As talks to renegotiate the North American Free Trade Agreement, or NAFTA, get underway this week, some entrepreneurs are girding for potential losses--even as others anticipate that a "modernized" version of the pact could improve trade relations and the bottom line.
"It's not time to jump ship," notes Syama Meagher, the founder of the Los Angeles-based fashion consultancy Scaling Retail, which advises retailers that manufacture abroad.
Earlier in the year, President Trump threatened to do away with the decades-old trade agreement entirely. He cited a loss of U.S. manufacturing jobs to lower-cost plants in Mexico, even as many U.S. businesses have benefited from the ability to more freely import or export products over the border. In May, the president instead committed to reforming the pact, and last month issued a 17-page document outlining the U.S.'s key priorities therein.
So what could happen? Here are five possible outcomes:
1. You could get a stronger voice in trade disputes (at a cost).
The U.S. says it aims to reduce the $64 billion trade deficit with Mexico, and the smaller $11 billion trade deficit with Canada. According to the memo, it intends to do so by enforcing stricter labor and environmental standards, similar to those agreed upon under the Trans-Pacific Partnership, a trade pact that the U.S. failed to join. Trump has also signaled that he intends to scrap a special panel for settling tariff disputes among NAFTA members, and create provisions for the U.S. to eliminate "unfair subsidies."
Member countries working on behalf of companies may now appeal to the World Trade Organization to dispute unfair business practices. However, Trump's plan could make it easier for businesses to move the needle. Currently, the NAFTA mechanism calls for review by independent panels--rather than domestic courts--in anti-dumping and countervailing duty cases. Without it, U.S. companies could have the upper-hand in settling such disputes.
That has some entrepreneurs preparing for losses, though, should trade partners retaliate by enforcing tariffs of their own. Take Orion Melehan, the co-founder and CEO of the LIFEAID Beverage Company, which makes energy drinks that are popular at festivals such as Burning Man. The Santa Cruz, California-based business imports agave from Mexico, which it then uses to manufacture drinks in the U.S. "Any tariffs on the import of agave will increase our cost of goods and make us less competitive internationally," Melehan tells Inc., speaking by phone on his way to an Oregon festival celebrating the total solar eclipse. Should the new agreement lead to higher expenses, Melehan says he'd consider moving his manufacturing operations to lower-cost Canada or China.
2. You may be required to produce more at home.
Some analysts suggest a less-aggressive response may be in the offing. As Mexico and Canada have largely benefited from the NAFTA agreement, they may be more willing to make concessions to see the pact maintained. The nations may agree to re-classify their "rules of origin," suggests Monica de Bolle, a senior fellow with the Peterson Institute for International Economics. These dictate what amount of a given product needs to be manufactured within North America to qualify for duty-free trade; at present, it is 62.5 percent. The U.S. may push to increase that share, meaning that products which include parts sourced from Asia, for instance, may no longer qualify for free trade. That would give a competitive advantage to American manufacturers, and reduce competition with low-cost manufacturers in China and India. "This is one way in which you get a quick and dirty negotiation," de Bolle says.
Still, it's worth noting that U.S. automakers, in particular, could suffer if the percentage of a good that qualifies for free trade increases. Currently, such companies import various car parts used in assembling vehicles stateside. Should the new rules lead to tariffs on these goods, costs could rise for the automakers, which may make them less competitive with global businesses, industry trade groups suggest. Naturally, businesses in other, similar industries could also feel these consequences.
3. Expect years of uncertainty regarding trade.
De Bolle sees a retooled NAFTA as unlikely to arrive in the six-month time frame Trump is hoping for. "We'll have a situation where NAFTA will be hanging in the balance for at least the next two years, which isn't great for companies, because it introduces a level of uncertainty," she says.
Some U.S. businesses are already responding to this uncertainty. LLamasoft, an Ann Arbor, Michigan-based software company, has seen a noticeable uptick in business this year, thanks in large part to the NAFTA retool. The company helps clients such as Michael Kors, Whirlpool, and Land O'Lakes, as well as the U.S. Department of Defense, create digital models of their supply chains, booking $37.6 million in 2015 sales. (The company says it's on track to more than double that figure in 2017.) "Suddenly, business owners are asking: 'What if I have to deal with another 5 percent or more tax on items that I'm sourcing from abroad?'" says Toby Brzoznowski, LLamasoft's co-founder and executive vice president. He adds that clients are spending more time on average with the software, trying to get ahead of potential changes in the supply chain due to NAFTA.
4. A new NAFTA might affect trade beyond Mexico and Canada.
John Ballay, the co-founder and CEO of the men's suit retailer Knot Standard, says he's having more conversations with international partners since Trump took office. The company, which manufactures in Europe and Asia, also sources its fabrics from Italy. "The way the U.S. will be working with Mexico and Canada could set a precedent for how they'll work with future partners down the road," Ballay tells Inc.
Thus far, Knot Standard--which brought in $8.3 million in sales last year--has been able to absorb cost increases due to changes in the macroeconomy. Still, it acknowledges that higher tariffs on European imports could lead to a higher cost for their customers in future. "All retailers that rely on a global supply chain will indeed take all of the actions that occur [with NAFTA] very seriously," Ballay says, "because there can be effects not only on the business, but on the consumer as well."
5. Your needs could get addressed, finally.
Still others suggest that the renegotiation could benefit entrepreneurs in the long term. "Updating NAFTA and creating stronger balances between countries rights and needs, that's all in the right direction," says Ari Ginsberg, a professor of entrepreneurship with a focus on international business at NYU's Stern School of Business. He's particularly heartened that the U.S. has called for the establishment of a special committee to ensure that the needs of small- to medium-size businesses are considered in the broader agreement. "The signals are much more positive than before for small businesses," Ginsberg says.