With no substantive progress being made on the key issues in the North American Free Trade Agreement (NAFTA) renegotiations, businesses need to start working on backup plans, finds a new report from the professionals at KPMG’s member firms and Eurasia Group.
“While we think the possible withdrawal of NAFTA is unlikely, the strong divisions across the three countries on the key issues is increasing the risk that a deal can’t be reached in the near term,” says Russ Crawford, partner at KPMG in Canada. “It is time for companies to start making contingency plans. You may think that NAFTA renegotiations are not likely to pose a material threat to your business, but in these uncertain times, these risks may be unpredictable.”
He recommends businesses put together a Survival Guide for the next six months to prepare for an uncertain outcome.
- Decide upfront if you want to have a voice. “With the exact outcomes unknown, businesses can participate in the debate, sharing their concerns and assessment of the practical implications on their business with industry associations and other stakeholders. It is essential for any business exposed to NAFTA via trading links through Mexico, U.S. and Canada to understand the implications of various possible outcomes.”
- If you aren’t already a scenario planner, become one. “The possibility of withdrawal from NAFTA, however unlikely, increases uncertainty around the long-term prospects, costs and compliance obligations of doing business across not only North America, but globally. Consider the impact it might have on your customers, suppliers and employees, and develop contingency plans to deal with any potential changes to business and supply chains.
- Embrace the idea of planning with flexibility. “We are big proponents of contingency planning. The key is to separate the knowns from the unknowns in order to have a manageable set of possible business responses. An example may be to have a back-up plan mapped out to the extent possible if there was an X percent increase in tariffs, or a Y percent change in regional (or even country specific) content.
Daniel Kerner, Eurasia Group Practice Head for Latin America, says that it is important that parties start reaching consensus on the key issues later this month in Ottawa. “If the process slows and the three parties do not start to show progress in upcoming negotiations, the prospect of reaching a deal in the near term could be threatened by the overlap between the negotiations and the Mexican Presidential elections next year. It will be very difficult for the Mexican authorities to negotiate when the elections are in full swing.”
The report notes that recent talks in Mexico City previewed some of the most contentious issues. “Canada, backed by Mexico, continues to reject the elimination of the dispute resolution mechanisms stipulated in Chapter 19,” adds Kerner. “Also, the U.S. will try to increase the rules of origin and potentially promote U.S. content in manufactured products, especially in the automobile sector. Finally, labour has taken a central spot, with both Canada and the U.S. demanding that Mexico raise wages and implement stricter enforcement of labor laws and union rights.”
Could the U.S. President withdraw from NAFTA?
“The U.S. Constitution conveys authority to both the President and Congress in matters of foreign affairs,” says Crawford. “NAFTA was enacted into law by the NAFTA Implementation Act (NIA), but the NIA is silent on the question of who has the authority to abrogate the agreement - there is no explicit authorization within the NIA for the President to unilaterally invoke the termination clause without Congressional approval.
“And unless a U.S. law has a ‘sunset’ date of self-termination, only Congress has the authority to repeal an existing law. Should President Trump move to unilaterally withdraw without Congressional approval, the issue may be litigated before the federal courts.”
Crawford adds that if the U.S. does withdraw we can expect an increase in tariffs, challenges with U.S. customs, and for governments – and businesses – to see other markets as more attractive to trade with. “Withdrawal from NAFTA does not mean loss of access. Geography and size of the respective markets – and inertia – will ensure trade flows within North America remain an attractive proposition. But the removal of the preferential treatment under NAFTA may see a new focus on other markets – whether it be the EU, BRICs or the ASPAC region – TPP minus the U.S.”