By Steve Holland
WASHINGTON (Reuters) - President Donald Trump is considering issuing an executive order to pull the United States from the North American Free Trade Agreement, a senior administration official said on Wednesday, a move that could unravel one of the world's biggest trading blocs.
The news, first reported by Politico shortly before midday, rattled financial markets and could raise tensions ahead of negotiations to update the NAFTA pact between the United States, Mexico and Canada.
Mexico's peso and Canada's dollar spiraled lower against the U.S. dollar, with the peso shedding about 1.5 percent in just over an hour, while Canada’s “loonie” lost about 0.45 percent. Stocks in both U.S. neighbors also weakened, with Mexico’s benchmark IPC index <.MXX> falling more than 1 percent in 15 minutes.
A disruption in trade between the three NAFTA partners could wreak havoc in the auto sector and other industries, hitting profits at companies that have benefited from zero-level tariffs and Mexico's relatively low labor costs.
"To totally abandon that agreement means that those gains are lost," said Paul Ferley, an economist at Royal Bank of Canada.
Scrapping NAFTA would also hit U.S. farmers whose exports to Mexico have grown under NAFTA. Chicago Board of Trade corn futures fell 5 cents a bushel.
Trump has repeatedly vowed to pull out from the 23-year-old trade pact if he is unable to renegotiate it with better terms for America. He has long accused Mexico of destroying U.S. jobs. The United States went from running a small trade surplus with Mexico in the early 1990s to a $63 billion deficit in 2016.
Trump has stopped short of a formal threat to kill NAFTA so far, but legal experts say he likely has the authority as president to give a 60-day notice that America is exiting the pact. It was under an executive order signed by Trump on Jan. 23 that the United States pulled out of the sweeping Trans-Pacific Partnership trade deal.
Details about the draft order on NAFTA were not immediately available.
But Trump has faced some setbacks since he took office in January, including a move by courts to block parts of his orders to limit immigration. Withdrawing from NAFTA would enable him to say he delivered on one of his key campaign promises, but it could also hurt him.
"Mr. President, America's corn farmers helped elect you,” the National Corn Growers Association said in a statement. "Withdrawing from NAFTA would be disastrous for American agriculture."
Mexico had expected to start NAFTA renegotiations in August but the possible executive order could add urgency to the timeline. The Mexican government had no comment on the draft order. The country's foreign minister said on Tuesday that Mexico would walk away from the negotiating table rather than accept a bad deal.
Trump recently ramped up his criticism of Canada and this week ordered 20 percent tariffs on imports of Canadian softwood lumber, setting a tense tone as the three countries prepared to renegotiate the pact.
Canada said it was ready to come to talks on renewing NAFTA at any time.
"At this moment NAFTA negotiations have not started. Canada is ready to come to the table at any time," said Alex Lawrence, a spokesman for Canadian Foreign Minister Chrystia Freeland.
(Reporting by Steve Holland; Additional reporting by Fergal Smith in Toronto, David Ljunggren in Ottawa,; Rodrigo Campos in New York and Julie Ingwersen in Chicago; Writing by Jason Lange; Editing by Tom Brown)