Today marks the formal start of re-negotiations concerning the North America Free Trade Agreement (NAFTA) and many industry supply chain teams should be monitoring developments and conducting ongoing analytical analysis and management education.  There is a very narrow window for negotiators representing Canada, Mexico, and the United States to come to a broad consensus of agreement, and there is a risk that the negotiations could drag-on.

The Trump Administration has been the prime catalyst for leading-up to this week’s start of negotiations to fulfill campaign promises related to NAFTA being unfavorable and “unfair” to U.S. trade. The President has threatened that the U.S. would withdraw from NAFTA if a better deal for U.S. businesses and America’s workers is not achieved. Fortunately, key Trump Administration trade advisors and negotiators seem to be taking a more practical stance. 

NAFTA represents a truly inter-connected, regional industry supply chain ecosystem of material flows across and within the region’s borders. By some accounts, Canada, Mexico, and the United States trade some $1.24 trillion annually, nearly $3.3 billion per day on average under the current agreement that has existed for 20 years. Industries such as automotive, apparel, food and agriculture and others have established strong product value-chain linkages spanning the trade region and any significant changes are bound to have some impact.

Many business and Congressional leaders have emphasized the benefits gained from NAFTA, and are calling for modernization vs. overhaul of the trade pact. In late July, U.S. negotiators released a listing of 100 trade objectives which according to many, underscore the complexity and scope of challenges that negotiators must overcome. However, the good news is that many of the U.S. objectives mirror common ground in that they represent trade tenets that were already agreed to during previous negotiations concerning the Trans-Pacific Partnership (TPP). They include labor, environmental, intellectual property protection and trade in digital products which essentially have already been agreed to by all three NAFTA partners. The U.S. elected to formally withdraw its prior-agreement to TPP shortly after President Trump took office.

In today’s highly-charged political climates, the re-negotiation of NAFTA presents many politically focused challenges for all three countries. President Trump’s tough stance to “get a better deal” for the American worker is certainly one political backdrop, especially with the Congressional mid-term election cycle starting in 2018. Similarly, Mexico has its Presidential election scheduled for July of 2018, and the Mexican political climate has been highly charged regarding Trump policies on trade and immigration. Thus, by many published accounts, if the parties cannot come to some consensus of general agreement by the end of this year, existing talks would extend for many more months or even risk suspension, making consensus a far larger challenge.  Even if NAFTA negotiators were to achieve a consensus by the end of 2017, there would remain a series of multilateral negotiations for each specific industry such as automotive.

There are risks that the talks could drag on for many months to-come, adding a lot of supply chain strategy uncertainty regarding rules of origin and tariffs, not to mention increased trade tensions or retaliation among either of the parties. If talks were to fail and the U.S. elected to withdraw from NAFTA, tariffs would revert to the World Trade Organization most-favored nation tariff structures.

There are specific areas of prime contention. The first stated U.S. objective is: “Improve the U.S. trade balance and reduce the trade deficit with NAFTA countries” which strikes experienced trade experts as highly political and one-sided. For Canadian negotiators, a noted deal-breaker are stated U.S. efforts to eliminate Chapter 19, a process that allows Canada and Mexico to appeal trade duties imposed by the U.S. through independent panels rather than litigation through U.S. courts. Entering this week’s talks, Canada’s negotiators have already positioned a stance of Chapter 19 dilution as a non-starter to any broader agreement. The U.S. also seeks to reduce the direct labor wage gap perceived to exist within Mexico, accusing that government of policies to sustain such a gap to make Mexican sourced production more attraction. That appears to be a non-starter for Mexico. The U.S. wants to tighten rules-of-origin measures, used to qualify for duty-free access based on NAFTA content. The current NAFTA rule of origin for automobile manufacturing is 62.5 percent of NAFTA composition. Rules of origin related to the auto industry turned out to be a contentious point for TPP negotiations last year as-well, dragging out consensus to the last minute.

Practical minds would conclude that the total scrapping of NAFTA for the sake of one country’s objectives does harm for the entire region. Major corporations and industry interests have too much already invested in NAFTA wide supply chain material and services flow, and would not tolerate a complete disruption. But, ladies and gentlemen, we exist in highly-charged, geo-political times were logic is sometimes overridden by events.

We submit that for businesses and their supporting industry supply chain teams, a posture of sitting-back and waiting for a clearer sense of policies and direction presents added risk. That includes the risk for not being adequately prepared to deal with any implications of future changes to NAFTA, or to have the ability to seize opportunities to gain added market or financial benefits because of any major trade agreement changes.

As we have emphatically stated in prior blog commentaries, this is a period where industry supply chain and procurement sourcing teams need to be constantly analyzing and educating and advising. This includes maintaining the most accurate up-to-date information regarding multi-tier supply chain flows with the ability to perform multiple scenario and what-if planning and analysis exercises to educate senior management as to potential vulnerabilities as well as market and supply chain sourcing opportunities. It should be little surprise that multi-national as well as small and mid-market manufacturers have already initiated various measures to hedge regional and/or global supply chain risk.

Over the coming weeks, both in online seminar talks and blog commentary, this author will outline what I consider to five specific actions that executives and supply chain teams can and should do to insure your company, larger or small, has the tools and competencies to manage an ongoing era of geo-political trade uncertainties.

Stay tuned.

Bob Ferrari

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