Daily Comment (May 7, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning! Today was a relatively slow news morning but here are a few stories we are following:

NAFTA negotiations: Today, trade representatives from Mexico, Canada and the United States will meet in Washington to discuss an agreement in principle for NAFTA.  Currently, there appears to be a stand-off between the countries over instituting a wage floor for autoworkers, an increase in the place of origin provision from 62.5% to 75% of the value of the vehicle as well as implementing a sunset provision that would allow the agreement to expire if it is not renewed after five years.[1], [2] Although both Mexico and Canada have resisted changes to the place of origin clause proposed by the U.S., the primary focus of recent negotiations appears to be the wage floor. In the event that Mexican wages were to fall below $16 an hour, the U.S. and Canada could place tariffs on autos entering either of their countries. Mexico does not like the provision as it fears a wage floor could deter companies from building cars in Mexico and therefore has been reluctant to budge; currently the average Mexican autoworker receives $8 an hour. Despite its reluctance, the Mexican government is expected to issue a counterproposal or come to a compromise later this week as it would like an agreement before the July 1st general election.

Iran uncertainty: The price of crude oil rose to a three-year high as Iran escalates tensions with the U.S. and Saudi Arabia. There is growing speculation that President Trump will not renew the sanction waivers before the May 12th deadline. In response, Iranian President Rouhani stated that if the U.S. were to pull out of the agreement it would consider restarting its nuclear energy program. President Trump has long expressed pessimism about the ability of the Iran deal to prevent Iran from getting a nuclear weapon. Many fear that if the U.S. were to pull out of the agreement it would lead to inevitable conflict between the U.S. and Iran, with the U.S. refusing to accept a nuclear Iran and Iran refusing to be bullied by the U.S. On Saturday, former New York mayor and presidential attorney Rudy Giuliani added fuel to that speculation by stating that the president is “committed to a regime change” in Iran.[3] In addition to increasing tensions with the U.S., Iran has also stirred up controversy among its fellow OPEC members. This morning, Iran notified its fellow OPEC members that it does not support Saudi Arabia’s goal of pushing crude prices to $80 a barrel, instead preferring a target of $65 a barrel. This dissention will likely heighten its rivalry with Saudi Arabia, which it is already fighting in a proxy war in Yemen.

Putin’s new term: This morning, Russian President Vladimir Putin was sworn in for a fourth term. It has been speculated that this could be his last term in office. President Putin won the general election with over 77% of the vote largely due to his ongoing standoff with the West. In his acceptance speech, Putin stated that his focus will be on domestic matters such as improving the economy as Russia’s economy has been hit hard by international sanctions and falling oil prices. At the moment, it is unclear who will succeed President Putin after his six-year term ends, but current favorites are Head of Rosneft Igor Sechin, Defense Minister Sergie Shoigu, former Putin body guard Alexei Dyumin and Moscow Mayor Sergei Subyanin.

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[1] http://www.elfinanciero.com.mx/economia/hoy-inicia-reunion-decisiva-de-tlcan

[2] https://www.reuters.com/article/us-trade-nafta/nafta-talks-enter-critical-week-with-u-s-still-pushing-hard-line-idUSKBN1I80BK

[3] https://www.politico.com/story/2018/05/05/giuliani-trump-iran-regime-change-570744