Why US-Mexico Trade Deal Still Must Include Canada

America’s neighbor to the north has been sidelined on NAFTA talks, amid Trump-Trudeau acrimony.

The US-Mexico trade deal is unlikely to stay a bilateral agreement, even though Canada lately is the odd man out on the talks.

The North American Free Trade Agreement (NAFTA), which President Donald Trump wants to scrap, is still on the books. For the US, only Congress can alter it. And free trade sentiment is still alive on GOP-controlled Capitol Hill.

There has been bad blood between Trump and Canadian Prime Minister Justin Trudeau over many issues. Recently Trump threatened to slap more punitive tariffs on Canada than he already has.

In recent weeks, Canada stayed out of talks on purpose, with Ottawa saying it wanted the US and Mexico to resolve their differences over American manufacturing jobs, specifically in the auto industry, migrating south of the Rio Grande. “Once the bilateral issues get resolved, Canada will be joining the talks to work on both bilateral issues and our trilateral issues,” Chrystia Freeland, Canada’s foreign minister, told reporters Friday.

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For both Mexico and Canada, it is better to have a three-way pact than a two-way one, because a bilateral agreement would give the US, by far the larger nation, more clout. The Mexicans in particular have long insisted that the Canadians be a part of any new treaty, to join in as a counterweight against the Americans.

The US-Mexico deal declares that goods traded without tariffs must be made in factories that pay their workers higher wages. That could tilt the board to returning auto jobs to the higher-paying US from Mexico.

“Automakers urge the US and Mexico to quickly re-engage with Canada to continue to build on this progress,” the Alliance of Auto Manufacturers, which represents most automakers selling vehicles in the US, said in a statement.

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Norway Commission Recommends Against Oil Divestment

Panel says divestment would not protect against a permanent drop in oil prices.

A commission appointed by the Norway government has recommended against the country’s $1.04 trillion Government Pension Fund Global (GPFG) divesting petroleum stocks, saying it wouldn’t do much to protect the fund against sell-off in oil, while at the same time complicating its investment strategy.

 “Divestment of the energy stocks in the Government Pension Fund Global (GPFG) is not an effective insurance against a permanent decline in oil prices,” commission chair Øystein Thøgersen said in a release. “The energy stocks only contribute marginally to Norway’s oil price risk.”

 Last November, Norway’s central bank, Norges Bank, which manages the fund, recommended that oil stocks be removed from the fund’s benchmark index. It said the vulnerability of the country’s assets to a permanent reduction in oil and gas prices would be reduced if the fund were not invested in energy stocks.

At the time, the bank said that its conclusion was based solely on financial arguments, and did not reflect potential future movements in the oil price, or the profitability or sustainability of the sector.

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The commission was asked to assess whether the GPFG should be invested in energy stocks, such as stocks included in the energy sector as classified by the FTSE Russell index. It said that after taking several factors into consideration, it recommends the GFPG should remain invested in energy stocks.

 Energy stocks only made up approximately 4% of the total value of the country’s sovereign wealth fund, or approximately NOK315 billion ($37.8 billion) as of the end of 2017.

The commission said it agreed with Norges Bank that the value of energy stocks is linked to the oil price, especially in the short term, and added that in isolation, this would suggest a reduction of the fund’s investments in energy stocks is prudent. However, it pointed out that it had been asked to take multiple considerations into account—not just financial ones—including the need for, and the benefit of, an insurance against a permanent decline in the value of Norway’s oil and gas resources.

“In a scenario with sustained lower oil prices, the loss in the government’s net cash flow from petroleum activities will be substantial,” said the commission. “However, only around 1% of such a loss will be covered if the GPFG is not invested in energy stocks.”

The commission said a sell-off of energy stocks would also “challenge the current investment strategy of the fund,” with broad diversification of the investments and a high threshold for exclusion.

“This investment strategy is simple, well-founded and has served the fund well,” said the commission. “If energy stocks are excluded from the fund, the composition of the investments will differ from market weights, and the fund will be expected to either achieve lower return or higher risk.”

It added that there is not much of a need to insure Norway’s wealth against a permanent reduction in the oil prices because the country has a high capacity to take on oil price risk, in part because it has a fiscal policy framework in which current oil revenues are placed in the GPFG rather than being spent.

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