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NAFTA Could Be Replaced By U.S.-Canada Deal Under Trump: CIBC

Ditching Mexico would make Canada more competitive, CIBC says.

The North American Free Trade Agreement could be replaced by a Canada-U.S. deal following Donald Trump’s election to the presidency, CIBC says.

And while that would put a huge question mark over Mexico’s future, it could actually be partly good news for Canada, economists Avery Shenfeld and Royce Mendes wrote in a client note Wednesday morning.

“Canada and the U.S. could revert to a bilateral free trade arrangement that excludes Mexico,” they wrote, referring to the U.S.-Canada trade agreement that existed before NAFTA was ratified in 1994.

“That might help Canada reap market share stateside, but there are also risks that protectionist sentiments could extend to restrictions on some Canadian shipments to the U.S., given the political tide in that direction.”

They noted that Trump is largely concerned about competition from “low cost producers like China and Mexico,” giving Canada an opening to maintain free trade with the U.S. if Trump goes ahead with his protectionist agenda.

Indeed, Canada could benefit in certain ways from a possible departure of Mexico from NAFTA. Mexico recently overtook Canada as the largest exporter of cars to the U.S. It has seen much more auto industry investment than Canada in recent years. A deal between Canada and the U.S. alone could help turn that tide.

But Trump’s protectionist agenda is by no means a certainty, the CIBC economists noted.

“Congress and his advisors could try to water down Trump’s protectionist plans,” they wrote, though noting that “the U.S. constitution gives [Trump] the power to unilaterally undo existing trade agreements."

“Overall, while the changes in policy might not be as drastic as the platform he ran on, this was an unexpected outcome and will likely lead to sharp movements in asset prices,” they wrote.

Global investors reacted swiftly Tuesday night as the election results poured in. Stocks tanked in overnight trading, though North American markets stabilized by Wednesday morning, and the Canadian dollar shed more than a cent in just four hours overnight. The Mexican peso went into freefall, seeing its largest drop on record.

Prime Minister Justin Trudeau congratulated Trump on his win in a brief statement Wednesday morning.

"We look forward to working very closely with President-elect Trump, his administration, and with the United States Congress in the years ahead, including on issues such as trade, investment, and international peace and security," Trudeau said.

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