Issuu

The U.S. Economy: North American Trade Dynamics Eugenio J. Alemรกn, Ph.D. Director and Senior Economist

October 2017

Trade Trends Post NAFTA

ď‚§ Since NAFTA went into effect (1994), U.S. trade has increased with Canada and Mexico. Established trade ties with Canada continued to grow as both exports and imports from Canada have more than doubled and trade between the economies is roughly in balance.

ď‚§ With Mexico, U.S. exports have increased 470 percent while U.S. imports from Mexico have increased 735 percent. This has resulted in a U.S. trade deficit with Mexico, which totaled $63.2 billion in 2016. U.S. Imports From Canada and Mexico

U.S. Exports to Canada and Mexico

In Billions of Dollars

In Billions of Dollars $700B

$700B

U.S. Exports to Mexico: 2016 @ $231.0B U.S. Exports to Canada: 2016 @ $266.0B

$700B

U.S. Imports From Mexico: 2016 @ $294.2B U.S. Imports From Canada: 2016 @ $278.1B

$600B

$500B

$400B

$300B

$200B

$100B

$600B

$0B

$0B 93

Source: International Monetary Fund and Wells Fargo Securities

Economics

$600B

NAFTA Renegotiations Timetable

 On average, the lag time from the date signed to the date implemented for Free Trade Agreements has been 22.9 months or nearly 2 years.

 With Article 2205’s mandatory 6 month waiting period, after a written notice of withdrawal is provided to remaining parties, President Trump more than likely will need a second term to see a renegotiated NAFTA agreement come to fruition. U.S. FTAs Implementation Lag by Trading Partner From Dated Signed to Date Implementated; In Months Korea Costa Rica Peru Dom. Republic Oman Guatemala U.S. Average Nicaragua Hondoras Bahrain El Salvador Morocco Jordan NAFTA Panama Singapore Australia Chile Israel

Source: Office of the U.S. Trade Representative and Wells Fargo Securities

Economics

Rules of Origin

 Part of the renegotiation of NAFTA could include a revision to the rules of origin

 Rules of origin determine the percentage of intra-region production content that needs to be present in each product to apply for zero-tariff

 Today, a Mexican automobile needs to have 62.5 percent of NAFTA country content to enter the U.S. without paying taxes

 Increasing the NAFTA content could bring in more automobile investment to any of the NAFTA countries. That is, nothing guarantees that this measure will increase investment in the automobile sector in the United States

 However, this could benefit U.S. automobile production at the expense of automobile production in Asia (i.e., China, Japan, South Korea, etc.).

Economics

What Is At Stake Regarding Trade and NAFTA?

 Major U.S. trade sectors that have a trade surplus with Mexico:  Minerals, chemical and pharmaceutical production ($19.5 billion surplus)  Petroleum and coal products ($15.6 billion surplus)  Plastics, woods, paper, fibers ($6.0 billion surplus)  Grains and milling products ($2.0 billion surplus)  Aircrafts, railways ($1.3 billion surplus)  Major U.S. trade sectors that have a trade deficit with Mexico:  Motor vehicles & parts ($71.5 billion deficit)  Electric, audio & sound equipment, apparel & accessories ($21.6 billion deficit)  Computer & electronic products ($15.5 billion deficit)  Fruits and vegetables, nuts, etc. ($10.3 billion deficit)  Furniture and medical instruments ($5.0 billion deficit)  Precious metals, beverages, spirits ($5.0 billion deficit)  However, many of these sectors supply each other in the U.S. and Mexico so the disruptions could be serious Economics

Manufacturing in the U.S. & Mexico

ď‚§ Manufacturing in the U.S. and Mexico are more complementary than competitive ď‚§ If the U.S. manufacturing sector strengthens, the Mexican manufacturing sector follows, and vice versa Manufacturing Production Index Year-over-Year Percent Change of a 3-Month Moving Average 20%

20% Mexico Manufacturing Production: Jul @ 3.0% U.S. Manufacturing Production: Aug @ 1.4%

15%

10%

-5%

-10%

-15%

-20%

-20% 95

Source: U.S. Department of Commerce, IHS Global Insight, and Wells Fargo Securities

Economics

Exported & Imported Goods Between U.S. & Canada  Since NAFTA, U.S. exports to Canada and American imports from Canada have increased by 145.6 percent and 135.3 percent, respectively  Canada is currently the world’s largest purchaser of U.S. goods especially transportation equipment, chemicals, nonelectrical machinery and computer/electronic products U.S. vs. Canada

Trade by Commodity

Total Exports Between the U.S. and Canada

Two-Way Trade With Canada by Commodity

In Billions of US Dollars $400

$350

$300

$250

$250 Petroleum & Coal Products

$200

$300

Signing of NAFTA

$8.9 $9.4 $10.1 $10.6 $11.7

$250

$150

$200

$14.1

$200

$24.2

$150

$25.5

$100

$150

$26.9

$100

Plastics & Rubber

$8.4 $7.5

$5.5 $3.7

$19.3 $15.6 $6.5 $12.9 $22.7

$200

Primary Metal Mfg Fabricated Metal Products

$150

Electrical Equip. & Appliances Food & Kindred Products

$100

Computer & Electronic

Machinery, Except Electrical

$50

Canda Exports to U.S.: 2015 @ $313.2 Billion U.S. Exports to Canada: 2015 @ $280.6 Billion

$50

$63.6

Chemicals

$50

Transportation Equipment

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

$0 Total U.S. Exports

Source: International Monetary Fund, U.S. Department of Trade and Wells Fargo Securities

Economics

$70.5

Total U.S. Imports

Billions

Top 10 Commodities Sorted by Exports, In Billions of Dollars, 2016

Exports & Imports Between U.S. & Mexico ď‚§ Exports and imports to and from Mexico reveal a similar pattern of complementarity rather than competition between the two countries ď‚§ Exports from the U.S. to Mexico have been less volatile than exports from Mexico to the U.S. as the former are less discretionary than the latter U.S. vs. Mexico

Trade by Commodity

Total Exports Between the U.S. and Mexico

Two-Way Trade With Mexico by Commodity

In Billions of US Dollars

$300

$350 Mexico Exports to U.S.: 2015 @ $296.4 Billion U.S. Exports to Mexico: 2015 @ $235.7 Billion

$250

$250 $5.0

$300 $200

Signing of NAFTA

$250 $200

$250 $150

$200

$9.6 $10.0 $10.4 $10.7

$1.1

$8.6 $7.3 $8.1

Food & Kindred Products

$17.0

Plastics & Rubber Products

$150

Fabricated Metal Products

$16.3

$18.9

$100

$150

Electrical Equip. & Appliances

$99.5

$21.7

$100

$200

$5.3

$16.7

$150

Primary Metal Mfg

$26.2

Petroleum & Coal

$100

Machinery, Except Electrical

$100

$50

Transportation Equipment

$50 $42.9

Computer & Electronic Products

$0 Total U.S. Exports

Source: International Monetary Fund, U.S. Department of Trade and Wells Fargo Securities

$50

$58.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Economics

Chemicals

$31.8

$50

Total U.S. Imports

Billions

$350

Top 10 Commodities Sorted by Exports, In Billions of Dollars, 2016

On the Services Side, U.S. had a Trade Surplus

ď‚§ Despite all the hand-wringing over trade deficits, the United States enjoys trade surpluses on the services side with its NAFTA partners and even with China International Trade Balance in Services $40 $35

$40

Canada: 2016 @ $24.0 Billion Mexico: 2016 @ $7.5 Billion China: 2016 @ $38.0 Billion

$35

$30

$25

$20

$15

$10

$0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Source: U.S. Department of Trade and Wells Fargo Securities

Economics

Thousands

In Billions

Global Forecast

Wells Fargo International Economic Forecast (Year-over-Year Percent C hange)

GDP 2018

2019

2017

2018

2019

Global (PPP Weights) Global (Market Exchange Rates)

3.4% 3.2%

3.4% 3.3%

3.1% 2.8%

3.2% 3.2%

3.3% 3.3%

3.1% 3.1%

Advanced Economies 1 United States Eurozone United Kingdom Japan Korea Canada

2.3% 2.2% 2.1% 1.6% 1.9% 2.9% 3.0%

2.3% 2.6% 2.0% 1.7% 1.1% 2.8% 2.0%

1.8% 2.5% 1.7% 1.6% 0.7% 3.0% 1.9%

1.7% 1.9% 1.5% 2.6% 0.3% 2.1% 1.6%

1.9% 1.7% 1.7% 2.1% 0.7% 2.0% 1.9%

1.4% 2.2% 1.9% 2.0% 0.3% 2.4% 2.0%

Developing Economies 1 China India2 Mexico Brazil Russia

4.5% 6.6% 7.1% 2.1% 0.6% 1.7%

4.5% 6.3% 6.4% 2.3% 2.0% 2.0%

4.3% 5.9% 7.2% 2.4% 2.2% 2.2%

4.8% 1.5% 3.1% 6.0% 3.5% 4.2%

4.8% 2.0% 4.1% 5.0% 3.5% 4.3%

4.8% 1.9% 4.3% 5.2% 3.8% 4.5%

Forecast as of: September 7, 2017 1

Aggregated Using PPP Weights

Source: International Monetary Fund and Wells Fargo Securities

Economics

CPI

2017

FX Outlook

Wells Fargo Bank Currency Strategy Group Forecast (End of Quarter Rates) 2017 Major Currencies Euro ($/€) U.K. ($/£) U.K. (£/€) Japan (¥/$) Canada (C$/US$) Australia (US$/A$) Switzerland (CHF/$) Other Currencies China (CNY/$) South Korea (KRW/$) Singapore (SGD/$) Taiwan (TWD/$) India (INR/$) Mexico (MXN/$) Brazil (BRL/$) Colombia (COP/$)

2018

1.21 1.33 0.91 111 1.20 0.81 0.95

1.22 1.34 0.91 110 1.19 0.82 0.95

1.24 1.35 0.92 109 1.17 0.83 0.94

1.26 1.35 0.93 108 1.15 0.84 0.92

1.27 1.35 0.94 108 1.14 0.84 0.92

1.27 1.36 0.94 107 1.14 0.85 0.92

6.52 1130 1.33 30.00 63.75 17.80 3.10 2925

6.49 1130 1.31 30.00 63.50 17.80 3.08 2900

6.46 1120 1.29 29.75 63.00 17.50 3.06 2875

6.43 1110 1.28 29.50 62.50 17.20 3.02 2850

6.42 1107 1.28 29.42 62.33 17.10 3.01 2842

6.41 1103 1.27 29.33 62.17 17.00 2.99 2833

Forecast as of: September 12, 2017

Source: Wells Fargo Securities

Economics

2019

Wells Fargo Securities Economics Group Global Head of Research, Economics & Strategy

Economists

Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com Global Head of Research, Economics & Strategy

Sarah House, Economist

……

michael.a.brown@wellsfargo.com

Jamie Feik, Economist

Chief Economist John E. Silvia

sarah.house@wellsfargo.com

Michael A. Brown, Economist

jamie.feik@wellsfargo.com

Erik Nelson, Currency Strategist

erik.f.nelson@wellsfargo.com

john.silvia@wellsfargo.com Economic Analysts

Senior Economists

Michael Pugliese, Economic Analyst

michael.d.pugliese@wellsfargo.com

edward.h.pershing@wellsfargo.com john.h.carmichael@wellsfargo.com

Mark Vitner, Senior Economist

mark.vitner@wellsfargo.com

E. Harry Pershing, Economic Analyst

Jay H. Bryson, Global Economist

…jay.bryson@wellsfargo.com

Hank Carmichael, Economic Analyst

sam.bullard@wellsfargo.com

Ariana Vaisey, Economic Analyst

Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Eugenio J. Alemán, Senior Economist

Shannon Seery, Economic Analyst

eugenio.j.aleman@wellsfargo.com

Azhar Iqbal, Econometrician

azhar.iqbal@wellsfargo.com

Tim Quinlan, Senior Economist

tim.quinlan@wellsfargo.com

Eric J. Viloria, Currency Strategist

Abigail Kinnaman, Economic Analyst

nicholas.bennenbroek@wellsfargo.com

ariana.b.vaisey@wellsfargo.com abigail.kinnaman@wellsfargo.com shannon.seery@wellsfargo.com

Administrative Assistants

eric.viloria@wellsfargo.com

Donna LaFleur, Executive Assistant

donna.lafleur@wellsfargo.com

Dawne Howes, Administrative Assistant

dawne.howes@wellsfargo.com

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2017 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

Economics