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How Will Your Business Respond with NAFTA in Doubt?

Although the United States (US) chief negotiator for the North American Free Trade Agreement (NAFTA), US Trade Representative Robert Lighthizer believes the recent round of negotiations made “some progress,” the agreement’s future remains in doubt. Some multinational corporations are already planning for the US to depart from the deal. Fiat Chrysler Automobiles announced to move production of heavy-duty Ram pickup trucks to Detroit. While the move will not happen in 2020, this action by the automaker is a hedge against the possibility the US leaving NAFTA. With NAFTA’s future uncertain, every US company involved with this trade agreement needs to begin preparing for the deal to continue as well as for its end, rather than waiting or watching. Not every firm involved with NAFTA will have the agility and funding to make a significant move like Fiat Chrysler.

One of NAFTA’s best tenets is the promise of free trade, and ending the current agreement will impact the way some industries like apparel, agriculture, and medical devices, as well as businesses related to automakers function currently. For most goods crossing the border under NAFTA, Canada, Mexico, and the US pay nothing for them.  If the United States exits the pact, the aftermath would require Canada and Mexico increase the tariffs, or taxes, on their goods. Depending on the products, some tariffs could rise as 150%. Because of these significant changes, prices will spike, cutting into company profits. Since each country belongs to the World Trade Organization (WTO), it is likely tariffs would revert from 0% for most goods under NAFTA to 7.1% for Mexico, 3.5% for the US, and 4.2% for Canada under average WTO tariffs. It is possible for the US and Canada to return to a previous agreement, but trade with Mexico will become subject to normalized trade relations and have exposure to a multitude of tariffs.

With the application of WTO rules, some goods like soap and handbags would face tariffs as a high as 20%, while agricultural exports such as wheat (15%), beef (25%), chicken and potatoes (75%) would become more expensive as well. In turn, goods from Mexico would have a 3.5% tariff. Initially, Mexico would not feel the effects of the US departure from the deal as trade would continue through investment from the US to Mexico. However, if the current US administration decides to end the trade agreement and proceed with the President’s plan to levy 35% tariff on Mexican imports, the withdrawal would hurt any American firms manufacturing products in Mexico. This action would force these businesses to move these processes back to the US or look elsewhere. In response, Mexico could impose specific tariffs also to impair American manufacturing and products.

  • Automakers: All three NAFTA member nations’ automotive sectors are intricately connected, with billions of dollars in exporting and importing of parts. Current trading partnerships assist in maintaining lower costs for final product and keep this sector competitive with other major global manufacturing hubs in Asia and Europe. US automakers depend on imported parts from overseas, and they imported over a million vehicles from Mexico, last year. Nearly half of the value of components in those cars came from the US.
  • Apparel: According to the National Council of Textile Organizations, Canada and Mexico received more than $11 billion in goods from the US textile industry last year. The tariffs that the three countries have on clothes under the WTO are relatively high, often 18 to 20 percent. For example, the price of some designer jeans would significantly rise, making some brands obsolete. NAFTA provides cost savings for producing jeans in Mexico. Designers with smaller companies rely on NAFTA to allow for the shipment of raw materials to Mexico to manufacture jeans and then import the finished goods back to the US to sell. Unfortunately, for these manufacturers, the loss of NAFTA would add exorbitant costs to the final product, raising the price for their designs to unrealistic levels for consumers.
  • Agriculture: Farmers in the US gained access to markets in which they previously were excluded from through NAFTA. Consumers in Mexico can now purchase corn grown in the US. Conversely, food products such as avocados, tomatoes vegetables, and other fresh fruits, which were once hard to find during winter months in the US, are now available year-round through imported goods from Mexican growers.
  • Medical Devices: Mexico is the leading supplier of medical devices to the US, which imports 30% of these devices from its southern neighbor. This trend led several large US manufacturers to open factories in Mexico.

US Criticism of this trade deal alleges that NAFTA led to job loss, wage stagnation, increased the trade deficit, and helped companies move to Mexico to decrease production costs. With a flood of imports from Mexico, the US lost more than 600,000 jobs. NAFTA is bearing the brunt as a scapegoat for labor issues in the US instead of China and technology. Since China joined the WTO in 2001, its manufacturing sector has adversely affected US manufacturing. China’s share global manufacturing increased during 2000-2010, which resulted in a loss of 6 million US jobs. In addition to China’s rise, technology is the second most common factor for the decline in employment. Unfortunately, for workers, the outcomes of US firms utilizing technology to provide for cost efficiency and streamlined processes continue to diminish the need for human labor.

Advocates of the free trade agreement believe better trade produces gains in the overall economy as consumers benefit from lower prices and import competition improves quality of goods. Even though some jobs loss occurs, they argue that the trade deal creates jobs.  Without NAFTA, importers would face higher tariffs.  Several US firms would need to address broken supply chains as many of them spent decades in building intricate supply chains along the North American Border to seize the advantages of differing costs and resources.  Goods would be more expensive, and there would be fewer jobs created. The US would gain two estranged neighbors, who were once allied nations and trading partners.

Trade Tensions between the US and Canada in regards to NAFTA could grow worse. The combination of White House continually threatening to leave the agreement and Canada’s recent filing of a trade case against the US at the WTO further hampers the vulnerable relationship between the two North American countries. The Canadian government claims the US is in violation of WTO rules by using tariffs to reprimand unfair trade practices to protect its markets. Hopefully, this course of action is not the catalyst the current US Administration needs as a reason to end NAFTA. With NAFTA, the US Agriculture gets a boost, improves economies of both Canada and Mexico, and it helps the US stay competitive with Chinese manufacturing.

Some argue that leaving NAFTA would penalize US companies for outsourcing jobs and manufacturing. However, it may be inevitable under the current administration because one of its primary agenda items is an emphasis on curbing outsourcing. However, forcing American businesses to make drastic changes to their supply chains by returning existing components back to the US to avoid tariffs and penalties would not be an easy or expeditious process. If Mexico loses free trade rights, American companies could seek less expensive options in Asia or Latin America. It is likely Mexico would agree to a deal with China, eventually leading to higher tariffs and even to a trade war with China.

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