In NAFTA talks, uncertainty reigns for suppliers and manufacturers
Wednesday, August 30, 2017
The first round of talks to rewrite the North American Free Trade Agreement (NAFTA) ended Aug. 20 in Washington, D.C. Round two of negotiations is set for Sept. 1-5 in Mexico City. What is at stake for U.S. supply chains and manufacturers?
For them, the future contours of a renegotiated tri-continental trade pact could come sooner than later against the backdrop of President Donald Trump's threat to withdraw the U.S. from the NAFTA. Congress may think differently, adding to the political turmoil in Washington, and not sparking the stable economic climate that the business community prefers.
Rodrigo Rubio, Thomas Huber, Joe Terino and Gabriela Lozada of Bain & Company write that suppliers and manufacturers should develop strategic flexibility to adapt more swiftly than business rivals. For starters, the Bain foursome recommends "no-regret moves. They include improving cost management or operational effectiveness in procurement, supply chain and inventory management."
Potential changes to currency rates add uncertainty to such strategic planning for suppliers and manufacturers. Such adjustments would alter the current level of demand and supply for a range of goods and services, the latter of which include the growing sector of digital businesses, e.g., e-commerce.
The Washington-based Business Roundtable supports renegotiating NAFTA and issued a prepared statement that in part recommends including provisions to "strengthen intellectual property protection and enforcement."
From Presidents Ronald Reagan to Bill Clinton, the Business Roundtable pushed NAFTA forward, write Richard Roman and Edur Velasco in "Continental Crucible: Big Business, Workers and Unions in the Transformation of North America."
Adjusting currency rates could increase the value of the U.S. dollar. That hike would make American-made products more costly in Canada and Mexico, decreasing exports and pushing down the bottom lines of U.S. suppliers and manufacturers. Big Ass Solutions, a fan-manufacturer based in Lexington, Kentucky, that exports its products globally, would feel such impacts from currency valuation adjustments, according to The New York Times.
In the meantime, if the value of the greenback falls, the prices of U.S. exports would decline. As a result, U.S. suppliers and manufacturers would sell more goods and services in Canada and Mexico.
NAFTA opponents such as Trump have criticized the trade pact for helping U.S. companies to close factories stateside and reopen them in Mexico. Trump has threatened American firms with a 35 percent tariff, or import tax, if they shift operations from the U.S. to Mexico.
A second approach for manufacturers and suppliers from Bain & Co. is "options and hedges. One option today is automating operations to some degree. If NAFTA is repealed, it would be easier to move a partially automated production line back to the U.S., compared with a highly manual line."
Computerized automation has become highly popular. Look no further than Amazon and its relentless price-cutting.
Bain's third strategic option is that of "big bets." As the term implies, the scale of risk and reward is large to suppliers and manufacturers.
"The most challenging balancing act involves large-scale investments that have different payoffs depending on how the future plays out," according to the Bain brief. "Any company that keeps its supply chain and manufacturing footprint plans for North America may be making a big bet, and management teams should assess their investments from this perspective."
Uncertainty might reign supreme in NAFTA talks now. Yet all things equal, more clarity for U.S. suppliers and manufacturers should emerge when round two of negotiating the trade pact wraps up.
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