Why a NAFTA collapse isn’t such a scary prospect to many of America’s CEOs
Listen to American CEOs, though, and the potential collapse of the continent’s trade framework doesn’t sound quite so scary.
As talks on reshaping the pact drag into a seventh month, executives are getting asked — on earnings calls and at conferences — how their businesses would fare in the event of a breakdown. Words like “well-positioned” and “manageable” keep cropping up in their answers.
Fiat Chrysler Automobiles NV has already said it’s moving production of Ram heavy-duty pickup trucks from Mexico — and not to a low-cost Asian nation, but to Michigan. The move has been interpreted as a hedge against U.S. withdrawal from NAFTA. It’s also the kind of outcome President Donald Trump’s administration been calling for, as it seeks to bring manufacturing home.
Companies from off-road vehicle-maker Polaris Industries Inc. to auto-parts supplier Lear Corp. have suggested they could follow suit — often citing Trump’s tax cuts as a further incentive. “A lot of the business that exists in Mexico today existed a lifetime before it in the U.S.,” Lear Chief Executive Officer Matthew Simoncini said Jan. 26. “We have a footprint in the U.S. that could absorb business back if it made sense.”
To be sure, executives could be downplaying risks — to soothe investors, or to get on the right side of Trump: the president has a track record of berating bosses over offshore jobs.
And economists warn that in the longer-run, U.S. business could still choose lower-cost countries for post-NAFTA production, thwarting the president’s goal of rebalancing trade. “We will have to source some of these goods from Asia, which merely shifts around the trade deficit,” said Benn Steil, director of international economics at the Council on Foreign Relations.
Still, some little-known data from the depths of the NAFTA ledger helps explain why the CEOs sound sanguine. A growing number of companies in Canada and Mexico don’t even bother to fill out the paperwork that would entitle them to use NAFTA’s preferential tariffs.
Last year, only 43 per cent of imports from Canada came into the U.S. under NAFTA rules. The figure for Mexico was higher, at 58 per cent, but still short of an overwhelming majority. (Take-up varies sharply across industries: About 95 per cent for vehicles and parts, less than 1 per cent for pharmaceuticals.)
When firms circumvent the deal, they have to pay rates ranging from about 2.5 per cent for cars to 12 per cent for clothes. But in the case of cars, for example, there are offsetting advantages. Skip the paperwork, pay a bit extra, and you don’t have to meet NAFTA’s regional-content rules.
Those rules are central to the ongoing talks, the latest round of which gets under way next week in Mexico City. Tightening the local-content requirement is among Trump’s demands, and he’s repeatedly threatened to pull the U.S. out of the accord if they’re not met. Mexico and Canada say U.S. proposals are unworkable.
If the impasse ends up collapsing NAFTA, corporate lobby groups have warned that the U.S. economic recovery could be at risk. In an op-ed in the Wall Street Journal, Chamber of Commerce President Thomas Donohue described the prospect as a “calamity” that would kill jobs, ramp up prices and leave “crops in the heartland” rotting in their fields.
‘Around a While’
The view from recent earnings calls is less apocalyptic. “If there were to be any significant impact from NAFTA, we feel like we would be well positioned with our three strong plants in the U.S.,” Ginger Jones, chief financial officer of Cooper Tire and Rubber Co., told analysts on Jan. 17. Polaris CEO Scott Wine raised the possibility of expanding capacity at the company’s plant in Huntsville, Alabama, though he said no contingency plans are in place.
Greg Husisian, a lawyer at Foley & Lardner LLP who advises companies on how to hedge against NAFTA risk, says some may be more worried than they let on.
Businesses with major fixed investments in Mexico, such as large plants, tend to be most concerned, he said, while firms with more “mobile” assets such as tool and dye presses are happy to wait and see.
But in general, said Husisian, companies aren’t actively hedging much yet because “it looks like NAFTA will be around for a while.”
Renegotiating the pact has already taken longer than it was initially supposed to. And with Mexico heading into elections in July — and then into a five-month interregnum under a lame-duck president before the winner takes office — there are plenty more speed bumps ahead.
Powered by WPeMatico