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

The Future of NAFTAUnder the Trump Administration

February 7, 2016

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


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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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Investment

• Non-discrimination

• Investor protections

• Investor-State dispute resolution

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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


Top 5 goods categories• Crude oil

• Motor vehicles

• Motor vehicle parts

• Motor vehicles for the transport of goods

• Petroleum products

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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


Top categories of services exports

• Travel

• Transportation

• Computer software

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US foreign direct investment increased

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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



Top categories of FDI in Mexico

• Manufacturing

• Mining

• Retail

• Finance

• Insurance14


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



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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


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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


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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


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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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Renegotiation: rules of origin

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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


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Sales

Income Tax

Change trade terms: BAT

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Sales



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20% Tax

Sales

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


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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


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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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Thank you

Scott [email protected]

+1.202.747.1909

Reid [email protected]

+1.202.747.2314 @reidglobaltrade

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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