It's rare that economists agree on policy, but when it comes to free trade, experts are nearly unequivocal in their support. Yet, a Trump presidency complicates things.
Not only has the billionaire businessman turned president-elect called for doing away with trade deals favored by President Barack Obama, he expressed interest in renegotiating the North America Free Trade Agreement, a 22 year-old trade pact between the U.S., Canada and Mexico that eliminated most tariffs on products traded between the countries and strengthened intellectual property enforcement. That was just on the campaign trail.
More recently, in a flurry of tweets in recent weeks, Donald Trump broadcast his zeal for propping up U.S. manufacturing. He proposed implementing a 35 percent tariff on products made by U.S. companies that manufacture abroad. Currently, tariffs on imports depend on the product--not the company's country of origin--with the highest at 45 percent for certain kinds of heavy motor vehicles.
With a Trump Administration renegotiation of NAFTA looking likely--indeed, he's said it would be on his agenda on Day 1 of his presidency--considering what could change for your business should be a priority. After all, with trade being such a key element of economic growth, businesses generally could feel the sting if tariffs spike, even companies that don't rely on international sourcing and manufacturing.
"Small businesses are disproportionately vulnerable to these events," says Ari Ginsberg, professor of entrepreneurship and management at New York University's Stern School of Business. He notes that small businesses are plentiful, but that diversity can make corralling their economic might tough. "Larger corporations have ways of muffling these events but small businesses don't."
Despite opposition from business groups including the U.S. Chamber of Commerce and the Small Business & Entrepreneurship Council, Trump has promised to renegotiate the treaty, or throw the whole thing out. Citing an eviscerated U.S. manufacturing sector, he called NAFTA the "the worst trade deal ever."
While details are thin, Trump has described hiking tariffs on goods made by U.S. companies--a move that's been widely panned by lawmakers, including key members of the Republican leadership in Congress. He has specifically named automobiles made outside the U.S. as being subject to a 35 percent tariff. Trump has also proposed levying fines on U.S. companies that move jobs across borders.
What's at stake?
Besides touching off a trade war with other countries, a bump in costs--even if only for certain sectors of the economy, like automotive companies--could have ripple effects on the economy overall.
Like it or not, trade and supply chains are fluid, notes Hiten Shah, founder, president and CEO of Columbus, Ohio-based manufacturing and logistics company Marketing and Engineering Solutions. Cars assembled in the U.S. can cross the borders between Canada and Mexico half a dozen times before completion of the final vehicle, Shah says. If trade agreements go sour, he's worried that retaliation from neighboring countries could come in the form of tariffs on U.S. exports. On top of that, he adds, the already relatively high costs of labor in the U.S. combined with an appreciation of the dollar this year, could spell disaster for manufacturers.
That concern is echoed by economists like Harvard professor Gregory Mankiw. He points out that collapsing barriers to the most cost-efficient manufacturing helps American businesses. Prior to the enactment of NAFTA in 1994, companies regularly paid as much as 30 percent taxes on goods traveling between Canada, Mexico and the U.S.--making it near impossible to trade internationally for smaller, cash-constrained firms. Elimination of these fees, by contrast, was especially beneficial to small businesses, making manufacturing, sourcing and shipping cheaper and more efficient.
On the front lines
Lisa Chu, the founder of online children's formal wear brand Black N Bianco, is grateful for NAFTA. Thanks to the treaty, she says her four-year-old El Monte, California-based company is able to sell products at a cheaper price than it would cost customers to rent tuxedos and formal dresses for little tykes.
"As a small business owner who imports a lot of fabric and clothing pieces from Mexico, NAFTA was tremendously beneficial for my small business," she says. "It virtually eliminated all tariffs on my imports and made it easier for my small business to stay competitive against giant retailers on pricing." Chu adds that without the trade agreement, her business wouldn't exist.
Michael Barrett has similarly benefited from the trade deal. His company, Unosquare, employs 250 software engineers in Guadalajara, Mexico, who develop software for American companies. Trump has proposed levying fines on companies that choose to move jobs across borders, and while his criticism has centered on manufacturing jobs, Barrett is worried the same scrutiny could be applied to service jobs.
While you could argue that Unosquare embodies criticisms about free trade sucking jobs from the U.S. economy, Barrett says companies in the U.S. can't find enough software engineers to fill open positions. Depending on the study, there is only a 1 to 2 percent unemployment rate for software developers in the U.S., and open positions are expected to grow. That's why some companies enter into work-for-hire contracts with businesses like Unosquare.
Barrett says making services more expensive to provide from across the border is only going to hurt his clients because he says if there is a tariff added to services his costs would go up accordingly. "If Trump focuses on tech services like he is on manufacturing, there still is not enough talent in U.S. to fill that need," Barrett says. "All it's going to do is raise prices for U.S. businesses."
The jury's still out
To be sure, if Trump gets his way, companies like Unosquare and Black N Bianco will run into roadblocks. And businesses could see more individualized intervention, akin to Trump's recent efforts to prevent Carrier, the Indianapolis, Indiana-based air-conditioner manufacturer owned by United Technologies, from moving 2,000 jobs to Mexico.
But exactly what Trump will accomplish is still unclear to most experts. "It's a puzzle to me because you don't hear specifics of what could be renegotiated," says Ray Keating chief economist at the right-leaning Small Business & Entrepreneurship Council. If Trump's chief concern is saving American jobs, Keating says his focus on trade distracts from real issues that squeeze businesses, like regulation, taxes, and barriers to free trade with regions outside North America.
Economists, naturally, have difficulty divining how renegotiating NAFTA could help small businesses. Tariffs on imported goods would force many to rethink their supply chain or increase prices, and moving manufacturing to the U.S. would be a death wish for many small firms like Black N Bianco. Jobs were disrupted when factories moved out of the country, but as Mankiw points out, many positions now rely on exports to Mexico and Canada. And all three countries can create goods more efficiently under a free trade model.
"People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries," he writes. "Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries."