Renegotiating NAFTA - How Will It Impact You?

Jun 06, 2018

The North American Free Trade Agreement (NAFTA) renegotiations started almost a year ago. Progress toward an updated treaty has been slow. The United States just announced that it will impose steel and aluminum tariffs on Mexico and Canada. As a result, it is unsure just how long it may be until there is a clear outcome to these tense talks. Regardless of the changes to NAFTA, any alteration to the agreement will have impacts on the logistics industry and many of them could potentially be negative. What might these effects look like?

What is NAFTA?

NAFTA is a trade agreement between Canada, Mexico, and the United States. It went into effect in January 1994 and its terms were gradually implemented through January 2008. It eliminates most tariffs on imports and exports between the three countries. One of the original goals of NAFTA was to provide economic opportunities for Mexico and its workforce, in an effort to discourage illegal migration from Mexico. It was also a way to strengthen the competitive position of the three countries in global trade.

Since NAFTA was instituted, the North American economies have benefited. Trade between the three countries has increased significantly from approximately $290 billion in 1993 to more than $1.2 trillion today.

What’s at risk?

It is estimated that 14 million U.S. jobs depend on trade with Canada and Mexico. Approximately 31,000 of those are truck drivers and 50,000 are railroad workers, who are almost entirely dependent on hauling cross-border NAFTA freight. If the US pulls out of NAFTA, these jobs, along with others related to freight transportation would potentially be in jeopardy. Infrastructure has also been established to facilitate NAFTA freight movement. Some examples include:

Wheat, corn, and cereal grains are transported from the Heartland for export to countries including Mexico, who imports $3.6 billion of these products from the U.S. each year. They are moved via rail and truck to barges that travel down the Mississippi. From there they are warehoused and shipped via various modes to their final destination.

Cross-border trade accounts for 30% of the Kansas City Southern (KCS) railroad’s total traffic. As a result, concerns over NAFTA are already having a negative impact on this activity.

The Union Pacific railroad originally had $700 million in business going to and from Mexico in 1999. Now that figure exceeds $2.2 billion, due to the transport of goods like grain and auto parts going into Mexico and finished cars, avocados, and televisions coming into the U.S. Plus, Union Pacific has added more refrigerated cars to accommodate a need to export meat to Mexico and they have invested $550 million on a significant rail yard in Texas primarily for cross-border trade.

These risk may not impact the intermodal process directly, but the companies who provide those services could possibly be affected.

Potential Impacts of NAFTA Changes

The primary negotiations are focused on the rules of origin. Although there are other aspects of NAFTA, it is the changes to the rules of origin that seem to be creating the most uncertainty for supply chain pros. The existing rules of origin in NAFTA are already considered more restrictive than those found in other trade agreements. Some experts believe that additional tightening may actually be counterproductive.

Even minor changes to NAFTA will have a major impact on procurement and logistics. Those in the large automotive supply chain, for example, are especially nervous about upcoming changes to content calculations around rules of origin. Other industries impacted include aerospace, agriculture, and textiles.

Warehousing, transportation, sourcing, regulatory filings, and far-reaching changes to procurement will all be affected as rules of origin are revamped. If the rules of origin are too slack, countries outside of the agreement may benefit. If the rules are too tight, producers may also be driven to source outside of the agreements where parts may be less expensive, impacting the existing supply chain. And if the rules become too complicated, it may be too labor intensive for more complex supply chains to comply, especially smaller companies, causing them to potentially relocate or discontinue business.

Of course, if the U.S. were to entirely pull out of NAFTA, it could potentially mean tariffs based on the pre-NAFTA World Trade Organization (WTO) rates, or worse. Plus, the length of such a process could last for an unknown period of time due to procedural requirements, resulting in a complicated transitional period.

One potentially good outcome anticipated from the new NAFTA, is the automation and streamlining of the customs procedures at border crossings. This could help boost efficiency where logistics has previously experienced delays.

It is yet to be seen what the end result will be from the renegotiation of NAFTA. One thing that’s certain is that its impacts will be felt by the many people employed in logistics and supply chains in all three countries. With the new steel and aluminum tariffs in place, we should start to experience its effects. Stay tuned for additional changes as the negotiations continue. Need help planning your next cross-border shipment? Contact American Group for assistance.

American Group is a 3PL with decades of experience guiding businesses through the selection, preparation, and shipping of their freight. Contact us for assistance with your next shipment by phone at 866-553-6608 or by email at Info@ShipAG.com. We’re here to make Shipping.Simplified®.

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