A US withdrawal from the North American Free Trade Agreement (NAFTA) could lose the country credibility as a global trading partner and undermine prospects for current and future US apparel manufacturing, analysts have warned.
Talks to renegotiate NAFTA head into their fifth round tomorrow (17 November) in Mexico City, with a conclusion expected by March 2018 at the latest. Yet while a unilateral withdrawal by President Donald Trump is thought to be unlikely – although not entirely impossible – Cowen Research analyst John Kernan believes talks are going worse than expected.
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“We view a NAFTA withdrawal as unlikely, but is something President Trump can do unilaterally. Protectionist trade theory has been his policy North Star for decades – this is a zero-sum, visceral issue for Trump,” he wrote in a note published today.
Following four rounds of NAFTA talks in the past four months, Kernan points to three major macro issues: rule of origin, the five-year sunset (a provision to automatically terminate NAFTA every five years unless it is specifically renewed), and investor state dispute settlement provisions.
Without a negotiated unwind, he says tariffs would likely equal those to non-free trade partners: 3.5% average by the US; 4.2% by Canada; and 7.5% by Mexico.
Kernan says the apparel industry is one of three sectors that would be most impacted by any decision to withdraw, alongside automotive and freight carriers. If the US was to walk away from the agreement it would lose credibility as a global trading partner, lose bargaining power globally, and prospects for current and future US manufacturing would be undermined.
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By GlobalData“In the black swan scenario of a unilateral NAFTA withdrawal, our retail and consumer brands sector would be negatively impacted given the vast majority of apparel and footwear manufacturing that takes place outside of the US,” Kernan says. “We think most exposed would be Hanesbrands, Nike and VF Corp due to their significant overseas manufacturing volume and least impacted would be Burlington.”
According to Cowen Research, the US has not withdrawn from a trade agreement since 1866. But this is not due to its difficulty, as Article 2205 means a treaty can be dissolved six months after written notice, without Congressional approval.
“Because this hasn’t happened since 1866, we do not know what would actually happen if this happened: tariffs reset to 1994? US investment to Mexico blocked/unwound? It would be a zero-gravity environment. What is clear is that President Trump can go down this road with a single stroke of a pen and a six-month lag,” Kernan explains.
Meanwhile, trade ministers from the remaining 11 Trans-Pacific Partnership nations this week agreed on core elements of the new trade pact that is moving forward despite the absence of the US from the agreement.
TPP11 nations move trade pact forward with new name
TPP 11 – now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – is the successor proposed trade agreement to the Trans Pacific Partnership (TPP).
