Find Research
Our World View
Industry Perspectives
Research Program
Parallax View Magazine
> stay tuned
View our collections of research around key subject areas:
>
>
>
>
ERP
>
>
>
>
>
>
>
SRM
>
>
WMS
 
 
Article
NAFTA--Supply Chain at Risk?

With withdrawal from the TransPacific Partnership and threats of withdrawal from NAFTA, enterprises and employees should reach out to their congress members and let them know how they feel. The stakes are too high.


Full Article Below -
Untitled Document

Introduction

No doubt, the U.S. has had a significant decline in economic position. The days of the family thriving on a single income, weekends off, savings accounts for the kids’ colleges and confidence in the family’s future have been gone for decades now. 

The wave of outsourcing began long before NAFTA and, today, is a fact of the land. It has been a harsh reality for many, and politicians and economists have no solution. From the trickle-down days to the current ideas on reducing corporate taxes, new restrictions on outsourcing, and increased tariffs vs. open markets, debate still continues on just what is the right path forward.

The CEOs of international firms who were the architects—and beneficiaries—of the current structure also present challenges to the interests of American citizens. Clearly, part of that structure is unfair. During the 90s while outsourcing and downsizing got rolling in earnest, we also witnessed the biggest salary gains for the top 1% with CEO pay soaring into the stratosphere. Their ‘club’ has its own take on trade (always free), labor (always cheap) and global markets (always open).1

At the same time, the U.S. consumer has gotten poorer. Income growth has stagnated while the number of essential goods in the family market basket2 has increased along with the cost of those goods. Back in the day there were no smart phones for each family member (what to say of multiple devices: iPads, Kindles, laptops); home internet (de facto, paying double for internet, i.e. at home and your cellular device); cable services for movie networks; $100 shoes for each family member; and automobiles that can cost the annual salary of a working person. Families ate at home, with a lower cost of food per capita. College education often had multiple sources of funding from scholarships, state schools, low to no tuition and so on. Additionally, health care costs are rising (and many insured are now at risk of losing their insurance). Consumers confront all these issues, making the average citizen far poorer. Of course people are angry!

Deconstructing NAFTA?

Talk continues on the Trump promise to do away with or renegotiate NAFTA. But the fact is, most states in the U.S. have both Mexico and Canada as their largest trading partners—and I mean export markets. For example, Canada is Michigan’s largest trading partner (of course, as it is a border state) with exports in 2015 of $23.5B, which is nearly 44 percent of Michigan’s exports.

Mexico is Michigan’s second-largest trading partner with $11.7 billion in exports in 2015, which is about 22% of the state’s exports.3 Surely, Michigan will be very attentive and involved in any changes to NAFTA. And they are not alone. Oklahoma is a major agricultural and aerospace exporter. In fact, most of the Midwest farmers are major food exporters, since US agribusiness is so productive. Mexico and other Asian countries can turn to other sources like Brazil or Argentina for grain and produce if they don’t get a good deal from the US. Said Joni Ernst, a Republican Senator from Iowa, in a recent statement, “If we’re talking about renegotiating NAFTA, we actually stand to lose ground in agriculture….”4 Soybeans are Iowa’s number one agricultural export and Mexico is already talking to Argentina, for example, about supplanting the US source.

John McCain, Jeff Flake and Glenn Hamer, all of Arizona, have stated that since NAFTA has been enacted, Arizona has increased trade with Mexico to the tune of over $5.7B, providing more jobs. However, they do call for ‘modernization,’ not repeal, of NAFTA. Though the Transpacific Partnership details are not well known to most Americans, unlike NAFTA which we have lived with for years, farming states were in favor of such trade agreements to expand overseas business.

Most in congress and the senate, from both red and blue states, have a strong interest in NAFTA, since many major enterprises depend on North American trade. What is interesting is that some of the tough talk is coming from Democrats such as Congressman Peter DeFazio of Oregon. His proposed bill, besides laying out trade objectives, gives the negotiating process one year, once negotiations are initiated, or a call to get out of NAFTA all together. (I guess we all need a deadline to stay focused.) Senator Sherrod Brown, a Democrat from Ohio, is trying to work with Trump on renegotiating NAFTA and voiced concerns that Trump’s own party would get in the way of this process.

Although President Trump wants to continue the warm and powerful trade relationship with Canada, he wants a different deal with Mexico. After a friendly visit with Justin Trudeau, Canada’s Prime Minister, it appears Mr. Trump got a bit of an education on the tight linkages between the three countries. Trudeau wants a trilateral relationship, not separate bilateral relationships with each country. This makes sense. Since the U.S. is between Canada and Mexico, anything that would slow down or add more cost to the supply chain would wind up being reflected in the Canadian consumer’s wallet. This North American block could lose dominance globally if it is weakened.

And Mexico is not sitting idly by with so much at stake. Mexico’s Ildefonso Guajardo, Secretary of Economy of Mexico and one of the original NAFTA negotiators, also agrees that it is time to refresh NAFTA. But he also said, as far as U.S. economic growth is concerned, “We are part of the solution. We are not part of the problem.” He cited the advantages of a stronger North American trade region (vs. Asia, i.e., China who is now taking a lead since the US dropped out of the TransPacific Partnership5): steady growth backed up by mostly transparent business contracts, traceable product supply chains, currency stability, and overall regional growth that increases the consumer bases in all three nations.

Mr. Guajardo also reiterated that, as pointed out in the Wall Street Journal, Mexico isn’t to blame for the loss of manufacturing jobs in the U.S., insisting much of that work has disappeared because of automation, not outsourcing.6 He has a point there. Economics and manufacturing experts feel that even if some manufacturing returns to the U.S., it won’t have much of an impact on jobs, since the drive to automate continues across most production sectors.

Another interesting and significant dynamic here is the dialogue inside Mexico and its own protectionist instincts. This is not just Mexican pride and a history of protectionism; the World Bank recommends that poorer nations build higher tariffs to protect their industries. Mexico had such a history and through NAFTA, Mexico actually limited that. Their top economic advisors during the NAFTA talks were U.S. educated and free trade disciples. Thus, if the U.S. puts up some barriers, then the U.S. might face tariffs as they sell into Mexico. Whether import tariffs on goods coming into the U.S. from overseas (most organizations actually are NOT in favor of this) or retaliatory actions that increase barriers for U.S. goods, deconstructing NAFTA cannot be done based on a simpleton’s view into trade policy. 

And it is not as though Mexico has no options. The image that some uninformed Americans may have of a sleepy underdeveloped nation is incorrect. Other nations compete against the U.S. for the Mexican market; therefore, Mexico, with a consumer population of 129M, can turn to these sources to provide a tariff-free market.

But wait, there is more!

How About That Supply Chain?

Across the country different industry groups have varied opinions about NAFTA and overall trade restrictions or tariffs. Retailers, for example, have worked for decades with low-cost-country sourcing schemes, as well as the establishment of private label manufacturing with supply chains from China to Romania and Ethiopia. A significant import tariff would undo most of the work done here. For manufacturers, the reality is that if they want to sell in a particular market, they must make there too. Ideas such as increasing the percentage of the total product manufactured in the U.S. or outright moving manufacturing back to the U.S. could reduce those manufacturers’ global footprint. In other words, if you don’t make in the EU, you don’t get to sell stuff there, either.

Also, manufacturers can’t just snap their fingers and build a new plant in the U.S. For example, a semiconductor plant takes more than a year to build once a suitable site is found, which includes conducting a geological survey, finding an appropriate labor pool of educated workers, as well as spending close to a billion dollars. Semiconductor manufacturers wouldn’t shut down foreign plants, as there are strong markets for the technology worldwide. (Remember: make there to sell there.) There would arise the question of will demand support that increased capacity?

In the Detroit News, it was stated, “GM Chairman and CEO Mary Barra, who sits in a group of business leaders advising Trump on economic policy issues, has said she’s shared information with Trump and his administration about the long lead time automakers have when investing in plants7 and the complicated supply chain that is integrated with Mexico.”8  

Firms like Boeing spent a decade creating an international supply chain to make, for example, the Dreamliner. And they had a lot of angst making the supply chain work.9 However, the new aircraft was not created for naught, since their chief rival Airbus is also always bidding on any contracts. And international sales can be quite large with most economically developed nations boasting their own airlines—from Norway to Korea, Dubai and so on. Closing plants in those countries could shut off key markets.

In fact, global firms are transnational and not particularly loyal to their home or host country. A global firm, in general, is looking at the overall growth and profit of the firm and how best to maximize that. (Anything that jeopardizes it will surely impact that astronomical executive compensation package.)

And yet, the voting public who filled the current Oval Office—the working (or non-working) American worker—will expect action. Labor unions, as well, lead the charge to ‘bring jobs home.’ But labor unions also are the friends of regulation, with expectations of expanding various environmental standards as well as employee benefits—not the interests of CEOs.10 Ultimately, whatever ‘deals’ are created not only have to work for labor, but must have the input of corporations and be agreeable to them, since they are the ones who will implement them.

And need we say that anything that increases prices to consumers, who, by their purchasing preferences, have tacitly endorsed outsourcing all these years, will have a new wave of protests across the country. The number one import by dollar volume is our cell phones, which are already expensive. Will consumers be happy with a 20% hike in the price of phones11?

But wait. There is still more at stake!

Conclusions—It’s Complicated

Photo credit: AUTOMOTIVE NEWS ILLUSTRATION

Trump has threated to “tear up” the NAFTA agreement if he can’t get the deal he wants. But a simple flex of the wrist will have many consequences for the U.S. Congressmen, senators, businesses, labor, and consumers all have a perspective, and all are anxious about what really is on the table.

Theoretically, changing or ending NAFTA is meant to ‘bring back jobs,’ but according to several studies by the auto industry, ending NAFTA or imposing some of the tariffs suggested by Trump, or implementing other ideas such as increasing the U.S. content of vehicles would actually reduce jobs and increase costs.12 Obviously there are strong conflicting opinions, with the Commerce Department stating that that U.S. GDP grew 22% from 2009 to 2015 and that growth supports more than 3 million American jobs.13  

What is interesting is that the auto industry’s recent decisions to upgrade and retain workers in the U.S. vs. in Mexico14 are based on the quid pro quo promised by Trump to address regulatory issues in the auto industry like energy policy/fuel emissions. However, the jobs will be created in right–to-work states, resulting in layoffs to workers in northern states who have higher pay and union membership. The net result retains U.S. jobs, but with a lower pay scale—that is if we get net new jobs. A student of history will note that even with quotas/restrictions in textile, apparel, and footwear, the march to totally outsource these industries did take place, with virtually all of these items now imported to the U.S. That’s economics 101.

No doubt, the U.S. has lost a lot in the last decades: so many jobs gone, intellectual property transferred15 to other nations, and a lack of confidence in our future. We do need more equitable trade terms, but many of our problems are from within, the result of displacement as a result of huge technological and societal changes.16 In a sense we are living through future shock. We also know that some of the workforce is just not aligned with the growth sectors we do have in our economy.

NAFTA as a regional trade group vs. China/U.S. trade also has to be thought through. What is best for the U.S.? Mexico and China are not just trading partners. We have other issues with Mexico such as solving cross-border drug crime. And we need to partner with China to counteract the threat of North Korea and maintain overall regional peace, where the U.S. still plays a vital role.

A strong Mexican economy means a diminished need for Mexican citizens to migrate to the U.S., thus reducing challenges in law enforcement, border patrols, immigration detentions, and a clogged legal system. That costs a lot of money and is disruptive to our society.

It’s just complicated, and NAFTA—or any trade deal—cannot be thought of in isolation. Thus, negotiations on NAFTA will require economic and policy ‘brain surgeons,’ not media sound bites or spokespeople. The outcome needs to support long-term improvement—in jobs, for our consumers, and in our national security.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

For further reading:

The North American Free Trade Agreement 

Council on Foreign Relations on: NAFTA’s Economic Impact

Congessman Rick Nolan: Press Conference, Blueprint for America's New Trade Policy

Rep. Peter DeFazio Introduces Resolution Outlining Principles for New Trade Agreement with Mexico and Canada

Principles for the NAFTA bill laid out by DeFazio are quite interesting and include:

  1. Require strong labor & environmental standards—and ensure they are enforced
  2. Add strict, enforceable disciplines to fight against currency manipulation
  3. Eliminate procurement provisions that undermine “Buy America”
  4. Require imports and foreign companies operating in the U.S. to adhere to U.S. laws
  5. Lower the cost of prescription drugs
  6. End tribunals that undermine U.S. trade enforcement laws, such as NAFTA’s Chapter 19
  7. Require foreign operators to comply with U.S. transportation laws
  8. Require strong rules of origin on cars, auto parts, and other manufactured goods
  9. Eliminate the dangerous Investor State Dispute Settlement (ISDS) provision that undermines sovereignty
  10. Protect U.S. energy policy

_______________________________________________

1 Continuing the discussion from Jobs, the Economy and Politics -- Return to article text above

2 economic market basket -- Return to article text above

3 Source: U.S. Department of Commerce. -- Return to article text above

4 The Wall Street Journal March 13, 2017 -- Return to article text above

5 Note: Many of our regional allies, like Japan and South Korea, who have feared China’s dominance, now are forced to rethink their partnership strategies and look to China as a more significant partner. -- Return to article text above

6 The Wall Street Journal March 3, 2017 -- Return to article text above

7 Italics mine. -- Return to article text above

8 Detroit News, Charles E. Ramirez, and Melissa Burden 9:15 a.m. ET March 3, 2017 -- Return to article text above

9 The Boeing Challenge -- Return to article text above

10 or the current administration who has vowed to reduce regulations -- Return to article text above

11 According to studies of Apple’s supply chain, just assembling phones within the US would add 5% to the cost, but if components were also made stateside that would increase the cost about 10% to 15%. Read MIT’s: The All-American iPhone. Or instead of assembling phones within the U.S., Apple could pay a tariff—estimated to be between 10% and 20%. For Trump, a bigger harvest may just be getting Apple and their ilk to report US taxes and pay up, an idea that will have support from most everyone except a few CEO’s and shareholders. -- Return to article text above

12 Read Forbes article: How Trump's Protectionism Would Destroy Auto Industry Jobs, Not Create Them -- Return to article text above

13 Exports to Free Trade Agreement Partners Support American Jobs. Another report said the US added 25M jobs in the last 20 years, most of those during the Clinton administration -- Return to article text above

14 Read WSJ article here -- Return to article text above

15 Read The Russians Are Coming -- Return to article text above

16 Read about digital displacement in Your Supply Chain Is Calling You -- Return to article text above


To view other articles from this issue of the brief, click here.




MarketViz powered.