NAFTA in the Netflix Age

August 25, 2017 Patrick Ercolano

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The year the North American Free Trade Agreement came into effect, there was no such thing as Google and you had to walk to Blockbuster to watch a movie at home.

As NAFTA negotiations intensify in the coming weeks, there are many questions about the future of this long-standing agreement, from its impact on Canada’s economy to whether Canadians will ever be able to access U.S. Netflix. (My fingers are crossed on the latter).

I strongly believe there will be a revamped form of NAFTA within the next year or so, despite all the noise we are hearing today. Some industries may benefit while others lose ground, but Canada can continue on a path of growth—of that, I’m sure.

The rise of Big Data analytics and artificial intelligence holds significant opportunities for Canada. The need to recognize new industries, along with labour and environment protection, is vital. 

Last week, representatives from Canada, Mexico and the U.S. began to renegotiate NAFTA for a modern age, even as U.S. President Donald Trump amped up threats to kill it. His rhetoric has (so far) been taken in stride by the markets, and we don’t see reason to change our long-term fund management strategy.

The U.S. goal is clear: to improve its trade balance. With a trade deficit of US$70 billion with Mexico compared to a deficit of US$16 billion with Canada, the U.S. is expected to press harder on its neighbour to the south.

Three amigos who have done better, together

Canada, the U.S. and Mexico are natural trading partners. Trade in North America has more than tripled since NAFTA came into effect to eliminate most tariffs and barriers.

We don’t only sell things to one another, we make them together: integrated economies with supply chains across borders to serve industries from aerospace to apparel.

You can’t force a trade genie back into the bottle

NAFTA has made North American industries globally competitive as a trading block. The auto-making sector, for one, has prospered with an integrated supply chain that would be hard to pull apart in a “Build American, hire American” regime.

For instance, Canada’s largest auto parts maker, Magna International, an MD holding, operates 58 manufacturing and assembly plants in the U.S., 30 in Mexico and invests more south of the border than in Canada (Read more about this supply chain in our recent article).

Coming to terms with digital dilemmas

NAFTA’s origin pre-dates widespread e-commerce and digital services. As such, President Trump’s trade team is pressing Canada for things like freer access to our telecommunications industry.

In the context of telecom companies like Rogers, an MD holding, it will take more than trade talks to substantially alter the foreign investment landscape, says James Black, Vice President, Canadian Equities for Beutel, Goodman & Company Ltd., sub-advisor to MD Dividend Growth Fund and MDPIM Dividend Pool.

“We think it is unlikely that Canadian telecom foreign ownership regulations will be changed during NAFTA negotiations. Even if they were, the Broadcast Act would also have to be changed in order for foreigners to buy any of the incumbent telcos or cablecos, and broadcasting is a political sacred cow.”

Let me check out that shopping cart

Web retail is another area where the U.S. is pushing for access reform. President Trump wants Canadians to enjoy the same $800 duty-free exemption on cross-border online purchases that Americans get—up from a mere $20.

Whatever the shape of NAFTA 2.0, a deal that respects the realities of 2017—not 1994—could bring benefits to us as consumers and investors. After all, who doesn’t love finding a great deal online?

In the long term, trade policies may influence the value of some investments reliant on U.S. exports for revenue growth. We’re prepared to reevaluate as things develop.

As for your Netflix: well, it’s complicated. But we’ll be tuned in as the NAFTA drama plays out: the next episode of talks is set for release, September 1–5 in Mexico.

 

About the Author

Patrick Ercolano

Patrick Ercolano, CFA, MBA, is a Lead Portfolio Manager with the Investment Management and Strategy team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.

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