Role of the WTO
• Establishes trading rules
• Ex: “most favored nation” (MFN)
• Provides dispute resolution
• Strongest remedy: retaliatory tariff
• Average timeline of cases: 2-3 years
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Court challenges?
• Any importer or exporter has standing
• Any US federal court could hear – Goldwater v. Carter: DC– Rocket docket: ED VA– Keep an eye on ED Michigan
• TRO may be sought immediately• Resolution: months to years
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Agenda
• Introductions• NAFTA basics• Trump Administration position• Potential pathways to changing NAFTA• What concessions will the United States seek?• Changes in trade: Border Adjustment Tax• Potential challenges – WTO and the courts• How to prepare
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How to prepare
• Pay attention to developments
• Use the “what to look for” tools
• Understand supply chains
• Do the math on increased duties
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