The Trump administration's pledge to retool the North American Free Trade Agreement has some small businesses drawing up a Plan B. To prepare for possible changes well ahead of any official action, options under consideration include cost-cutting moves, new tax strategies, and e-commerce investments.
"We're tossing around ideas," says Syama Meagher, founder and chief executive of Scaling Retail, a consulting firm in Los Angeles whose clients include small apparel and accessories companies manufacturing outside the U.S.
Many business owners with much at stake in a new NAFTA are in watch-and-wait mode. While the U.S. could move to scrap the deal altogether--provided it gives six months notice--both Mexico and Canada are expected to come to the table, given that they rely heavily on the U.S. market and don't want to see the deal disappear.
Possible outcomes include a proposed 20 percent tariff on Mexican imports to the U.S. They might also include concessions from either--or both--trading partners that could benefit U.S. companies, such as new "rules of origin" to classify goods produced within the trade zone, and further reducing taxes and regulation on U.S. exports. Canada and Mexico could also look to retaliate against steps to shore up U.S. domestic manufacturing--and that might not end well for U.S. businesses.
"When you negotiate in a global world, what you want to create is a win-win," explains Ari Ginsberg, a professor of entrepreneurship and management at New York University's Stern School of Business whose specialties include strategy and entering new markets. Otherwise, "at the end, instead of cooperating, we'll continue competing until we get to the bottom," Ginsberg says.
Of course, it's still very early days, and nothing about the future of trade in the Americas is clear.
"It raises a massive red flag of uncertainty," says Fred Crosetto, founder and CEO of Ammex, a disposable-glove distributor in Kent, Washington. "When there's rhetoric but no firm position, people then want to put everything on pause. It decelerates the potential to grow."
Crosetto nonetheless is optimistic. "Everybody's focused on all the negative stuff that Trump does, but what if this actually works?" he says.
Here's a look at some of the steps that companies are considering to get ready for a renegotiated NAFTA.
Should the Mexican tariff--also being dubbed a "border tax"--be implemented, Meagher says she's concerned that her four-employee business, whose annual sales grew by 45 percent last year, will suffer if clients lose their competitive edge. Currently, companies that manufacture outside the U.S. account for about a third of sales. "My clients have been getting such great margins on manufacturing that they were able to be competitive with other companies that have big distribution centers in the U.S.," Meagher says.
Now, Meagher is advising clients to consider moving operations to countries where it costs less to manufacture, such as Guatemala and Bolivia. A change to NAFTA might "give way to an opportunity for manufacturing and production [there]," she says.
Unosquare, a Portland, Oregon-based software services company, set up an office in Belfast, Northern Ireland, where it's now hiring sales employees. With clients in the U.S. and most of its 300 employees in Mexico, Unosquare anticipates that a possible border tax would be bad for business. Northern Ireland's low corporate tax rate--at just 12.5 percent--allows Unosquare to mitigate the risk that it might lose American business under a new NAFTA, says co-founder and CEO Michael Barrett.
Although Trump has not yet suggested imposing a tax on services over the border--merely a tax on goods--Barrett anticipates that it may well come in the future. If a tariff were applied to Mexican services, it would drive up Unosquare's prices, he says. Unosquare, which joined the Inc. 5000 list of fastest-growing private U.S. companies, ranking No. 2,550 in 2016, brought in more than $15 million in sales last year.
"One of the aspects that is missing from [Trump's] discussion of NAFTA is the idea that somehow it's binary--that if we don't want [U.S. companies] doing their business in Mexico, they will come back here," says Dean Baker, an economist and the co-director of the nonpartisan Center for Economic and Policy Research. "They have a whole world to go to."
One winner in a new NAFTA could be e-commerce.
A number of Scaling Retail's clients are investing more in e-commerce--selling clothes directly to consumers--to save on costs if a tariff is imposed. Should prices on imported clothing rise--and retail partners grow leery of buying their goods--these companies can continue to grow. Of course, they would still have to pay the tariff on imported clothes, but profit margins could widen.
Baker says he isn't surprised by this approach. "There's clearly an ongoing shift from brick-and-mortar to e-commerce," he tells Inc. "It's certainly possible that [the renegotiation of NAFTA] could accelerate it."
Likewise, Crosetto sees a silver lining if a border tax leads to a slowdown in the Mexican economy, even if it limits his ability to sell there. Mexico is a key developing market for Ammex, which has about $110 million in annual revenue and sells to labs, hospitals, and other companies around the world. Last year, the company made the Inc. 5000 list at No. 4,789, and saw sales of $89.9 million in 2015. By investing in e-commerce, Crosetto says, he can hit the Mexican market "hard," as other nervous competitors draw back.
"You just double down on those markets now, while everybody's pausing on this defensive crouch," he says.
The strategy could work, says Ginsberg. But it's not guaranteed, particularly if the Mexican economy wanes. "If the pie shrinks enough, then the size of his slice might still be so low that it's not worth going in," he says.