NAFTA has been on everyone’s minds, from the beginning of the Trump presidency and especially now.
But the North American Free Trade Agreement is a complex beast, and even those who have thoroughly studied it can say very little with certainty. With recent moves from Justin Trudeau to secure Canada’s independence from North American purchasing and Mexico currently undergoing political changes of its own, NAFTA could have some surprising (and resounding) side effects.
Understanding NAFTA
In simple terms, NAFTA has made it more affordable for Canada and Mexico to export their goods to the United States. Mexico and Canada are currently the second and third largest exporters to the United States, following only China. However, these countries are also the leading importers of American made products. NAFTA has come under fire by the Trump administration as making it easier for American jobs to shift towards Canada and Mexico, as this is where manufacturing is being done on products ultimately sold in the United States.
NAFTA has been in action since 1994, which means that it’s presently an economic reality that the United States’ economy has grown to deal with and rely upon. Consequently, any pulling out from NAFTA is likely to cause upheaval. For individual businesses, investments, and entrepreneurs, this upheaval could create potential opportunities — and also the potential for ruin. Finance-minded individuals are strongly advised to prepare for both outcomes.
The Direct Consequences of Repeal
Presently, NAFTA makes it so that Canadian and Mexican goods can come into the country at a nearly 0% tax. Repealing this agreement would suddenly make these goods more expensive. It would additionally become more expensive for United States businesses to export out to these countries.
Businesses would find it more difficult to manage their supply chains. Many companies would see their goods and services increasing in price. There would be monumental disruption for companies that sourced products and parts through either Mexico and Canada, or that exported to these countries.
Though it could become more affordable to begin manufacturing more in the United States — “bringing jobs back” — this would not happen overnight, as substantial industry disruption would occur first. This could see a marked recession or depression across the economy.
And while production may move more towards North America for North American goods, other countries may move their manufacturing out of North America for optimal deals with Canada and Mexico.
Potential Adjustments
It’s not yet known if NAFTA could be repealed or simply adjusted. It’s possible if it is repealed that Mexico could be dropped from the deal and that a prior existing agreement, which had already existed between the United States and Canada, could come into play. This would mitigate some of the economic damages of the action.
But Canada has already begun taking some aggressive actions to lower its own reliance upon the United States, which it may now see as a wild card. Not only is NAFTA under fire, but there have also been issues such as increased taxes on solar technology. It is these decisions that likely spurned Canada to move ahead with the TPP though it had previously been reluctant.
When it comes to NAFTA, the question is primarily how much the United States relies upon goods from Mexico and Canada, and how much these countries also rely upon goods from the United States. Most analysts believe that NAFTA is, as a whole, a solid deal, and that modifying it will cause significant disruption for the economy.
Whether this disruption will create any marked opportunities in the market, on the other hand, is another question entirely. If NAFTA is repealed outright, it may become easier for companies to deal outside of the United States entirely, especially companies that rely upon foreign manufacturing. But if NAFTA is adjusted, it is possible that it could be adjusted in the direction of making only Mexican transactions more difficult. This will hit the market unevenly, as not all industries will be equally effected.
What is certain is that either repealing or modifying NAFTA will have an immense impact on the economy as a whole and nearly every industry will feel some impact, whether it’s positive or negative. Businesses, investors, and entrepreneurs should begin considering this now.
Regards,
Ethan Warrick
Editor
Wealth Authority
