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  1. Home
  2. / Investing

Potential Winners and Losers in the U.S.-Mexico Trade Deal

Trade negotiations between the U.S. and Canada resumed on Wednesday.
By ELIECER PALACIOS
Aug 29, 2018 | 01:09 PM EDT
Stocks quotes in this article: EWC, EWW, TRP, GTE, GPRK, VLO, ANDV

Following this week's trade pact between the U.S. and Mexico, the Trump Administration is aiming to arm-wrestle Canada to agree to more favorable trade terms in the U.S., particularly in matters of agriculture and dairy. President Trump has gone as far to say that he will drop the "NAFTA" name and name this week's agreement the "United States-Mexico Trade Agreement," potentially leaving Canada out in the cold.
 
However, the deal still faces approval from Congress, which is likely to move forward only if Canada is brought on board as a trilateral agreement is paramount given the relevance across many industries, including agriculture, autos, manufacturing, steel and energy.
 
Trade negotiations between the U.S. and Canada were taking place on Wednesday. Canada foreign minister Chrystia Freeland "expressed optimism that the talks were going to move in a positive direction this week," the New York Times reported.
 
In terms of equities, we think Canada is better positioned than Mexico to benefit from this agreement given the uncertain outlook for Mexico in light of the new incoming administration. This forecast is evidenced by the consistent outperformance of Canadian vs. Mexico stock markets, measured by the iShares MSCI Canada ETCF ( EWC)  versus iShares MSCI Mexico ETF ( EWW)  .
 
One of the major concerns for the U.S. is what to do with the excess supply coming from the Permian Basin of West Texas and New Mexico, America's busiest oil field, where roughly $1 million worth of natural gas goes to waste each day.
 
Producers have no way to move the gas, which is a byproduct of oil drilling, to market because there are not enough natural gas pipelines. Instead, they are getting rid of the excess gas by setting it on fire, a practice known as flaring. Producers flare about 3% of the natural gas they extract in the Permian. However, production in the Permian Basin is so high that the volume of gas burned every day would be large enough to supply the daily needs of U.S. states such as Montana and New Hampshire.
 
Mexico has historically been a major consumer of U.S. natural gas and petroleum products. Thus setting up a trade agreement with Mexico first was paramount to setting the guidelines on energy policy. For Canada, Mexico also represents a major trade partner in the natural gas industry as Transcanada ( TRP)  has been a major pipeline operator in the country for the last 10 years.
 
In a clear sign that U.S. and Mexico should ink a deal on time is Mexico President-elect Andres Manuel Lopez Obrador's consideration to indefinitely suspend auctions for oil and gas projects, giving Petroleos Mexicanos (Pemex) the authority to pick its own joint-venture partners rather than holding competitive tenders.
 
While this is bad news for Canadian players like Canacol Energy, Gran Tierra ( GTE)  and GeoPark ( GPRK)   who have been looking to enter the country for many years, it is positive news for U.S. independent refiners like Valero Energy ( VLO)  and Andeavor ( ANDV)  who over the past 18 months have been negotiating supply and trade agreements with Pemex to import high-margin, U.S. refined products such as gasoline, diesel and jet fuel.
 
U.S. negotiations with Mexico on auto assembly is mainly a blow to China's trade relationships as provisions of the new trade deal limit the scope for assembly in Mexico with Chinese components, favoring higher-value parts from manufacturers covered by the trade agreement.
 
Trump is betting on U.S. negotiating power, but his weakness lies in multi-lateral negotiations. Trump has pulled out of Trans-Pacific Partnership (TPP), diminishing the nation's ability to trade with Asian markets, particularly southeast Asia.
 
As for China, it'd be easier for them to find other markets beyond the U.S. and to watch the U.S. mid-term elections in November before making any further moves.
 
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At the time of publication, Palacios had no position in the securities discussed.

TAGS: Investing

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