Late last year, City National conducted a survey of our clients who do business internationally. We will be talking more about the interesting results of that survey over the next few weeks, but one of the responses is particularly applicable in light of some news that broke this week.

When asked what would constitute major threats to their plans for international expansion, one of the survey respondents' top answers was the fate of NAFTA.

On Wednesday, Reuters reported that Canada is becoming increasingly convinced that President Trump will announce that the U.S. is pulling out of NAFTA. One of the officials quoted said that the Canadian government is “planning for Trump to announce a withdrawal.”

The markets reacted immediately, with both the Canadian dollar and the Mexican peso dropping in value, along with stocks of companies that currently benefit from the treaty. But aside from the short-term reaction, the bigger question is what long-run effects will be in the cards if this news proves to be true.

In fact, “cards” may be a good way to look at this situation – as something akin to a global poker game with the highest of stakes.

It is possible that the suggestion of a NAFTA pullout is simply a negotiating move by the administration to try to extract more concessions from Canada and Mexico. Another interpretation could be that by raising the alarm this week, some in Canada are hoping to rally support for NAFTA from U.S. business interests.

If speculation that Trump will decide to exit the treaty at the end of this month proves true, that would set off a six-month withdrawal timeline. That would coincide with Mexico's presidential election in July, in which left-wing candidate Andrez Manuel Lopez Obrador is so far making a strong showing.

We have mentioned in this commentary previously that the NAFTA negotiations are not going well. Before the Reuters story broke this week, market chatter had settled on a consensus that there was a 50/50 chance of a U.S. exit of NAFTA, which of course would effectively kill the treaty altogether.

The aftermath of such an event could be something like a smaller, U.S version of Brexit, where long-established production chains would be disrupted and many transitions would need to be made in various industries over months and even years.

Our View: While it has been controversial, and certain companies have suffered, economically NAFTA has been an overall positive for the U.S. Withdrawing from NAFTA would result in overall lower corporate profits, higher prices for U.S. consumers and a lower stock market. These are all results this administration does not want to see happen - therefore, we believe a NAFTA exit is not very likely.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447-4133.

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