SCDigest Editorial Staff

SCDigest Says:

Even if new changes to NAFTA mean increased costs in sourcing from Canada and/or Mexico, advantages in supply continuity may still favor sourcing from those companies in a new NAFTA environment. What do you say? Send us your comments here

With the Democrats having a strong chance of winning the White House in the 2008 presidential election, how should US companies think about the potential for major changes in NAFTA, as both Democratic contenders currently argue that the agreement is bad for the US?

The North American Free Trade Agreement (NAFTA) was adopted in 1994 under the Clinton administration, and basically created open trade, free of duties and tariffs, amongst the US, Mexico, and Canada.

However, both Democratic candidates (Barack Obama and Hillary Clinton) have recently been taking aggressive shots at the NAFTA, saying it should be renegotiated to better protect US manufacturers and workers.

“Democrats have been flirting with outright protectionism for some time now -- taking a dip with the "fair trade" movement, cozying up to labor and environmental standards, and shunning trade deals in Congress,” wrote Kimberly Strassel last week in the Wall Street Journal, “It's been a tease, though they’ve been careful not to let things go too far.”

(Global Supply Chain and Logistics Article - Continued Below)

(Global Supply Chain and Logistics Article - Continued)

The real question for US companies is whether the campaign rhetoric combined with a Democratic victory in the Presidential and Congressional elections could mean important changes in NAFTA provisions.

“Companies must weigh a variety of factors when making sourcing or outsourcing decisions, including total cost, certainty of supply, quality, government regulations, and increasingly, sustainability,” notes John Blascovich, a partner at consulting company AT Kearney who leads the firm’s Supply Management Sourcing efforts in North America.

“Any changes to NAFTA that have a negative impact on one or more of those dimensions will reduce the cost competitiveness of Mexican and Canadian suppliers in any assessment, especially when compared to countries in Latin America and Asia Pacific, unless similar changes are made to our trading relationships with those regions,” Blascovich added.

If no other trade provisions are changed, this may have the effect of driving more business to Asia and/or Latin America. However, even if new changes to NAFTA mean increased costs in sourcing from Canada and/or Mexico, advantages in supply continuity may still favor sourcing from those companies in a new NAFTA environment.

“It is not clear that businesses already in these countries will be moved back to the US,” Blascovich told SCDigest. “It is possible that it may slow the flow of outsourcing if some companies are less comfortable moving further offshore than Mexico or Canada.”

“Companies that have invested heavily in Mexico based on NAFTA may decide to cancel additional investment,” Blascovich observed. “However, some of the plants that have been commissioned are operating at world class quality and cost levels and may continue to be competitive even in a weakened NAFTA environment. They may also be able in some cases to supply markets outside the United States,” he added.

Regardless, it’s important that US companies begin to assess the potential for changes to NAFTA in making near-term supply chain decisions. Use of “scenario analysis” – such as looking at supply chain network design or “make versus buy” decision given perhaps a 10% increase in tariffs on goods coming from Mexico - is the prudent move.

What’s your perspective on NAFTA? Do you think changes are likely depending on election results? What should companies be doing now to best prepare for potential NAFTA revisions? Let us know your thoughts at the Feedback button below.