In the brief time since President Donald Trump took office, he has shown he plans to follow through with the trade policies that were a central part of his campaign. Now that the President has officially withdrawn the United States ("U.S.") from the Trans-Pacific Partnership ("TPP") and announced his intention to renegotiate the North American Free Trade Agreement ("NAFTA"), U.S. and multi-national businesses are left with more questions than answers and need to be aware of how Trump's trade policies may affect their industry and businesses.
We know, broadly, that the President claims an "America First" policy in regard to trade agreements with foreign countries, but what will the specific changes to trade agreements look like, and how can American businesses anticipate their responses in turn? Preliminary statements from the White House and leaders in Canada and Mexico provide some insight into a few key issues that could be renegotiated in NAFTA. Canada, which is the leading buyer of U.S. exports, appears to be less of a target for the President than Mexico. He has already signaled to Mexican officials he wants to renegotiate NAFTA's "rules of origin" regulations, which determine the country that particular goods come from and, therefore, the goods' duty rate. Critics of the current "rules of origin" believe that too many goods entering the U.S. duty free under NAFTA are made in large part with foreign, especially Chinese and Southeast Asian, materials to the detriment of U.S. businesses and workers. For instance, under NAFTA, 62.5 percent of the material in a car or light truck made in Mexico must be from North America to enter the U.S. tariff free. If this rate were to increase, then more materials would likely come from U.S. businesses and manufacturers (e.g. U.S. jobs) and less from Asia. For Mexico, the goal is to keep cross-border trade duty free and agreeing to such a proposal would hopefully prevent a more extreme stance from President Trump, such as his threat to impose a 35% tariff on certain Mexican goods. However, Mexican officials stated that if President Trump offers them an unfavorable deal, then they might pull out of NAFTA altogether.
Further, President Trump signaled that he wants to address the dispute resolution mechanisms in NAFTA to limit the ability of Mexican and Canadian companies to sue the U.S. government, which will presumably create more tension in the NAFTA renegotiations with our neighbors to the north and south.
What this means for U.S. companies, workers, and our trading partners all remains uncertain. However, U.S. companies in industries that relied heavily on NAFTA to import goods duty free and that have set up factories outside the United States, e.g. textiles, automobiles, electronics, etc., may find themselves in a situation where they are forced to reevaluate their supply chains, business structures, and transfer pricing strategies to comply with and take advantage of new trade policies. The same is true for companies that moved to Asia to manufacture their goods and source their materials.
The International Trade Practice at Lewis Brisbois Bisgaard & Smith LLP is constantly monitoring changes in trade laws and advising our clients on the most cost effective strategies for importing and exporting their goods and services to and from the U.S. and globally.
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