New indication that California and Texas would be insulated from NAFTA shift

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LOS ANGELES — Strong fundamentals, the growing sophistication of logistics facilities, and e-commerce growth has led to a surge in foreign industrial investment in the U.S. with the Greater Los Angeles region drawing the most foreign capital nationwide, according to CBRE, one of the country’s largest commercial real estate brokerages.

Foreign investors have acquired nearly $61 billion in U.S. industrial real estate since 2010, 48% of which has come from Asia-Pacific-based investors, largely from Singapore and China. Investors from Canada also invested more than $17 billion in U.S. industrial real estate assets during this period.

The report supports Fitch Ratings' belief that diverse economies and trade links with Asian counties would insulate Texas and California if the North American Free Trade Agreement is dismantled, said Michael D’ Arcy, a Fitch director.

The fourth round of NAFTA negotiations ended recently at an impasse, but talks are expected to resume in the spring.

The Greater Los Angeles area has attracted the most foreign capital with $1.4 billion in non-entity sales in the industrial sector since 2010, according to CRBE. Other markets that saw significant foreign investment during this period include San Francisco/Oakland, Seattle and Phoenix.

The findings of CBRE’s report are in line an Aug. 30 Fitch report, which argued that California and Texas would be insulated from the Trump administration’s efforts to dismantle the North American Free Trade Agreement.

“The California economy, which is the 10th largest economy in the world, has much greater exposure to trade with Asia and South America,” D’Arcy said. “So, California in general would only feel a modest impact if there are changes to NAFTA, or NAFTA is completely abrogated by Trump.”

Only 15% of California exports go to NAFTA countries, D’Arcy said.

Fitch expects to provide an update within the next few weeks to the August report, "Fitch Focus on Munis: Trade in the Time of Trump — Part 1."

The latest round of NAFTA talks ended without the negotiators reaching any particular agreement, D’Arcy said. In the fourth round of talks, D’Arcy said the parties discussed big picture issues, and the three sides were very far apart, but they have committed to continuing to negotiate, he said.

Kansas, Montana, Indiana or Iowa are more exposed to NAFTA changes, because their economies are dependent to a high percentage on exports to Canada and Mexico, D’Arcy said.

“The U.S. administration team brought with them six demands that are very, very important to the U.S. side,” D’Arcy said.

A sticking point was that the U.S. wants a sunset agreement built into the next version of NAFTA in which each country would have to vote to continue the agreement every five years.

That means the entire U.S. Congress would have to vote, up or down, to continue the agreement, as would the Parliament in Canada and the Mexican Congress. If any country voted against NAFTA, it would result in the agreement automatically being scrapped. Canada and Mexico said that provision is a non-starter, D’Arcy said.

In addition to state economies, certain metropolitan city governments are more exposed to a dismantling of NAFTA.

Roughly 60% of Michigan’s goods are exported to Canada and Mexico, so that state’s export economy is heavily exposed to NAFTA, D’Arcy said. Of Texas’ total exports, 43% go to Canada or Mexico.

Though most people think of the Rio Grande and southern border when they contemplate NAFTA, he said, it is actually some of the northern tier states that would feel the brunt of any changes.

Some 82% of exports in Montana go to Canada. If the current zero tariff on goods traded with Canada went to 7%, it would impact South Dakota and Montana, he said.

“It might not slow down the whole U.S. economy, but it would hit certain economies in the mid-west and northwestern states,” he said. “Many of the farm belt states send 20% to 40% of their exports to Canada or Mexico.”

The California economy as a whole is not as exposed, he said, but San Diego County and Imperial County would feel a pinch. The largest border crossing between U.S. and Mexico is at San Ysidro in San Diego County.

“San Diego is going to feel an impact,” D'Arcy said. “But it would be a very local, regional impact — particular to San Diego County and Imperial County.”

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