NAFTA Negotiations: Will the U.S. Throw Punches at Canadian Manufacturers?

Early reports suggest that companies such as Linamar Corporation (TSX:LNR) may not have to sweat out a major protectionist push.

| More on:

According to sources with knowledge of the NAFTA renegotiation, which began on August 16, the United States did not open with specific details of the extent to which it wanted to increase national content for auto manufacturing. Robert Lighthizer, the top trade official for the Trump administration, stated that the White House was seeking tougher rules of origin for automobiles.

The current rules of origin require that automobiles must meet 62.5% North American content, and components must meet 60%. In the last year, the United States had an auto and parts trade deficit with both Canada and Mexico (though a much more substantial deficit with the latter). The subject of trade deficits has been a significant focus in the rhetoric of the Trump administration. Still, leaked conversations between President Trump and the Mexican President Nieto seemed to indicate that Canada was not in the cross-hairs of the administration.

The stock for Magna International Inc. (TSX:MG)(NYSE:MGA) was mostly stagnant throughout the week of August 14-18, rising 0.16%. The company released its second-quarter earnings on August 11 and posted record results, but investor response was lukewarm due to a 3% drop in North American production. Magna has diverse global demand and is aggressively moving into fast-growing markets in China, eastern Europe, India, and South America. An attempted shift to grow North American content relative to its global competitors may produce a change in strategy.

Winpak Ltd. (TSX:WPK) is a Winnipeg-based company that manufactures and distributes packaging materials and various products used to protect perishables and healthcare applications. The company released its second-quarter results on July 27. It reported net income of $25.7 million, or $0.40 per share, compared to $25.2 million, or $0.39 per share, in Q2 2016. Over a three-month period, the stock has fallen 9% as of August 18, and it has been in a steady decline since reaching a peak in late June.

Linamar Corporation (TSX:LNR) is the second-largest automobile parts manufacturer in Canada. The company released its second-quarter earnings on August 2 and reported sales of $1.77 billion, which represented a 6.6% increase from Q2 2016. The stock offers a dividend of $0.12 per share, representing a 0.71% dividend yield. Chief executive Linda Hasenfratz remarked in an interview in April that the protectionist rhetoric of the Trump administration would not come to fruition. The company has been more aggressive with its push into Asia since she took control in 2002.

Input from representatives of these sectors reveal a common skepticism regarding the benefits of protectionist policies, even from the perspective of an economic Goliath like the United States. From the moment the negotiations were announced, it was presumed that much of the harshest rhetoric was simply a starting negotiating position from which the United States could extract concessions.

When it comes to manufacturing, the intricacies of the economies in the NAFTA agreement make it very difficult for a heavy-handed policy to prove its effectiveness. Expect cooler heads to prevail by the time the negotiations end and bet on the global strategies of Linamar and Magna International.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned. Magna is a recommendation of Stock Advisor Canada.

More on Investing

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »