The Logistics of NAFTA: What Does it Mean for Supply Chain?

What is NAFTA?

Established in 1994, the North American Free Trade Agreement aims to make it easier for the US, Canada, and Mexico to do business with each other. Over the last 24 years, the trade bloc has eliminated tariffs and reduced other barriers to trade. However, not everybody believes that NAFTA’s benefits outweigh the costs.

Why is it at risk?

One view of NAFTA critics is that it eliminates manufacturing jobs in the US, as firms can move to Mexico where labour is cheaper. But, research has shown mixed results of the trade bloc’s effect on US labour. Some industries have shown great loss, while others have grown. The Economic Policy Institute states that in 2013, 700,000 production jobs were lost to Mexico. Other industries that saw losses are the automotive, textile, and computer sectors.

However, a 2014 report from the Peterson Instutite found that at most 5% of US job losses were for this reason. Instead, this report stated that most Americans lose their jobs due to plant shutdowns and mass layoffs unrelated to Mexico. There are other factors to consider, such as the rise of automation and competing with imports from China.

The Verdict

So, what’s the verdict? It’s still unclear. A nonpartisan Congress report from 2015 states that NAFTA did not result in the huge job loss predicted by some or the large economic gains predicted by others.

Some say that NAFTA’s impact has been underwhelming. Under this deal, the lack of tariffs has increased Mexico’s welfare by 1.31%, and only 0.08% for the US. Although NAFTA may have had little impact on the growth of the continent’s economy, the supply chain and logistics impacts have been much greater. Revoking or altering NAFTA could have large-scale impact on supply chain and logistics.

The Integrated Supply Chain

24 years later, the economies of the US, Canada, and Mexico are now interdependent. This trade bloc has been a game changer for the economy and the way it works. The reality is that these three countries now have deeply integrated supply chains. Oxford Economics predicts that if the US pulls out of NAFTA, all three countries will see cuts in real GDP.

Today, Canada and Mexico are two of America’s top trading partners. They are trumped only by China, and trade between the North American countries in 2016 was over $1.6 trillion.

Are there winners and losers?

For the US, one benefit of NAFTA is improving the efficiency and cost of intermediate goods. These are the materials or parts that firms use in the production of their final good. By outsourcing these goods, the quality is higher and the cost is lower, giving firms competitive advantage. Supporters of NAFTA say that this ultimately supports jobs and wages in the US.

In 2015, 43% of America’s total goods imports were these intermediate goods. This is where NAFTA critics’ concerns about job loss come in. However, America wasn’t the only country that saw a loss of jobs. 

Changes to Logistics

Many firms in the US rely on supply chain operations with suppliers in Canada and Mexico. Three industries in the US that rely heavily on these intermediate goods are automotive, agriculture, and energy. For example, in 2017 the US energy sector imported 1,248,549,000 barrels of crude oil from Canada. This number has been on the rise every year. Pipelines take this crude oil the the States, where it is then refined and ready for the market. 

With NAFTA gone or the policy changed, firms could see a return of tariffs and other logistical barriers to trade. Before NAFTA, it was common for exports to Mexico to have tariffs of over 30% and experience paperwork delays.

For example, border processing is currently streamlined under the trade bloc. There are also less licencing requirements. The opening of the Mexico border to US truckers has made this process much faster. Without NAFTA, we could see these high taxes and barriers return.

What Does All of This Mean?

Depending on the nature of your supply chain operations, NAFTA renegotiation may have varying effects on your firm. If you don’t do cross-border business, the effect may be minimal. It is important to stay informed and be ready for all of the possible outcomes. Although the US backing out would greatly impact the continent’s connected supply chain, backing out is not the only outcome. Under renegotiation, NAFTA can also improve if the new terms benefit all parties. After all, the trade bloc is 24 years old. With the boom of e-commerce and new technology, there is much that can be added to NAFTA.