NAFTA Series Part III: Consequences of Negotiations

This is the third article in a series about the North American Free Trade Agreement, or NAFTA. The first dealt with the history and purpose of NAFTA; the second, with the current debate surrounding the trade deal. This time, we’ll look at real-life consequences of the negotiations, and how businesses are dealing with them.

So far, the biggest impact of the talks to renegotiate NAFTA has been uncertainty. Not even industry lobbyists fully understand the changes proposed to NAFTA, or what those changes might do to North American trade, making it difficult for businesses to plan, commence, or follow through with their strategies and investments.

Investment Uncertainty

Miguel Valenzuela, an outside director on M. Holland Latinoamérica’s Board of Managers, says that he’s noticed decreased interest in investing in Mexico over the past 12 months. His private equity firm, which receives 30 to 40 percent of its funds from foreign investors, is particularly suited to observe such changes in behavior.

“The uncertainty about NAFTA is creating a lack of interest to invest in Mexico and Canada, and in some cases to divest,” Valenzuela said. “[It’s] not so much because of the Mexican elections, or the strengthened U.S. dollar…it’s simply because of the uncertainty.”

As previously noted (NAFTA Series: The Current Debate), tariffs on trade between Mexico, Canada, and the U.S. would resort to World Trade Organization standards (somewhere around 3 to 6 percent) if NAFTA were repealed. Valenzuela says, however, that potential tariffs are not what’s causing so much anxiety. Rather, it’s the possibility of losing the legal assurances that NAFTA brings to foreign investors.

“It’s not all a matter of tariffs, duties, quotas,” Valenzuela said. “NAFTA, more than anything else, is like a legal framework. If [it] is suspended or canceled, many foreign investors would lose that certainty, and that is more important than the fact that we have no tariffs in most cases.”

Valenzuela believes that the prevailing attitude of businesses at the moment is to “wait and see,” but if a new NAFTA arrives soon, or even the assurance that NAFTA will not be dissolved, investment will ramp up like before.

Tariffs and Investments

Tariffs, however, are a big concern for others. The substantial steel and aluminum tariffs that the U.S. administration recently placed on its trading partners, including Mexico and Canada, have prompted retaliatory tariffs on U.S. exports to those countries. A tit-for-tat tariff battle between the U.S. and China, the world’s two largest economies, heated up this week with U.S. threats to slap additional 10-percent tariffs on $200 billion worth of Chinese imports

The steel and aluminum tariffs already are impacting the U.S. plastics industry, where low-cost energy has prompted a construction boom in new plastic resin manufacturing facilities, with many multi-billion dollar construction projects already underway. Overnight, the 25-percent tariffs on steel and the 10-percent tariffs on aluminum have raised the price tags for those projects, since steel and aluminum are major components of the infrastructure and machinery for making plastics. The American Chemistry Council (ACC), in a late-May detailing filed with the U.S. government, said that the tariffs would jeopardize the almost $200 billion in planned U.S. plastics and chemical development. The filing cited one ACC member company with $6 billion in planned Gulf Coast investments, of which 20 percent is related to steel.

“A higher cost of steel inputs fundamentally changes the value proposition of new construction and directly discourages future investments,” the memo said.

Already, the plastics industry is an anomaly of deficit-prone U.S. trade, generating large surpluses with its major NAFTA partners. Further, the ACC estimates an expansion from $33 billion to $73 billion in chemicals and plastic resin exports by 2022, most of which will come from capacity expansions. Prolonged trade tensions could disrupt this optimistic outlook.

The tariff skirmishes only increase the uncertainty for the NAFTA negotiations. As William Carteaux, head of the U.S. Plastics Industry Association, recently voiced in a letter to President Trump (here), “These tariffs will erode the manufacturing sector’s ability to grow, create jobs and, perhaps even worse, they threaten to poison the well for NAFTA negotiations and more positive trade talks in the future.”

On July 11, Carteaux responded to the most recent threat of expanded tariffs against China, stating, “This disruptive approach to trade policy endangers the gains that the $404 billion plastics industry has made as a result of this administration’s achievements on comprehensive tax and regulatory reform…” The American Chemical Council also issued a cautionary statement about further tariffs, saying, “As an industry that touches 96 percent of all manufactured goods and which has much to gain from a productive, respectful trading relationship with China, ACC and our members remain hopeful that the U.S. and China can resolve their differences and prevent further harm to U.S. manufacturers, farmers, and consumers.”

Cross-border Travel

Border tensions among the NAFTA neighbors are affecting more than just trade. Recently, one of M. Holland Canada’s longtime employees was stopped by U.S. border control on his way to a business meeting in the United States, a trip he’d made frequently for many years on the strength of his Canadian passport and status as a “business visitor.” After an hours-long interview he was allowed into the country, but with a warning that he would require a visa for future visits

Jake Kanyusik, an immigration attorney at Kriezelman, Burton & Associates, hired to help obtain the now required visa, said it “does seem there is a higher rate of instances where [border] officers are deciding that an individual’s visit to the U.S. does not comply with…scenarios that do not require a work visa.” The implication of this, Kanyusik added, is that it can be costly for global companies to comply with this stricter environment, as greater resources will have to go toward ensuring immigration compliance.

Conclusion

The prolonged NAFTA negotiations and growing tariff tensions are creating an environment of uncertainty that is clouding business decision making, impacting investment costs, and even hampering the ease of business travel among NAFTA partners. Plastics industry associations are anxious for a speedy resolution to the growing trade tensions.

In our next and final post, we’ll take a look at pathways for advocacy and what you can expect in the coming months, with important dates and events to keep in mind.

If you enjoyed this article, please check out some additional posts

NAFTA Series Part II: The Current Debate
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NAFTA Series Part I: What Is It And Why Should We Care?
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Bisphenol-A, Episode VIII: The Saga Continues
Remembering The Legacy Of Javier Lebrija Sr.
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