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NAFTA renegotiation unlikely to slow energy trade: experts

Houston — Renegotiation of the North American Free Trade Agreement is not likely to result in new rules that would substantially impede current cross-border flows of energy among the US, Canada and Mexico, people familiar with the trade deal said Tuesday.

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In fact, energy barely got a mention in a Summary of Objectives for the NAFTA Renegotiation, released Monday by the Office of US Trade Representative. The 18-page document contained a road map that US trade representatives plan to follow in renegotiating the 23-year-old treaty.

Related: Find more content about Trump's administration in our news and analysis feature.

The summary, which reflects President Donald Trump's campaign promise to either revise or scrap the agreement, calls for negotiating a new NAFTA treaty that "will promote a market system that functions more efficiently, leading to reciprocal and balanced trade among the parties."

Although representatives of all three countries appear to be amenable to renegotiating the treaty, no timeline has been set for beginning talks.

Related podcast: What impact will Trump NAFTA talks have on oil and gas flows?



In its single reference to energy trade, the summary calls for an agreement to "reserve and strengthen investment, market access, and state-owned enterprise disciplines benefiting energy production and transmission and support North American energy security and independence, while promoting continuing energy market-opening reforms."


SUMMARY HAS FEW SPECIFICS


The lack of specificity in the document regarding cross-border flows of natural gas indicates that this aspect of trade policy might not present as significant issue for negotiators as some other subjects, Bernard Weinstein, associate director of the Maguire Energy Institute, said Tuesday.

"I haven't heard any specific references to international gas flows," said Weinstein, an adjunct professor of business economics in the Cox School of Business at Southern Methodist University in Dallas.

"We've developed an integrated North American gas market and I'm hopeful that any NAFTA renegotiations would leave that alone or allow it to grow, because in the not-too-recent past we've started to bring US gas to Mexico," he said.

With the construction of new cross-border pipelines US gas exports have grown apace over the past decade, from less than 1 Bcf/d in 2010 to more than 4 Bcf/d in recent months, according to Platts Analytics' Bentek Energy.

Unlike the case with other commodities, such as agricultural products, international trade in all forms of energy is not that controversial, Weinstein said.

"I don't see any parties lining up to protest, with the possible exception of some chemical manufacturers, who claim that we're starting to export so much gas that it's starting to affect price and that's not going to be good for American consumers," he said.

"I do think there's broad-based support for continuation of the substantial cross-border trade between all the NAFTA parties. There's no question that all three economies understand the importance of that trade," Josh Zive, an analyst with Bracewell, said Tuesday.

"At the same time, even though it's not reflected in that document, I do think there's an awareness that an effort needs to be made to extend the full NAFTA protections for parties and investors in the energy sector, particularly Mexico," he said.

Zive said that since the original treaty was negotiated in the 1990s, Mexico has undergone a substantial reform of its energy sector, opening up segments of its oil, gas and electric power industries to foreign investment for the first time, and any renegotiation of NAFTA would necessarily have to extend the full protections of the treaty to these new players.

"There's so much broad language in that renegotiation document that there are plenty of hooks that can be used to approach these issues," he said.


RISKS TO TRADE


The biggest risk to continuing the current cross-border flows of energy would be if negotiations fail and "NAFTA as we know it falls apart," Zive said.

In that event, the US would revert back to its pre-NAFTA trade relations with Canada and Mexico.

"That would pose a significant obstacle for the way energy trade has been constructed," he said.

Ed Hirs, economics instructor at the University of Houston, said the NAFTA renegotiation document contained "nothing of substance that will interfere with any ongoing imports and exports of crude, natural gas and electricity."

Hirs said Tuesday that what is more likely to threaten cross-border energy trade among the three countries is if the US were to impose a border adjustment tax, as some US politicians have proposed as a way to balance the budget.

"We could have some very detrimental impacts on both sides of the border," he said.

In addition to constraining flows of energy, such a tax could result in unemployment and recession in border states such as Texas, whose economies rely heavily on trade with Mexico, Hirs said.

--Jim Magill, jim.magill@spglobal.com

--Edited by Jason Lindquist, jason.lindquist@spglobal.com