Majority of small, medium businesses use NAFTA to save costs, yet remain dangerously passive as to its outcome
Businesses invested in cross-border trade with the U.S. are by now all too familiar with the feeling of sea sickness that has come from the highs and lows of the ongoing NAFTA negotiations.
It seems every few weeks, optimism turns to pessimism and back to optimism again before retreating into a temporary information vacuum, and then resurfacing at either end of the queasiness spectrum, depending on one’s industry or market segment.
U.S. multinationals that have invested heavily in continental supply chains over the years have been carefully watching the talks with hopes of a renegotiation that leaves the core tenets of the agreement unaltered.
Small businesses, however, seem to be taking a dangerously passive approach to the negotiations. Even among those that use NAFTA, there appears to be a sense of fatalism with regard to the beleaguered trade deal.
A recent study by Livingston International of businesses that use NAFTA shows 80 per cent of small businesses use the trade deal to achieve cost savings for all or most of their cross-border transactions. In addition, just less than half believe a U.S. withdrawal from NAFTA would have a very negative effect on their industry, and half believe it would have a very negative effect on their individual business. So one would presume the fate of NAFTA would be of high importance.
Not so. The same study (which surveyed 1,017 businesses in the U.S., Canada and Mexico that use NAFTA, including 669 small businesses, 234 medium-sized businesses and 114 large businesses) shows only 15 per cent of small businesses and 16 per cent of medium-sized businesses are closely following the negotiations, and are aware of the key issues and potential outcomes. Most (85 per cent) are either casually following the talks or not following them at all. Furthermore, only six per cent of small businesses and four per cent of medium-sized businesses say they have contingency plans in place for a U.S. withdrawal from the deal.
Those numbers only seem surprising until one considers the likely cause of this laissez-faire attitude toward the negotiations. A little more than half of small and medium-size businesses believe the talks will eventually lead to a successful renegotiation of the trade deal or continue to linger on with ultimately little effect to the terms of the agreement.
This hopeful premonition is inspiring and – given some of the positive remarks in recent weeks coming from the ministerial leaders involved in the talks – may prove visionary. But the study was conducted in February when sentiments around the the negotiations were still fairly sour and the threat of a U.S. withdrawal quite real.
Many businesses believe talk of Washington scrapping NAFTA is just bluster on the part of a U.S. president who deep down knows how damaging a U.S. withdrawal from NAFTA would be to U.S. economic interests.
That may prove to be true. But the president has made trade reform a core part of his mandate, and so far he has delivered on all those promises.
During his campaign he said he would pull the U.S out of the Trans-Pacific Partnership and did so on Day Three of his term in office. He said he would impose steel tariffs to revitalize America’s struggling steel towns and has found the legal mechanism to do so. He said he would impose punitive tariffs on countries that maintain large trade imbalances with the U.S. and has thus far imposed such tariffs on Korean and Chinese exports. He said he would renegotiate trade deals he felt were unfair to U.S. interests and has successfully done so with the Korea-U.S. trade agreement.
Given this solid track record on trade, it’s difficult to dismiss threats of withdrawing from the pact as just tough talk. Businesses of all sizes who rely heavily on cost-savings through NAFTA should be actively considering how a worst-case scenario might impact them. The Livingston survey shows 55 per cent of small business and 60 per cent of medium-sized businesses will either be forced to pass down the cost of tariffs to consumers, making their businesses less competitive, or eat the cost and reduce their business investment.
With that kind of impact, it’s critical that businesses work with their trade services partners (trade management firms, legal counsel, freight forwarders, customs brokers, etc.) to do some scenario planning and identify in advance how they might mitigate the ill effects of a U.S. withdrawal from NAFTA. Similarly, they should be considering alternative markets to source materials and sell their wares should a worst-case scenario become a reality.
Washington is only required to give six months’ notice on withdrawal from NAFTA. That would create an ambitious timeline to reconfigure a supply chain and/or source new suppliers, vendors, distributors, etc.
With any luck, the NAFTA saga will be over in the next month. But even if it is and the outcome is positive, there will still be changes to the terms of the agreement that could affect businesses in certain industries.
Taking a wait-and-see approach is certainly an option. But given the stakes, it’s probably not the best one.
Stéphan Galarneau specializes in trade for small business at trade services firm Livingston International.