NAFTA assessment checklist: Preparing your organization for NAFTA 2.0

December 14, 2017
Heather Innes

Rounds 2 and 3 of the NAFTA 2.0 negotiations have recently concluded. It is still too early to know what a NAFTA 2.0 will look like, or even which issues will make it into the final agreement. However, we are getting a better sense of each country’s priority issues and know that any of the proposed changes to NAFTA could significantly impact the way in which Canadian organizations do business.

While Round 2 and Round 3 each appear to have concluded on a positive and constructive note, it is still too early to predict whether the parties will be able to conclude their negotiations before the 2018 elections in Mexico and the U.S. That said, it is not too early for organizations to contribute to the negotiation process and prepare for the changes that will possibly affect their organization, their supply network, labour options and ultimately, their competitiveness.

The U.S. continues to pursue a full NAFTA re-negotiation, including demands for increased access, changes to rules of origin and reduced trade barriers. Canada and Mexico remain focused on updating or modernizing NAFTA to accommodate new products, services and priorities. What is clear, is that we can expect changes in the way that business is conducted within North America and these changes could have a significant impact on the success of your business and your bottom line.

So, what do you need to do to best position your organization for the coming changes? Consider the following as a guideline for developing your position and identifying the steps that you need to take to prepare for changes that could come into play as early as mid to late 2018 or early 2019:

1. Assess the NAFTA benefits currently enjoyed by your organization

What do you import from NAFTA countries: Work with your customs team or broker to fully understand the products and services that you import and for which NAFTA duty-free treatment applies. The associated costs represent your current cost baseline that could change if there are changes to the definition of what qualifies as originating in the NAFTA (i.e., rules of origin).
What do you export to NAFTA countries: It is equally important to understand how your customers’ costing structures could change. If it costs your customers more to import your products/inputs/materials because they no longer qualify for NAFTA duty-free treatment or if your inputs cannot be added to their cost base as qualifying NAFTA content, will they continue to source from you? Or will they seek NAFTA-qualifying alternatives? Take stock of the inputs, services and finished goods you currently export or will export to one of the NAFTA countries. Properly identify the correct Harmonized Tariff Schedule codes (i.e., the tariff codes/items used to import the product into a NAFTA country). Monitor proposed changes to those products/HTS codes. For example, the U.S. has stated that it wants to see enhanced rules of origin requirements for products such as autos/auto parts. If the rules of origin change, so too could the needs of your customers. Additionally, if your supply network is highly integrated, then the flow of goods through the entire production cycle could involve numerous crossings of NAFTA borders. If the rules of origin change such that one or more of those product/material crossings is no longer duty free, this could disrupt the cost effectiveness of your current supply network.
What are the current rules of origin for the products that you import or export: Identifying the applicable rules of origin for your production parts/materials and finished goods will give you the current baseline from which changes may be negotiated. Understand which of these parts/materials, products and services qualify for NAFTA duty-free treatment and those that do not qualify. For those that do not qualify, make sure you understand why they don't qualify for duty-free treatment. NAFTA's renegotiation may create an opportunity to change the rules to enhance your current access to inputs, services and market opportunities.
NAFTA preferential import duties vs MFN import duties (WTO bound tariff rates): To fully appreciate the costing impact that a re-negotiated NAFTA may have on your organization you also need to consider the most-favoured-nation duty rate that would apply if your or your suppliers’ goods & services no longer qualify under a revised NAFTA rule of origin. In many instances, the MFN duty rate will be relatively low. For example, the MFN rate for passenger vehicles imported into the U.S. is only 2.5 per cent. In Canada, the MFN rate is 6.1 per cent.

2. Identify your sourcing and export options

Changes to the rules of origin could affect the cost of important inputs or services upon which you rely. They could also make your exports more expensive to customers within NAFTA if your products/services no longer qualify for duty-free treatment.

If you think you may require more North American content, or more U.S.-specific content, are there alternative providers who can meet your organization's needs? Often re-sourcing activities cannot be undertaken overnight, so now is the time to identify and validate your options.
Additionally, consider suppliers from other countries with which Canada has a trade agreement. If your finished product will not meet new NAFTA origin requirements, can you alternatively source your inputs to reduce the overall product cost? Are there viable sourcing options in other, non-NAFTA countries with which Canada has a trade agreement (e.g., CETA – the Canada – European Union Comprehensive Economic and Trade Agreement)? Would imports from those alternative suppliers qualify for duty-free treatment under that trade agreement? If so, perhaps the associated duty cost reductions may offset the increased duty costs when shipping your finished goods into the other NAFTA countries.
Consider sales opportunities in non-NAFTA countries. If your finished goods will no longer qualify under a re-negotiated/updated NAFTA, then are there other markets for those goods? Do your finished goods comply with the rules of origin provided under other free trade agreements signed by Canada? In other words, explore the possibility of exporting goods to other countries (South America, Europe, Asia).

3. What about your other stakeholders? How will they be affected and what are their priorities?

If your organization is supported by unionized workers, it is important to understand their NAFTA re-negotiation interests and priorities. In Canada, certain union leaders have been very vocal about their priorities. Among other things, they want to see increased wages in Mexico.

It will be important as well to understand the priorities of your key suppliers and service providers. If you are part of a North American or global organization, coordination with your counterparts in the other NAFTA countries is key. A unified voice is likely to carry greater weight with the negotiators.

4. Where does NAFTA need to catch up to your business reality? Re-negotiation opportunities

Harmonization of regulations: Safety, marking and other regulations differ in each of the NAFTA countries, creating a complex and costly maze of regulations with which organizations must comply. Efforts to build “North American” products and services could be enhanced and less costly if certain of these regulations were harmonized as a NAFTA requirement.
Should certain protectionist programs be addressed/removed/limited? Does your organization face any non-tariff barriers, technical barriers to trade, sanitary or phytosanitary measures or other protectionist policies that limit your ability to source from or sell into one of the NAFTA markets?
Counterfeit Goods: Is your business plagued by illegally imported counterfeit goods? If so, you may wish to identify as a priority the enhancement and better enforcement of current laws intended to prevent the import and movement of counterfeit goods within North America.
Immigration needs: NAFTA allows certain individuals with specialized skills or professions to obtain work permits in NAFTA countries. Do you feel that your needs for intracompany transfers, or the movement of service providers, are adequately met? Is your organization able to secure the skilled and unskilled workers that it needs to effectively build and maintain your business? Would operational mutual recognition for an increased group of NAFTA professionals, particularly professionals in the high-tech sector, be beneficial to your organization?
E-commerce and the digital economy: NAFTA was negotiated and implemented in the early 90s, before e-commerce played a significant role in international commerce. What changes would you like to see to better facilitate your e-commerce opportunities or needs? Should e-commerce sales be duty free?
R&D and the innovative economy: Would your organization or sector like to see measures designed to further enhance innovative R&D opportunities in Canada? How could NAFTA 2.0 facilitate the continuation and growth of existing relationships within the North American R&D community?
Customs facilitation: Would your organization benefit from improved customs administration at the border? If so, what changes would you propose?
Currency manipulation restrictions: Certain industries may feel that including currency manipulation restrictions in NAFTA will create an important precedent for the negotiation of other trade agreements.
Trade Remedy laws: Is your business affected by anti-dumping or countervailing duties applied by one of the other NAFTA countries and if so, were you satisfied with the process used to assess the dumping or subsidy and the resulting duties? If there was a special safeguard rule that permitted one country to impose safeguard duties on a product if that country experienced a surge of imports of that product (thereby adding incremental cost to your exports), how would that affect your export business to that country?
Government procurement: Has your company participated in public/international bids in one of the NAFTA countries? Is it your experience that these procedures result in fair and transparent competitive conditions? What could be improved?
Investment: NAFTA has promoted and protected investment and created a favorable climate for doing business among the three countries. Do you feel that your investments in the other NAFTA countries have been adequately protected?

5. What about your competitors?

Whenever a free trade agreement is negotiated, your organization has an opportunity to gain a competitive edge. If you have a solid understanding of your priorities, the impact on your organization, your options, and those of your competitors, you can better position your organization and your business sector when making representations to the governments' negotiating teams. It also permits you to adequately and cost effectively prepare for possible changes.

6. Don't wait for the changes: Be part of and influence the change process

Although the formal consultation periods in each of the three NAFTA countries have concluded, informal consultations will continue throughout the negotiations. The Canadian government has made it clear that they want to hear from Canadians and Canadian organizations.

The next round of negotiation begins in the near future. Take this time to consult with your trade law professional to determine your priorities and ensure that your voice is heard by:

Reaching out to business/sector associations which, in turn, can reach out to governments.
Encourage your business association to coordinate, as much as possible, with other associations on common issues.
Coordinate with associations in the other two countries where you have common positions.
Arrange meetings with your local, provincial/state and federal government representatives to ensure that your interests are heard and represented.