TORONTO—With no substantive progress being made on the key issues in the NAFTA renegotiations, businesses need to start working on backup plans, suggests a new report from professional services firm KPMG and political risk consultancy 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,” said 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.”
Crawford recommends businesses share their NAFTA concerns with industry associations and other stakeholders to make sure their voices are heard.
He also suggests firms plan for the possible outcomes of the trade talks and discern what implications these will have on their businesses.
“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,” said Crawford.
He continued, “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 backup 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.”
The report warns that if the parties don’t reach consensus on key issues soon, we could be headed for trouble.
“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,” said Daniel Kerner, Eurasia Group practice head for Latin America.
Kerner notes a number of contentious issues that could act as stumbling blocks: Canada and Mexico’s continued rejection of the American idea of eliminating dispute resolution mechanisms; the U.S.’s insistence on increasing the rules of origin, particularly in the automotive sector; and Canada and the U.S. demanding that Mexico raise wages and implement stricter enforcement of labour laws.
While stalled talks or an unfair deal for Canada are worrying possibilities, the biggest fear is U.S. President Donald Trump making good on his threat to unilaterally axe the deal.
However, whether Trump has the legal authority to follow through on that threat is another matter.
“The U.S. Constitution conveys authority to both the President and Congress in matters of foreign affairs,” said 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.”
Crawford continued, “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.”
The U.S. government made public September 14 that it has been working to insert a sunset clause into the new NAFTA, a proposal that would automatically terminate the agreement after five years unless all three member countries agree to extend it. Resistance from Canada and Mexico was swift and strong.
According to Crawford, U.S. withdrawal wouldn’t deliver a mortal blow to North American trade, but it would encourage the Canadian and Mexican governments and businesses to look elsewhere for commercial opportunities.
He said, “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.)”