KANSAS CITY, Mo. – Business owners and firms that advise businesses gathered at the KC Chamber Board Room Nov. 30 to learn about the most recent North American Free Trade Agreement (NAFTA) talks held in Mexico City, including possible outcomes and strategies businesses can implement to prepare for a spectrum of scenarios.
Renegotiations of the North American Free Trade Agreement bogged down in Mexico City and no meaningful progress was made as the United States, Canada and Mexico firmly held their positions. Paul Lalonde, a partner in the law firm of Dentons Canada LLC, said the loggerheads have changed the narrative of a US withdrawal from NAFTA from “The sky is falling,” to “Ok, the sky has fallen, now what do we do?”
Lalonde is advising clients to assess risk and understand the impact of the end of NAFTA on existing value chains. Executives should understand what are their company’s top import and export commodities across NAFTA borders, and know the difference between NAFTA treatment of those products and the duties companies will have to pay post-NAFTA.
Companies facing higher duties should look for other domestic or free trade options. Are there other duty relief systems available that you aren’t using to your advantage now because of NAFTA?
Businesses also should be prepared to deal with different possible scenarios that may unfold over the coming months including a hard NAFTA exit to a new, NAFTA 2.0.
Finally, Lalonde advised exploring opportunities in the current renegotiations to mitigate or eliminate barriers or hindrances to doing business in Mexico and/or Canada. Companies should consider what can be done to influence policy negotiations and renegotiations.
Free trade agreements involving Canada and Mexico will become more important, according to Raj Bhala, associate dean for International and Comparative Law at the Univ. of Kansas and a senior adviser at Dentons US. For example, the Comprehensive Economic and Trade Agreement (CETA) between Canada, the European Union and its Member States came into force in September. Before CETA, only 25 percent of EU tariffs on Canadian goods were duty-free. Now, 98 percent of Canadian goods enter the EU without tariffs.
“Watch what Canada and Mexico are doing when it comes to negotiating and signing free trade agreements because they are increasingly looking east-west instead of north-south,” Bhala said.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnerships (CP-TPP) is another free trade pact businesses in the US need to be watching, Bhala added. After President Trump withdrew the US from the Trans-Pacific Partnership in January, the 11 remaining countries continued negotiations and eventually reached consensus on core elements of a new agreement. The CP-TPP members include Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
“If Canada and Mexico give a signal that they are putting their resources into [CP-TPP] — finalizing it and giving up on NAFTA — that really changes thinking for businesses in this area and across the country,” Bhala said. “They came very close to finalizing the CP-TPP about a week ago. The number of issues are fairly small; they knocked it down to about three or four major issues, and they’re all solvable.”
Lalonde explained that the misalignment of objectives and premises for renegotiating NAFTA are beginning to show, and the injection of domestic politics into international trade negotiations has created a difficult negotiating dynamic. Negotiators for Canada and Mexico have made their position clear: Both countries are prepared to accept a US withdrawal from NAFTA, rather than accept a deal that isn’t in their national interests. However, the US is unlikely to approve a new NAFTA deal that doesn’t appear to deliver significant concessions from Canada and Mexico.
“Maybe those concessions could be achievable, but the problem is that the [Trump] Administration hasn’t offered concessions of its own in order to secure…those concessions which puts Mexico and Canada in a difficult quandary,” Lalonde argued. “The US has got its hand out and saying, ‘keep putting money there until I tell you I have enough.’
“This makes a very difficult negotiating dynamic and a difficult political dynamic in terms of selling a new agreement domestically.”
He added that the possibility of the end of the NAFTA is receiving more serious attention in Canada from analysts, foreign exchange traders, financial institutions, institutional investors and think tanks, among others. The studies coming from those thought leaders show that a hard end to NAFTA will hamper Canada’s growth prospects and will have a negative impact on the Canadian dollar, Lalonde said, but it won’t be cataclysmic. NAFTA will continue to exist — without the US.
“There will be winners and losers if NAFTA ends, just different winners and losers,” he added.
Trade will continue, but trade among the US, Mexico and Canada will be inefficient and North America’s overall collective competitive advantage will be greatly diminished in global markets. The only real winners will be the EU, China, Russia and other off-shore competitors, Lalonde said.