Signals from United States President Donald Trump's administration on the North American Free Trade Agreement (NAFTA) seem to be having some impact on stock prices around the continent.

Reuters recently reported Canadian stocks on the Toronto Stock Exchange’s S&P/TSX index fell .11 per cent. Losses were also recorded for Mexican exchanges.

What does this have to do with international policy and the outlook for North American markets?

“There is a strong correlation between the U.S. and the Canadian stock markets,” Hossein Varamini told Toronto Business Daily. 

Varamini is a professor of finance and international business director of the International Business Program at Elizabethtown College in Elizabethtown, Pennsylvania.

“Any time we hear a policy proposal that may restrict trade between the two countries, both markets reacts negatively, but since the Canadian stock market is much smaller than the U.S. equity market, it could suffer a bigger loss relative to its size,” Varamini said. 

He noted that stock fluctuations and market moves of this size are not unusual in this context.

“The overall long-term trend in the stock market is affected by big macro news, but there are short-term fluctuations due to daily arrival of economic and political news,” Varamini said. “For instance, we hear that the Trump administration is proposing a huge business tax cut; the market shoots up one day. The next day we hear that even the Republican congress will not pass such a tax cut plan; the stock market gives back its gain from the previous day. The proposed plan to withdraw from NAFTA by President Trump was another short term news story, followed by a different proposal a few days later to renegotiate some parts of NAFTA. These are daily events causing jitters in the market with limited long-term consequence."

As for the intent of the U.S. White House, Varamini said the policy proposal on NAFTA may have been motivated for three reasons: to satisfy its political base, to test the public reaction and as a negotiating tool for serious policy changes later.

“After being in the White House for 100 days, President Trump has softened some of his policy positions and reversed a few others,” Varamini said. “His hard position on trade, both about NAFTA and China, helped him being elected, but he is now learning about the consequences of pulling out of NAFTA and needing to cooperate with the Chinese government on issues of mutual interest. He has learned that his tough stance on NAFTA is not in the best interest of the Americans.”

Varamini credits NAFTA for a certain amount of economic gain for its partners.

“Our NAFTA agreement has created a powerful economic integration in North America and, according to the U.S. Chamber of Commerce, 14 million jobs in the U.S. depend on trade with Canada and Mexico,” Varamini said. “Any major change in this agreement may make some of the American workers happy, but it will make many others very angry. Furthermore, any form of import restrictions from these two countries could lead to retaliation from them and could be against the guidelines of the World Trade Organization (WTO)."

Varamini added he does not expect a “trade war” between Canada and the U.S.