The Coming NAFTA Confrontation as a Game of Chicken

Donald Frump began his campaign inveighing against Mexicans, promising to build a wall, and threatening to abrogate the North American Free Trade Agreement, in place now for some twenty years.  Punitive tariffs have been threatened on Mexican exports.

Nothing hidden or covert there! After Frump won, the Mexican stock market fell and the peso trended down.

Then again, although Mexico exports about $250 billion of goods per year to the US, the United States exports about $200 billion back to Mexico.

Fun to read a Texan small businessman opining to journalists, “Well I hope that was just part of Mr. Trump’s campaign rhetoric—he wouldn’t really try to shut down trade with Mexico, would he?”

So let’s imagine how this might play out.  Mr. Frump, el caudillo, lays it down: “Mexico will renegotiate NAFTA on favorable terms, or I will impose a 45% tariff on all Mexican imports to the US, starting right now.”

The ball is in Mexico’s court; what do they do? I suppose they could submit: “Yassir, yassir, whatever the patron commands.”

But I dunno. Maybe I watched too many Robert Rodriguez movies

What if instead, the leadership of Mexico decides to play a game of chicken against Trump? “Okay, tariffs back at you.  And in 30 days, if you don’t relent, we will nationalize every piece of property in Mexico owned by US citizens or corporations—auto factories, hotels, beachfront condos, every single one.”

Now take this confrontation onto the movie set.  High desert scene, straight, empty highway.  At one end, Donald Frump, driving a white Cadillac Escalade, V8 revving, representing de Estado Unidos.

At the other end of the highway, well, who do we see?  Think about it for a moment: who will represent the sovereign nation of Mexico in this high stakes cinematic confrontation?

I’m thinking Danny Trejo, in character, driving a tricked out Ford 150 pickup.

Revvv! Vroom! Frump and Trejo accelerate straight toward one another. Game on!

Frump in the Cadillac, Trejo in the pickup, playing chicken. What happens?

Three possible outcomes:

• Frump swerves aside at the last minute. “Let’s negotiate, the United States would like a new agreement.”
• Trejo swerves aside at the last minute. “You got me, Mexico yields”
• Nobody swerves. They meet head on at a net velocity over 200 mph. Trade war!

How do you think that game of chicken will play out?

Now translate your prediction into stock market outcomes: how should you invest?