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?
Today’s professional politician will say anything to get elected. They will say NAFTA is bad in Ohio and it is good for Texas. Looks like a valid case for term limits.
There will be no change to NAFTA as too many have benefited. What will happen if the Democrats do win the Presidency is no more trade agreement. Additionally, we will see efforts to balance trade deals. One of the reasons the dollar has dropped so much is our negative balance of trade. Unless we fix this, we are headed for major inflation problems.
Would that the discussion in Washington could be so reasoned as the discussion here….
Neither NAFTA nor China are the real cause of the loss of manufacturing jobs in the US. Manufacturing jobs in the US, Canada, and Europe have all been lost in massive numbers while manufacturing output has actually increased. The reason? Technology. The man hours required to build one car are a fraction of what they were in 1970, let alone 1930, due to robotics and other manufacturing advances.
Free trade is a complicated issue but one that is worth the dialogue. It does not serve the national interest to grow tomatoes on land that would more rationally be used for housing and business growth, often with illegal labor, often on land that has to be irrigated with drinkable water, but instead to buy the tomatoes from an impoverished Caribbean or Central American country.
NAFTA isn’t the major cause of manufacturing job loss, it’s China. And from what I’ve heard, if NAFTA is tightened up, it’ll be to encourage conscionable labor and sustainability practices, which are unlikely to cost much. (And who believes they’ll be enforced?) Furthermore, before NAFTA, more and more manufacturing was done from lower-wage countries anyway, because the tariffs were almost negligible. If non-US workers make 20% of US wages, does a 3% tariff really matter?
The candidates are saying negative things about NAFTA to get elected, but it’s just talk. Once the election is over, I would expect the issue to go away. Focus group research is probably indicating that voters don’t like it so they are just saying what voters want to hear. But the dollars will talk and the campaign rhetoric will walk once the election is over.
One has to separate campaign rhetoric from legislative agendas. With the country in, or near being in, a recession, and when the campaign was in Ohio, one would expect NAFTA to be a target. There was far less discussion of NAFTA in Texas. Whether or not NAFTA is a key agenda item at the beginning of a Democratic administration will depend on many factors: the state of the economy and the situation in Iraq, just to name the top two. It is premature to say that NAFTA will be changed by either an Obama or Clinton administration.