The U.S. will likely ditch the North American Free Trade Agreement (NAFTA) with Canada and Mexico, according to a team of analysts at Goldman Sachs who sees President Trump's recent decision to impose tariffs on steel and aluminum as a catalyst for a breakup of the trade deal, as reported by CNBC. (See also: 5 Stocks to Outperform in 2018’s Volatile Market.)
On Friday, Goldman Sachs' Chief Economist Jan Hatzius indicated that while Trump has not formally announced a decision to exit the trade partnership, slapping a whopping 25% tax on steel and a 10% tax on aluminum would be the most substantial trade restrictions to date. NAFTA, which went into effect at the start of 1994, broadened a free-trade agreement between the U.S. and Canada in place since 1989, and created the largest free market in the world.
"Unlike routine antidumping and countervailing duty cases or less common safeguard cases, the Section 232 authority the President will apparently use is rarely used and more controversial," wrote Hatzius, referring to the Commerce Department's use of a section of the 1962 Trade Expansion Act in making its recommendation for tariffs. Department leaders suggested that dumping of cheap steel and aluminum from abroad puts U.S. players out of business, thus posing a risk to national security, according to CNBC. Wrote Hatzius: "There is a good chance that this could eventually lead the President to announce he intends to withdraw from NAFTA, but such an announcement does not appear likely in the near term."
No Economic Argument
Continued protectionist trade decisions by Trump have the potential to significantly disrupt the Mexican peso and the Canadian dollar, according to the investment bank. As the parties seem to have little common ground, the relationship is more strained. Hatzius added that the GOP's tariff proposal "does not rely on any economic argument and instead imposes trade restrictions on national security grounds."
On Friday, Trump took to Twitter Inc. (TWTR), indicating that "trade wars are good, and easy to win," while promising to impose reciprocal tariffs on any goods. Such views have angered U.S. allies and led worried investors to send equities down, with the market opening sharply lower this morning. The recently announced tariffs raise concerns about retaliation from major U.S. trading partners such as China. (See also: Expect More Global Volatility: GS, Bridgewater.)