You’ve heard of the North American Free Trade Agreement, or NAFTA. It’s a trilateral trade agreement between the United States, Canada, and Mexico, and it was signed in the 1990s. It has attracted a lot of controversy, and its termination was a centrepiece of Donald Trump’s “America First” platform during the 2016 election. There are those who believe that the agreement is to blame for the offshoring of US manufacturing jobs, and for the general decline of well-paying jobs available to American labor.
Since Donald Trump’s election, his administration has sought a number of changes to NAFTA, all centered around reducing the country’s trade deficit. This means, mostly, dismantling or renegotiating the parts of the agreement that allow Mexico and Canada to export manufactured and other goods to the United States. Since allowing the comparative manufacturing advantage afforded by lower labor costs in Canada and Mexico is maybe the most meaningful portion of the agreement, any renegotiation would have to be a complete overhaul.
Odds NAFTA is terminated in 2018: 8/1
By “terminated” we mean terminated, not just that the US (or any other signatory, for that matter) provides notice of intent to terminate, which could be little more than a sabre-rattling technique. At that point, there would likely be a legal battle (whether the President can unilaterally terminate NAFTA isn’t clear) and negotiations that would easily stretch into 2019. Also, with midterms elections coming up, posturing against NAFTA will be very popular, but like Brexit, it’s a very popular idea until it becomes reality.
Mexico’s Ambassador to the US, Geronimo Gutierrez, has the odds at 50/50 that NAFTA is terminated. We’ll call that a bullish assessment, say “Mexico’s Ambassador to the US” bullish, and work from there. If it is to be terminated, what are the chances that it will be completely undone in 11 months and change?
Timing is everything. Mexico is having a presidential election in July of this year, so successfully negotiating a deal gets less likely every day, and negotiating a deal after is a crapshoot. Some of the candidates would be more open to re-negotiation than others, and the current leader in the polls (Andres Manuel Lopez Obrador) would not be easy to negotiate with at all, having gained a solid chunk of his support from his vocal opposition to the United States.
Odds on the media’s nickname for the end of NAFTA
The American media generally isn’t as in to the cutesy headlines as the British media. For example, in America, we got “Amanda Knox” while the British press went with the much more fun/prejudicial “Foxy Knoxy.” If anything, they’ll attach it to the president a la “Obamacare,” so it becomes something like, “TrumpNAFTA Termination” or something.
- TermiNAFTA: 10/1
- AMEXIT: 10/1
- MEXIT: 20/1
- DeNAFTA: 30/1
- The Morning NAFTA: 50/1
- EnoughTA: 90/1
- NAFTerwards: 90/1
O/U price of Canadian dollar after NAFTA termination: $0.70 USD
The Canadian dollar is currently at $0.81 USD, and the lowest it has been in the last five years is 0.70 (January 2016).
The Loonie is already falling with each round of negotiations, as a huge part of its value is Canada’s deep ties with the United States and the buying-power that comes with free trade. You can track implied odds that the Bank of Canada will raise interest rates as a long way of tracking what the dollar will do, and every time Trump sneezes in a northern direction, it gets less likely that the Bank of Canada will increase interest rates.
For Canada, a straight-up termination of NAFTA would almost certainly be a disaster. Every Canadian company that exports to the US (read: almost every Canadian company) would lose value, and even now investors are sitting on their hands while this all sorts itself out. Speculation that NAFTA will be terminated is, by itself, exerting downward pressure on the dollar, nevermind if it actually happens.
O/U price change of Bitcoin after 24 hours after NAFTA termination: +$1,000.50
Nobody knows how the price of Dunning-Krugerrands will be affected by the passage of another hour, much less a NAFTA termination. As of writing, one BTC equals USD $11,071.82, so suffice it to say that in the event of a NAFTA repeal, or any other process that takes six months, that price will shift by at least $1,000 in one direction or the other. Maybe they’ll be valueless! Maybe they’ll be the only currency accepted at the Amazon Go store where you buy medical supplies after the apocalypse! Anybody who says they know better be telling you from a seat of gold.
It’s hard to draw a causal chain from NAFTA being terminated to Bitcoin, other than the devaluing of Canadian dollars and Mexican pesos spurring demand. Following the Brexit vote, Bitcoin’s price shot-up significantly.
O/U jobs lost in the US post-NAFTA termination: 0.5
It’s really difficult to quantify the effect terminating NAFTA would have on US employment numbers. NAFTA has been the status quo for so long; it’s reversal wouldn’t be a retreat to 1993. A 2015 report by the Congressional Research Service found that NAFTA didn’t have the catastrophic effects its critics feared or the huge benefits its proponents promised. Trade with Canada and Mexico is a small percentage of US GDP, and thus the benefit is only on the margins. A NAFTA termination won’t “bring back jobs” in the way Trump promises, but it also won’t destroy the US economy in the way his opponents claim. Setting the O/U at o.5 reflects the potential for jobs to be gained as well as lost, which are about equally likely.
Odds Donald Trump and Justin Trudeau engage in a Twitter war about NAFTA: 3/7
Both leaders live and die by their social media, so getting into a Twitter spat seems inevitable. Trudeau can score points in a country where Trump is hugely unpopular, and Trump’s base loves it when he gets into fights, particularly with well-heeled establishment types.
Odds construction of a Mexican border wall commences in 2018: 1/1
All Donald Trump needs to do is build 400 yards of wall, take a lot of pictures in front of it, and call it a day. Nobody’s going to Arizona to check.
Odds Mexico pays for the border wall: 1/1
We’ve established that “Mexico pays” does not mean a big cheque from Mexico to the United States, memo line “Por el Muro.” It could mean taxing remittances, introducing a border toll, or even dismantling NAFTA and calling Mexico’s loss of trade surplus a way of paying for it. Even if Donald Trump pays for it out of pocket, he’ll find some way to say that Mexico paid for it.
Odds construction of a Canadian border wall commences in 2018: 5000/1
Trump doesn’t want a wall with Canada. It’s too much “like Norway.”
Odds Canada pays for the border wall: 1/1
If there’s a wall being built, Canada’s likely paying for it, out of dogged politeness.