Here's my take on the deal the United States and Mexico announced Monday to revamp the North America Free Trade Agreement.
First, it looks like the two countries have closed major gaps around autos and energy, which will allow Canada (the third party in NAFTA) to return to the negotiating table. The Trump Administration is looking to fast-track these negotiations before Mexican President-elect Andres Manuel Lopez Obrador takes office on Dec. 1.
However, negotiations between the United States, Mexico and Canada are far from finished. There are still major hurdles, and even if Trump reaches final deal with Mexico and Canada, the U.S. Congress will likely have to approve any changes.
Still let's see where things stand now, as well as which U.S. stocks might win from Monday's pact:
The new deal reportedly includes a rule increasing how much of a Mexican-assembled car must come from North American factories to qualify for duty-free entry into the United States. The agreement boosts that minimum from the current 62.5% to a new 75%. Vehicles that don't comply will face a 2.5% import tariff.
Mexico represents a major market for U.S. petroleum refiners, with U.S. companies providing around 50% of Mexican gasoline. U.S. companies Andeavor (ANDV) and Valero Energy (VLO) already refine oil for Mexican state petroleum company Pemex, while Glencore (GLNCY) recently inked a joint venture with local partner Grupo G500 to import fuel into the Latin American country. GLNCY last week received its first gasoline imports at the company's 600,000-barrel private terminal at Dos Bocas in the Gulf of Mexico.
However, the incoming Lopez Obrador administration has said it's likely postpone public auctions for two years on Mexican oil exploration-and-production blocks in a bid to strengthen Pemex. Major U.S. players in the Mexican oil space include independent Talos Energy (TALO) and Chevron (CVX) .
Washington's most valuable negotiation tool with Mexico involves U.S. export of natural gas south of the border.
The Latin American country currently imports around 2.6 billion cubic feet a day of natural gas via pipelines across the Texas border, with major pipeline operators including Transcanada (TRP) and private equity-backed companies like Fermaca Global. However, Mexico aims to boost these imports 9 billion cubic feet per day under a five-year plan to build more gas pipelines and infrastructure.
Some U.S. companies aim to use Mexico as a low-cost weigh station on the road to exporting natural gas across the Pacific and into Central and South America. Major players in this space include:
- Mexico Pacific Limited, an Och-Ziff Capital-backed LNG export company.
- New Fortress Energy, an LNG provider backed by Fortress Investment Group.
The Mexican Peso
The peso was down as much as 1.6% Monday on news of the U.S.-Mexican deal. That's partly because excluding Canada from the negotiations could hurt Mexico, as NAFTA has been a three-way pact for decades. Additionally, a separate U.S.-Canadian trade agreement would leave Mexico behind.
The Bottom Line
It's evident by the relationships detailed above that U.S. companies across various industries will continue to find backdoors to trade with Mexico regardless of what treaty talks produce.
Over time, it seems certain that the trade "border" between the two countries will become blurrier and blurrier -- and that not even President Trump's proposed border wall will be able to hold imports and exports from crossing it.