Supply Chain Digest: What Happens if the U.S. Election Results in Big Changes to NAFTA?
By SCDigest Editorial Staff
Through a special arrangement, what follows is an excerpt of a current article from Supply Chain Digest, presented here for discussion.
With the Democrats having a strong chance of winning the White House in the 2008 presidential election, how should U.S. companies think about the potential for major changes in NAFTA, as both Democratic contenders currently argue that the agreement is bad for the U.S.?
Both Democratic candidates (Barack Obama and Hillary Clinton) have recently asserted NAFTA should be renegotiated to better protect U.S. manufacturers and workers.
"Democrats have been flirting with outright protectionism for some time now -- taking a dip with the 'fair trade' movement, cozying up to labor and environmental standards, and shunning trade deals in Congress," wrote Kimberly Strassel last week in the Wall Street Journal, "It's been a tease, though they've been careful not to let things go too far."
The real question for U.S. companies is whether the campaign rhetoric combined with a Democratic victory in the Presidential and Congressional elections could mean important changes in NAFTA provisions.
"Companies must weigh a variety of factors when making sourcing or outsourcing decisions, including total cost, certainty of supply, quality, government regulations, and increasingly, sustainability," notes John Blascovich, a partner at consulting company AT Kearney who leads the firm's Supply Management Sourcing efforts in North America.
"Any changes to NAFTA that have a negative impact on one or more of those dimensions will reduce the cost competitiveness of Mexican and Canadian suppliers in any assessment, especially when compared to countries in Latin America and Asia Pacific, unless similar changes are made to our trading relationships with those regions," Mr. Blascovich added.
If no other trade provisions are changed, this may have the effect of driving more business to Asia and/or Latin America. However, even if new changes to NAFTA mean increased costs in sourcing from Canada and/or Mexico, advantages in supply continuity may still favor sourcing from those companies in a new NAFTA environment.
Regardless, it's important that U.S. companies begin to assess the potential for changes to NAFTA in making near-term supply chain decisions. Use of "scenario analysis" - such as looking at supply chain network design or "make versus buy" decision given perhaps a 10 percent increase in tariffs on goods coming from Mexico - is the prudent move.
Discussion Questions: What's your perspective on NAFTA? Do you think changes are likely in the coming presidential term? What should companies be doing now to best prepare for potential NAFTA revisions?