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  April 20th, 2018 | Written by

NAFTA: Multinationals Should Choose Just-in-Case Over Wait-and-See

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  • Warehousing costs, inventory impacts, and customer service issues are among considerations from US NAFTA withdrawal.
  • Companies with JIT freight and with ecommerce offerings could be particularly vulnerable from US NAFTA withdrawal.
  • A US withdrawal from NAFTA doesn’t mean free trade won’t continue between Canada and Mexico.

The threat of a US NAFTA withdrawal has significantly dissipated in recent weeks, giving way to optimism and a sense of relief among those corporations that spent more than a generation making investments into expansive continental supply chains.

While widespread relief from America’s biggest industries and corporations would have been unsurprising, the response thus far has been somewhat muted. Perhaps that’s because many of them predicted and quietly expected the negotiations would ultimately leave the trade landscape relatively unaltered.

Recent research by Livingston shows two-thirds of large businesses across the US and Canada believed the negotiations would either be successful or would linger for an extended period until policymakers ultimately agreed to leave the agreement unchanged.

To their credit, a healthy contingent of large businesses that currently make use of NAFTA chose not to take a wait-and-see approach and began developing contingencies in the event of a worst-case scenario (i.e. a US withdrawal from NAFTA).

But the percentage of big business planning for the worst isn’t as great as one might think. Only 18 percent said they have developed contingency plans, while just more than half said that while they were concerned about a potential negative outcome, they had only a general sense of how a U.S withdrawal might affect their business and weren’t yet making contingencies. An additional 18 per cent said they hadn’t considered the outcome of the negotiations or the impact to their business at all.

That wait-and-see approach was rooted in their optimism that one way or another NAFTA would ultimately remain a mainstay of North American trade. Unfortunately, we’re not quite out of the woods just yet. While there’s significant cause for optimism and the parties continue to strive for an agreement in early May, they continue to remain far apart on a number of critical issues and anything could happen still.

For those companies yet to consider how changes to NAFTA might affect them, here are a few considerations:

Landed costs. Should the US choose to withdraw from NAFTA, the most immediate effect would be the imposition of tariffs on the countless goods that cross North America’s borders daily. Companies should be consulting with their customs brokers to determine what the tariff impact might be to their respective product classifications.

Transport times. One of the hallmarks of NAFTA is the degree to which it goes beyond strictly trade matters and incorporates cooperation in regulatory regimes and security policies. After the September 11 attacks on the United States in 2011, enhanced security measures were put in place and all three parties to NAFTA collaborated to find ways of streamlining trade processes without compromising security.

It’s difficult to say what impact a US withdrawal from NAFTA might have on those cooperative border processes. For example, under NAFTA, Mexican long-haul truckers are currently allowed to enter the United States and carry their loads up to 20 kilometers within the US before switching over to a US carrier. Should this process be discontinued, it would dramatically increase wait times at US-Mexico border crossings where truckers already have wait times of five to six hours before receiving clearance to proceed. It would also make the transfer process between Mexican and US carriers more cumbersome, further lengthening ground transport times.

Companies should be considering what delays in ground transport could mean for them, including the potential for additional warehousing costs, the impact to their inventory control and the potential for customer service issues. Companies with just-in-time freight processes and with robust e-commerce offerings could be particularly vulnerable.

Trade lanes. It’s important to remember that if the US withdraws from NAFTA, that doesn’t mean that free trade won’t continue between Canada and Mexico, which will soon have their free-trade relationship further solidified via their mutual participation in the Comprehensive & Progressive Trans-Pacific Partnership (CPTPP), the successor to the Trans-Pacific Partnership from which the US withdrew last year.

Companies that rely on trade between Canada and Mexico – where trade values amounted to almost $500 billion in 2016 – can still find ways to leverage the cost savings of free trade. For example, by bonding ground transport through the US, they could avoid duty by not entering the goods into the commerce of the United States.  Shipping goods by sea and avoiding the US altogether may be another possibility depending on the circumstances.

Corporations trading goods in high value and/or volume directly between Canada and Mexico should work with their trade consultants to determine what alterations to their current trade lanes might make most sense based on their transport costs and total landed costs.

FTA alternatives. For businesses in North America, NAFTA is the best game in town in terms of free trade agreements. But it’s not the only game in town. Mexico currently holds free trade agreements with more than 40 countries and Canada continues to reduce its trade barriers, including the aforementioned CPTPP and the recently ratified Comprehensive Economic & Trade Agreement (CETA), a free trade deal with the EU.

For US or Mexican companies with distribution centers in Canada, for example, it would make sense to investigate establishing manufacturing centers or supplier relationships in Asia where goods could be exported to Canada tariff free. Similarly, companies that import product into the US from abroad for assembly and eventual re-export to countries that maintain free-trade relationships with Canada or Mexico, might consider relocating their assembly operations to America’s northern or southern neighbor.

There’s no question a US withdrawal from NAFTA would have a dramatic impact on the supply chains of US multinationals, but there are ways of mitigating the impact with careful and thoughtful scenario planning. Yet it seems many business decision makers are waiting until a tangible announcement of NAFTA withdrawal takes place. Such an announcement would serve as the obligatory six-month notification requirement – a time period that is completely insufficient to reconfigure an international supply chain.

Things may be looking up on the negotiation front, but planning for the worst couldn’t hurt, especially when one considers the stakes involved.

Bernie Hart is a vice president in the Global Trade Management division of trade services firm Livingston International.