If the Trump administration makes good on its threat to pull out of the North American Free Trade Agreement (NAFTA), chief executive officers will be forced to engage in a continental reshuffling of their manufacturing and distribution assets. It won’t be easy. And there’s no guarantee that it will bring back all the jobs that have been shifted to Mexico. “The president is trying to bring jobs back,” says Ralph Biederman, head of the Midwest chapter of the U.S.-Mexico Chamber of Commerce, based in Chicago. “The question is whether the U.S. getting out of the agreement would give him what he wants.” Biederman counsels U.S. companies of various sizes on their Mexico strategies.
It took at least a decade after NAFTA took effect in 1994 for CEOs to re-evaluate where they made things and how. Supply chains for entire industries shifted to a continental scale. In the auto industry, for example, where there are three primary tiers of suppliers, a Tier Three supplier learned that it could make a component in the United States and ship it to Mexico where it could be assembled into a larger subassembly made by a Tier Two supplier. Then it all could be shipped back across the border to a Tier One supplier who makes it available for final assembly. The absence of tariffs allowed multiple movements across the border. By some accounts, NAFTA helped the U.S. auto industry stay alive in the face of tough Japanese competition.
If NAFTA now goes away, it would take years for companies to re-align their manufacturing strategies and that would be disruptive to the whole U.S. economy, says Oded Shankar, the academic advisor to the National Center for the Middle Market at Ohio State University in Columbus, Ohio. “If NAFTA is terminated, there will be a major disruption in the economy,” said Shanker. “There are some players who by reasons of luck or agility will benefit from that. But all in all for the economy, this really would not be good.”
There are different categories of companies and each of them will face decisions if duties are reimposed and rules of origin are dramatically tightened:
–If a company has operations only in Mexico and the United States. These companies may have large labor forces in Mexico, who have been employed for 15 to 20 years, and it would be expensive to fire them all because of country’s labor laws. The CEO of such a company might choose to accept the re-imposition of duties because that would be more cost-effective than re-locating production to the United States. But that might end up being a losing proposition against Chinese companies or other Western companies with large presences in cheap manufacturing locations. “The product from China would still be coming in at the same price,” says Beiderman.
Another challenge for companies that choose to relocate manufacturing back to the United States is that the right skills sets are not necessarily available. Manufacturers already say they have millions of job openings in the United States but cannot find people with the right skills to take them. In an effort to re-establish production in the United States, they might have to increasingly turn to robots, which is certainly not in line with President Trump’s jobs ambition.
—If a company has operations in multiple countries. If tariffs are re-imposed on goods coming from Mexico, some companies may choose to move the jobs they have in Mexico to another low-cost country, whether in Latin America or Asia. There is no guarantee that the reimposition of duties would force these companies to bring the jobs back to the United States.
–If a company ships parts to Mexico. Some nuts and bolts companies, such as Tier Three automotive suppliers, ship parts to Mexico that are to be included in sub-assemblies that are sent back across the border to Alabama or other southern states for assembly into finished vehicles. The reimposition of duties would halt the flow of parts from Mexico or make them much more expensive. That particular type of Tier Three supplier could lose those sales entirely, or as Ohio States’s Shenkar says, it could scramble to become more sophisticated and cut out the Mexican subassembler, turning itself into a Tier Two supplier. These companies thus could either win or lose depending on how well they play the game.
–If a company manufactures and sells only in the United States. You would no longer have to compete against lower-cost products coming in from Mexico and would therefore clearly benefit. “These companies would be sitting pretty,” says Ohio State’s Shenkar, also author of a book entitled, “Navigating Global Business: A Cultural Compass.” No one knows what percentage of U.S. companies fit into this category.
In short, the death of NAFTA would create a “wide ripple impact and it would not necessarily achieve what the president wants,” says Biederman. “Each company would have to sit down and figure out, how is this going to affect me?”
