NAFTA Risk Analysis No Easy Feat For North American Industry
It is not surprising to note the conclusion of the fifth round of NAFTA negotiations has left more than a few industries anxious. The negotiations, which hitherto had been a trilateral demonstration of mutual good will and diplomacy eroded quickly into unveiled attacks on the positions of each party to the beleaguered trade deal after the fourth round of negotiations.
The impasse has led many observers to question whether or not the fate of the trade deal was already sealed; that the course had already been set for a US withdrawal.
It is in such instances that corporations tend to begin scenario planning and risk analysis in an attempt to determine how their business will be affected and how to mitigate disruption. In many cases, they work with third-party organizations such as accountants, lawyers, actuaries and trade-services advisors, not to mention their existing suppliers, vendors, distributors and freight forwarders to determine how best to mitigate business disruption and loss of revenue.
The challenge, however, is that the potential outcomes of the NAFTA negotiations may significantly alter long-standing trade rules and the degree and timing of those changes all remain speculative at this point. While it’s true the final outcome will either be a US withdrawal from NAFTA or a new, modernized trade agreement, how negotiators will arrive at either outcome offers a cornucopia of possibilities.
ARRIVING AT NAFTA 2.0
Unanimous approval: Assuming all parties agree to the terms of a new agreement by the recently revised negotiation deadline of spring 2018, a revised NAFTA could be implemented as early as the third quarter of 2018.
Phased approach: In the event some of the parties offer concessions, they may find it politically (and economically) expedient to have these phased in over time. For example, in the unlikely event Canada were to concede a 50-percent US content requirement for automobiles, it may ask that this is something phased in over a period of five or 10 years (versus the current US proposal of a one-year phase in). This would allow companies to adjust gradually and would be less disruptive to their operations. Canada arranged a similar phasing in of tariff removals in its recently ratified free trade deal with the European Union.
Delayed implementation: Should the parties agree to a set of revisions for NAFTA, these revisions would likely have to be incorporated into the NAFTA Implementation Act, which governs the provisions of NAFTA. This would fall under the purview of Congress, which may not necessarily approve the changes immediately.
Delayed negotiation: All parties are in agreement that they don’t want the negotiations to be politicized, which means avoiding negotiations taking place amidst the Mexican presidential election (spring 2018) and the US mid-term elections (fall 2018). In the event the parties are unable to come to a consensus on the hot-button issues, they could choose to temporarily shelve these and revisit them after the US mid-term elections, leaving NAFTA intact in the interim. Even if the parties were able to reach eventual agreement and implement a NAFTA 2.0, the lag in negotiations could postpone that implementation for as much as a year, prolonging the period of uncertainty around the trade deal.
Unilateral withdrawal: If the US administration chooses to withdraw from NAFTA and Congress is on board, a six-month notification is all that would be required. In theory, this could mean trade barriers, including tariffs, between NAFTA countries could be in place as early as fall 2018. While this would be an unfavorable outcome for most industries, it would at the very least limit the time window of uncertainty around the fate of NAFTA.
Congressional debate: Legal experts are split on whether or not US President Donald Trump has the authority to unilaterally withdraw from a trade agreement. Many experts say that while the president can choose to pull out of NAFTA, Congress has ultimate authority over the NAFTA Implementation Act, which governs NAFTA. If that’s true, Congress may choose to debate and ultimately reject a US withdrawal from NAFTA. Such a debate would likely be heated and mired by legal contention, which could draw out the process for quite some time; even years.
Delayed termination: Given the massive implications of a NAFTA withdrawal to America’s economy and industries, Congress may choose to approve a gradual or delayed withdrawal, rather than a cliff’s edge, so that industries who are heavily invested in NAFTA can adjust over time. This could mean a full NAFTA withdrawal may not take place for several years.
Legal challenge: Should the US administration choose to withdraw from NAFTA, it is conceivable industries that are heavily invested in North American supply chains could choose to put forward a legal challenge that would essentially force Congress to maintain the NAFTA Implementation Act. This would be unprecedented and would likely leave NAFTA in limbo for an even longer period of time. If successful, it would essentially mean many of NAFTA’s rules would continue to be upheld in practice even if the US is no longer formally part of the agreement.
Shift to bilateral FTAs: The US administration has made no secret of its preference for bilateral trade agreements over multilateral ones. As such, a US withdrawal from NAFTA wouldn’t necessarily mean the end of free trade between the US and its neighbors. However, it is not clear whether or not a US withdrawal would mean the US-Canada trade relationship defaults to NAFTA’s predecessor, the Canada-US Free Trade Agreement, or not. But even if that were the case, it’s most likely the US would withdraw from that agreement as well, which would require an additional six-month notice. During that time the US would likely begin negotiations with both Canada and Mexico on bilateral trade deals, but industry would be left with the ominous task of having to navigate the provisions of a trade deal that hasn’t been used in almost a quarter century.
All this means that regardless of the outcome of the negotiations, the real implications of a withdrawal and their associated timelines are still shrouded in uncertainty. This makes risk analysis and scenario planning extremely complex and frustrating for businesses whose current supply chain investments have effectively been in limbo for several months already. The more negotiations are delayed, the longer the period of uncertainty and the lower the likelihood of investment.