Rebalancers. This category comprises sectors that generate either large surpluses or deficits for the US and that also have higher tariff rates under WTO rules than under NAFTA. These differences in tariffs would be significant enough to prompt manufacturers to shift production from one NAFTA country to another—and thereby make an impact on bilateral trade deficits. Light trucks such as pickups are a good example. Under NAFTA, Mexican-built light trucks are imported duty-free into the US. Under WTO rules, US tariffs on these vehicles would shoot up to 25%. So in a post-NAFTA world, automakers would be likely to relocate assembly of light trucks to the US for sale inside the US. One point that stands out in this analysis, however, is just how very few product categories, other than textiles and vehicles used for transporting goods, fall into this segment. This strengthens the point that in order to make a significant difference in the US-NAFTA trade balance, the Trump Administration would have to impose additional restrictions on imports of other types of products.
Sitting Ducks. These sectors are likely to get hit very hard by added protectionism. They contribute greatly to US trade deficits or surpluses, but a withdrawal from NAFTA would not be enough to make an impact, because US tariffs under WTO rules would remain very low. The deficit generators, such as passenger vehicles and fruits and vegetables, would be prime targets for further trade action by the US, as shown in Exhibit 2. The US MFN tariff on Mexican car imports is only 2.5%, for example, so the Trump Administration would have to hike trade barriers even further to force carmakers to shift production to the US. For trade into Mexico, chemicals and petroleum are among the sectors that can be regarded as sitting ducks. Sectors that generate significant trade surpluses for the US, meanwhile, would be natural targets for retaliation by Mexico and Canada if the US withdraws from NAFTA and imposes trade restrictions.
WHAT COMPANIES MUST DO TO ASSESS AND MITIGATE RISK
While it is important to identify which sectors are at risk, it is more critical for every company to understand how shifting trade rules will specifically affect its business. There are hundreds of tariff classifications and rates. The average tariffs we have used for analyzing overall industry sectors often mask higher and lower tariffs at a more granular, product-category level. In addition, each firm must assess its value chain. If an organization purchases its inputs and produces and sells in only one NAFTA country, it will face no direct risk from cancellation of NAFTA. But once the value chain includes activities in more than one North American country, there is risk.
Companies must do their homework. They must understand their specific risk profile and which steps they need to take to mitigate that risk. We suggest that sitting ducks, in particular, assess not only the risks posed by WTO tariff levels, but also the whole suite of policies that can lead to “managed trade” in specific sectors, such as quotas, seasonal restrictions, technical barriers to trade, and so-called voluntary export restraints.
Our previous article outlined three steps business leaders should take immediately: they should begin to assess the risk to their global value chains, work to influence policy, and develop a playbook for action based on several potential outcomes. Companies must also take into account the fact that the risk to the world trading system goes far beyond NAFTA; it also includes Brexit and increasing trade tensions between the US and China. (See “Adapting to a New Trade Order,” BCG article, July 2017.)
Any US move to cancel NAFTA will lead to major upheaval in industries that have built their business models around the free flow of business inputs and outputs among the three countries. It is vital that companies understand how this change will affect their competitive position and make the preparations necessary to move boldly regardless of the outcome. Indeed, companies at risk of being adversely affected should also mobilize now to try to stop the collapse of NAFTA from happening in the first place.
By Daniel Alanis Dustin Burke Marc Gilbert Claudio Knizek Michael McAdoo