As the fourth round of negotiations to re-tool the North American Free Trade Agreement draw to a close Tuesday, some businesses are already girding for higher tariffs and potential supply-chain disruptions.
A series of new proposals on the part of the Trump administration, including a sunset clause where the deal would expire after five years, are seen by many as "poison pills" -- essentially, concessions that trading partners Mexico and Canada are unwilling to make. [Update: Canada and Mexico have rejected some hardline U.S. proposals, extending negotiations into the first quarter of 2018.]
It may be increasingly likely that no deal is reached at all, analysts suggest, in which case tariffs on goods imported from Mexico and Canada would surely rise. (All three nations are members of the World Trade Organization, so tariffs would revert to W.T.O. standards.) Currently, under NAFTA, most goods trade freely within the zone.
Business groups that typically back Republican proposals have found themselves at odds with Trump's position. "We're going to fight like hell to protect the agreement," said Thomas Donohue, president of the U.S. Chamber of Commerce, in a speech in Mexico City last week.
Although NAFTA has tripled the level of trade between the U.S., Mexico and Canada since inception in 1994, critics say it has simultaneously sent hundreds of thousands of manufacturing jobs south of the border. On the campaign trail, President Trump repeatedly referred to the agreement as the "worst deal" made in history, and he recently told Forbes that it "will have to be terminated" in order for the U.S. to achieve favorable terms.
Trump's goals with the re-negotiation, as outlined in a 17-page document issued over the summer, include reducing the U.S.'s current $64 billion deficit with Mexico, and the smaller $11 billion trade deficit with Canada. The U.S. has also proposed limits on the number of federal contracts that Mexican and Canadian companies can win, as well as re-classifying "rules of origin" that govern whether a product can trade without tariffs.
The days of yore?
It's not entirely clear, however, that a re-tooled NAFTA would accomplish Trump's primary goals. Syama Meagher, the founder of the Los Angeles-based retail consultancy Scaling Retail, previously told Inc. that clients that manufacture abroad are looking to shift manufacturing work to low-cost plants in places like Bolivia, in the event that tariffs rise on Mexico-imported goods.
Meanwhile, a suggestion to increase the share of a product that must come from the North American trade zone--and the U.S. in particular--could certainly hurt some U.S. automakers, forcing them to cut staff at home. A study released last week by the Motor Equipment Manufacturers Association showed that higher content requirements would lead to the loss of up to 24,000 jobs, as some companies would forego the free trade benefits and ship in components from overseas. If the pact were scrapped entirely, the body estimates a loss of 50,000 U.S. jobs.
The New York-based egg seller Handsome Brook Farm, which booked around $18 million in sales last year, is bracing for similar challenges. Currently, the business imports a special type of carton--a combined board and paper pulp container--that it sources from Ontario. Should tariffs rise on imports from Canada, Handsome Brook says it plans to source product from lower-cost China, rather than seeking out U.S. makers. "[Higher tariffs] are a risk that we look at, and would probably force our hand in changing packaging," said the company's marketing head, Matthew Sherman, in an interview.
The odds that NAFTA is scrapped altogether, Sherman adds, are "more likely than I'd like them to be."
Ari Ginsberg, a profess of management at New York University's Stern School of Business, says it's smart for companies to be drawing up Plan Bs-- in anticipation of the changes Trump has proposed, and the impact they might have on expenses. "It doesn't hurt to spend time you otherwise wouldn't on contingency plans," he suggests.
It's worth noting that a scrapped NAFTA is still a long ways off, even in the event that Trump moves to withdraw. The President would still need the approval of Congress, which could take months and a series of lengthy court battles. "He [Trump] will have to deal with the Republicans in Congress--who are going to be lobbied by or supported by organizations like the Chamber of Commerce [who are against withdrawing from NAFTA]" notes Ginsberg.
To be sure, there are aspects of an altered agreement that could benefit U.S. businesses. In July, the government suggested that a new deal would include provisions to eliminate unfair subsidies, and give the U.S. more authority to crack down on the dumping of products--steel, in particular. Handsome Brook Farm's Sherman says the company would also welcome a lowering of tariff-rate quotas on Canadian dairy products during the talks, which might allow them to actually enter that market.
Much has yet to be determined, with the fifth round of negotiations -- if they happen at all -- set for the first week in November. What's more, reps have yet to broach some of the more contentious items on the agenda, according to a Bloomberg report--so it seems unlikely that a new agreement is hammered out before the end of the year, as initially intended.