Published on JOC.com (https://www.joc.com) Alan M. Field, Special Correspondent | Feb 19, 2018 10:00AM EST
While fears of a meltdown in North American Free Trade Agreement (NAFTA) negotiations have receded, shippers and transportation providers are grappling with how to prepare for the various potential outcomes for the 24-year-old pact.
When the latest round of NAFTA renegotiation talks ended in Montreal in January, without definitive word about the future of the world’s largest trilateral trade pact, many voiced optimism that agreement would survive the prolonged process in bigger and better form. That may not be captured in the daily mainstream reporting of negotiations, but shippers and transportation providers looking past the noise see reason for optimism.
“You have to be pleased that the rhetoric on NAFTA seems to have calmed considerably and negotiations are proving to be more productive than indicated initially,” said Bill Lane, long-time head of public affairs for Caterpillar, a manufacturer of heavy equipment.
Even so, the enormity of the value of trade between Canada, Mexico, and the United States, and the highly integrated supply chains that have evolved to funnel everything from manufacturing components to agriculture, keep shippers and logistics providers up a night.
In 2016, US shippers exported $497 billion worth of goods to its NAFTA partners — $231 billion to Mexico and $266 billion to Canada. Those numbers are up 72.7 percent from 2006. And they dwarf combined US exports of $216 billion to the five G-7 countries outside the pact — France, Germany, Italy, Japan and the UK — as well as combined US exports of $184 billion to the world’s eighth most populous countries, including China ($116 billion) and India ($22 billion).
And yet, NAFTA remains at considerable risk — not because of unhappy US companies and their trading partners, but the repeated threat of the Trump administration to dismantle it.
“A lot of number-crunching is happening in the back rooms” of Canada’s exporters and importers, as executives anxiously assess various what-if scenarios concerning the impact on their trade volumes and pricing of such long unthinkable scenarios as ‘no NAFTA,’ or ‘no free trade with the United States,’ ” said Joy Nott, president of the Canadian Importers and Exporters Association.
Although larger US multinationals are assessing possible changes in their supply chains if NAFTA disappears, one Washington-based trade consultant said many US firms have been slow to accept the notion that a Republican-controlled US government might actually pull the plug on NAFTA.
For her part, Cindy Smith, agricultural relations director of Arizona-based Gowan, said the company has assessed the potential financial cost if NAFTA ceased to exist. Might Gowan relocate some components of its supply chain? “We have not talked about specific changes we would make, but we already have a global supply chain … There are options for making (our) products in other places, but they are not very cost-effective options.”
Large companies generally have the resources to plan for a wide range of contingencies, and to mitigate some of their negative disruptions. Jonathan Huneke, a spokesman for the US Council for International Business, noted, however, “Obviously, the smaller you are, the less resources you have to plan for this sort of stuff.” US companies can be forgiven for not planning for an outcome that seemed unimaginable before the 2016 elections — or for hoping that even the most vehemently expressed political promises of a new president were never meant to be taken literally.
Where will it all lead? Here are the six most likely scenarios, based on interviews with trade policy experts, shippers, and transport providers:
The United States withdraws from NAFTA
The probability of this scenario remains moderate, although no longer as high as last year. The US could pull the plug on NAFTA, and then reject all further compromise proposals by Mexico and Canada. Huneke “there is a real possibility” that the Trump administration could “signal its intention to withdraw” from NAFTA. On the one hand, withdrawal from NAFTA was one of the cornerstones of Trump’s presidential campaign in 2016. On the other hand, many trade specialists are hopeful that Trump, who has publicly attributed booming stock prices to his administration’s economic policies, has become increasingly aware that a US withdrawal from NAFTA could destroy the bull market on the New York Stock Exchange.
US exporters and importers in a wide range of sectors would be stifled by the reinstitution of tariffs and duties. For example, about 70 percent of Gowan’s sales of crop protection products, seeds and dates are within NAFTA, Gowan does some of its manufacturing in Mexico, and imports some raw materials from that country. But it also operates a plant in Canada, and sells its products in both Mexico and Canada.
“If NAFTA were to go away, we would be extremely concerned,” Smith said. “We have had very steady growth over the past 50 years” in the region, “and NAFTA has certainly played a role in facilitating that.”
Which shippers would be most affected? Topping the list of NAFTA-bound export volumes in 2016 were machinery, $42 billion; electrical machinery, $41 billion; motor vehicles, $21 billion; mineral fuels, $20 billion; and plastics, $16 billion. It’s a measure of the tight integration of NAFTA that US importers and exporters in such sectors as vehicles and machinery would suffer disruptive declines. Top US import volumes from NAFTA partners included motor vehicles, $75 billion; electrical machinery, $62 billion; machinery, $51 billion; optical and medical instruments, $13 billion; and furniture and bedding, $11 billion.
In the automotive sector, the consensus holds that the end of NAFTA could force many shippers to move their plants back to the United States — where higher costs would likely force them to sell at higher prices. Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson International Center, said the US auto industry would continue to be strong even if NAFTA disbanded because there is only a 2.5 percent tariff for cars imported into the US under rules of the World Trade Organization WTO). Rather than apply now-defunct NAFTA rules, American automakers would just pay that 2.5 percent tariff on car imports. What’s still uncertain is whether US carmakers would charge higher prices for the vehicles, or move much of their Mexico-made vehicle output to Asia, and not back to the US.
The US signals it will withdraw, triggering further talks
In this low-probability scenario, the Trump administration’s signal to pull out of NAFTA won’t necessarily mark the death knell of trade agreement. Rather, it could “spur US trading partners to take the US position seriously and reach an accommodation that would keep NAFTA going,” Huneke said. Thus, the announcement of a NAFTA pull-out might actually be a bargaining ploy, intended to gain greater concessions from Canada and Mexico. What kind of concessions? Critics say that no accommodation will be possible unless US negotiators soften their very hard lines on such issues as tightening NAFTA’s local-content regulations, and eliminating its provision for Investor State Dispute Settlement (ISDS), enacted to protect US companies against expropriation and other abuses of power by foreign governments.
Huneke noted that similar ISDS provisions are included in every free trade agreement and bilateral investment treaty Washington has negotiated with other governments. If NAFTA survives, but only at the cost of eliminating the ISDS, that would hurt the prospects of larger US exporters, whose expansion plans depend on making direct foreign investments in key foreign markets.
Huneke said the ISDS is “absolutely critical” for the United States Council for International Business’s 300 multinational firms, although not so much for smaller shippers. For major multinationals, “discarding (ISDS) would be a major step backward” for the global expansion plans.
NAFTA undergoes modernization
A more-positive scenario is that the NAFTA negotiations result in a modernized trade agreement that includes pro-business clauses for protecting trade in e-commerce and intellectual property. Such a compromise might gain favor in all three countries because it would clearly address issues that, trade experts agree, needed to be addressed even if Trump had not won the presidency.
“We are cautiously optimistic that we are getting to the finish line of a process that will include NAFTA and will make it better for everybody and address the concerns the administration has brought forward,” Huneke said. That would require the avoiding of some of the most controversial US proposals — such as the elimination of ISDS, and disruptive new NAFTA rules that would force non-US automakers to source at least 50 percent of their value in the United States.
If NAFTA ultimately survives despite such pitfalls, its new text will surely incorporate new chapters dedicated to uncontroversial aspects of “modernization.” A broad, bipartisan consensus has emerged in all three NAFTA nations that NAFTA does, indeed, need to be updated with emerging standards for digital trade facilitation processes and electronic commerce. When NAFTA was enacted back in 1994, the internet had to yet be born. Twenty-four years later, big data, the cloud and the web have all become essential pillars of the digital age. For example, Smith agreed that significant barriers to the efficient filing of trade data remain. “When we are bringing raw materials across the border, there is still quite a bit of paper,” Smith said. It’s only in the last year or two that Gowan has been able to do some of that processing electronically, she added.
Such provisions might open new opportunities for US e-commerce firms elsewhere in NAFTA, while strengthening export prospects for US and Canadian firms that sell high-tech goods, such as sophisticated software. Even in the absence of such “modernization” provisions, US firms exported $31 billion worth of services to Mexico in 2016, and imported $23.5 billion from that country — an increase of 199 percent from 1993 before the agreement was enacted. Leading the way were services for travel, transportation, computer software, and industrial processes.
However, Luz Maria de la Mora Sanchez, a former official of the Mexican Foreign Affairs Ministry, is skeptical about the benefits for Mexico of a new text that modernizes NAFTA, given a fundamental “mismatch” in the goals of the US and Mexico. “While a NAFTA modernization has been long overdue, this renegotiation was motivated by the wrong reasons” — to address the United States’ concern regarding its trade deficit with Mexico, and to bring back jobs to the US. Sanchez said Mexico’s goals are to “deepen international trade, attract more investments, and modernize the agreement for the 21st century.” But the United States, under Trump, is focusing on bringing jobs back to the manufacturing sector. Modernization clauses or not, “I don’t see how the negotiations are going to bring [those jobs] back.”
Congress refuses to approve the new NAFTA agreement
Another unknown factor is the role of the US Congress, whose formal approval was required for the enactment of NAFTA in 1993, following a highly-charged public debate. In the US House of Representatives, the NAFTA Implementation Act was approved by a vote of 234-200, winning support from 132 Republicans and 102 Democrats. In the Senate, it passed by 61 to 38, winning support from 34 Republicans and 27 Democrats.
In a political environment that has become much more fragmented, and less sympathetic to the cause of free trade, it remains to be seen whether there is enough bipartisan consensus to approve any new free trade agreement, especially one that is negotiated by the Trump administration. The probability of this scenario is unlikely because the administration may argue that congressional approval is not required, fearing a fierce public battle.
The negotiations continue indefinitely, along with the status quo
NAFTA negotiators could fail to reach an agreement, but the negotiations would continue, as none of the countries dares to force a showdown that leads to a breakdown. The Mexican Institute of Financial Executives expressed that surprising view in mid-February, noting scheduling problems.
US approves a new NAFTA text with a 'sunset clause'
Popular among some US trade negotiators, but almost universally loathed in Canada and Mexico, this clause would limit the lifespan of the new NAFTA text to five years, after which all parties would need to re-approve it. Widespread distress would ensue because the clause would make it much harder for companies to undertake any strategic, long-term plans because of uncertainty about future trading rules. Rather than die a quick death, NAFTA would wither away, as a result of endemic uncertainty.