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How Businesses Deal With NAFTA Negotiations

The clock is ticking for Canadian and U.S. trade representatives meeting in Washington this week to reach a deal on a new Nafta before the end of the month–and companies with business ties across the border are growing anxious.

Last Friday, President Trump started a 90-day countdown after he sent a letter to Congress stating his intention to sign a new trade deal with Mexico and “with Canada if it is willing” by the end of November. That deal would update the longstanding trade pact, known as the North American Free Trade Agreement, which was enacted in 1994. By law, the administration is required to submit the full text of the treaty to Congress within 30 days, leaving Canada and the U.S. a September 30 deadline to reach a consensus.

Many businesses and trade associations have celebrated the progress made with Mexico in Nafta negotiations though they have also urged the Trump administration to make sure Canada remains part of it. “Anything other than a trilateral agreement won’t win congressional approval and would lose business support,” said Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce in a statement.

 

It remains to be seen whether this is the beginning of the end for the 24-year-old three-nation agreement that helps guide $1.2 trillion in annual trade. Business owners, however, aren’t waiting on the sidelines. They’re considering their options, which involve everything from pushing off investments and cutting costs to tweaking their pricing structures and targeting new growth markets to augment a potential loss of sales.

 

“In terms of getting ready for something, it’s like getting ready to fast,” says Carey Smith, former CEO and founder of Big Ass Fans, an industrial fan manufacturer in Lexington, Kentucky. “It’s going to vary from company to company and so [it’s hard] to say ‘get ready for it.’ There’s no ‘get ready for it’ at all,” he adds.

 

Businesses and entrepreneurs do have options, however. In the case of Big Ass Fans, for example, the Canadian market is bigger than Mexico’s, though it pales in comparison to what the company sells in Australia and Malaysia, Smith says. Expanding to markets outside North America could help businesses lessen their reliance on the border nations.

Even then you don’t need to necessarily cut entire countries out of your revenue forecast. If a deal with Canada isn’t reached and tariffs kick in, you most likely will have to tweak your pricing strategy. “When there are tariffs, it makes it more difficult to sell into [a country] because immediately the price goes up,” Smith says. “To compete, we would have to reduce our prices.”

 

Lower prices can cut into a company’s profit margins, naturally. So business owners need to weigh whether dropping them is a financially viable idea.

 

You might also attempt to find a manufacturing partner within the country and shift production there, Smith says. That’s an expensive transition and it could open your company up to intellectual property insecurity issues. If your company sources materials from Canada, he adds, it might further be wise to identify a new supplier elsewhere.

Still, other companies are slowing down their spending. M. Holland, the Northbrook, Illinois-based distributor of plastic resin, has adopted a more cautious approach to its hiring and investment strategies since President Trump announced steel and aluminum tariffs back in March. “We may be less apt to make a major capital investment or acquisition outside the U.S. until these things get settled,” says Dwight Morgan, the company’s vice president of corporate development. The business makes 10 percent of all its resin sales internationally, the bulk of which goes to Canada and Mexico.

 

Ultimately, none of these strategies are easy. And even if you could simply tweak your plans to account for the changes, having to do so in the first place is not ideal.

“A lot of people have made huge long-term bets of billions of dollars on these investments,” says Morgan. He argues that businesses felt confident to make investments like these because Nafta provides a legal framework and stability. A disruption, or anything that adds variables to the intricate trade relationships between the three nations “is chilling to decision making,” he says.

source: fool.com


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