GRIIT Newsletter: Feature Article

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What Does the NAFTA Renegotiation Mean for U.S. Businesses?

In May 2017, U.S. Trade Representative (USTR) Ambassador Robert Lighthizer announced to the U.S. Congress that the current administration would begin renegotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico. Negotiations are scheduled to officially begin on August 16, 2017 and conclude by the end of the year. What does the renegotiation of NAFTA mean for U.S. businesses?

The renegotiation of NAFTA has the potential to develop trade rules aligned to a trade environment that has evolved dramatically. For instance, electronic commerce (e-commerce) continues to grow as a significant component of international trade, which was not a factor during the early 1990s.

When NAFTA was signed in 1992 and took effect in 1994, the internet had not yet taken hold of commerce the way that it has today. It has changed the way that Business-to-Consumer (B2C) and Business-to-Business (B2B) transactions take place. “Small and medium-sized companies can broaden their market presence internationally by adopting e-commerce or electronic business practices that are user friendly for non-English-speaking users,” according to the U.S. Department of Commerce.  Just within the last five years, B2C e-commerce sales worldwide more than doubled from US$1.1 trillion to US$2.4 trillion. B2C e-commerce sales in Mexico increased by 56% from 2011 to 2012 and 5%, 2016 to 2017. In Canada, B2C e-commerce sales saw a 15% increase from 2011 and 2012 and 11.5% from 2016 to 2017, per U.S. Department of Commerce data.

GRIIT shows how the NAFTA renegotiations could enhance e-commerce trade, which is currently restricted, for the benefit of U.S. companies. This feature piece goes further to explore potential challenges with the revised NAFTA as it applies to e-commerce.


E-Commerce Trade Between the United States, Canada, and Mexico

Currently, products traded between the three countries via e-commerce portals receive duty-free treatment up to a specified dollar amount. For example, goods valued up to US$50 receive duty-free treatment in Mexico. Canadian shoppers that purchase foreign goods online do not pay duties up to only US$20.

 

Opportunities for North American Companies with a Revised NAFTA

The final outcome of the re-negotiation determines the opportunities for companies.[1] News reports already point out that companies, such as Amazon and E-bay, are likely to see significant growth in Canada and Mexico as a result. Here are a couple of things to keep in mind, even for small and medium-sized companies:

  • Growing Canadian e-commerce market – The Canadian e-commerce market remains small compared to other developed countries. However, retail sales via e-commerce are expected to increase from US$16.92 billion in 2015 to US$28.66 billion in 2021, per Canadian statistical sources. The number of Canadian consumers continues to grow with 80% of Canadians shopping online, of which 33% are millennials. In addition, the expansion of lower-cost, quicker shipping services, such as FedEx, into the Canadian market helps to boost online purchases and open doors for U.S. retailers reaching Canadian buyers.
  • Mexico is already the second largest e-commerce market in Latin America – E-commerce is expected to account for 2.5% (US$11 billion) of Mexico’s total retail sales by 2018. Currently, the country represents 12.3% of the Latin American’s e-commerce market, which is expected to increase by 3.3 percentage points by 2019, per a Business Insider report. Amazon is already investing in this specific market.

 

Challenges for North American Companies

While there are a number of opportunities, the politics behind the NAFTA renegotiation becomes very important. GRIIT’s own preliminary research on this issue points to several key political factors to take into account that may present a challenge, especially for smaller companies.

  • National Interests – Online retailers fear that by increasing or eliminating the duty-free threshold, they will face greater competition from foreign retailers. For instance, the Retail Council of Canada said in a publicly available letter, “To be clear, it is not the fact of cross-border purchases that we object to. Customers may have many valid reasons to buy from vendors outside Canada. What concerns us is the prospect that foreign sellers would be given a huge price advantage by being tax and duty-exempt.” The RCC carries a significant amount of weight and was listed among the top 100 lobbyists out of more than 5,000 federal government lobbyists by The Hill Times.
  • Unclear policies – The TPP mentions helping the small and medium sized businesses take advantage of e-commerce trade. If the TPP is to serve as a precedent for the NAFTA renegotiation, general language presents little strategy to ensure that smaller and medium-sized companies could benefit through being able to reach customers online. Currently, the larger companies are making investments in Canada and Mexico and hiring lobbyists to shape the negotiation agenda. Without specific proposals and strategies, the gain for SMEs may be limited.
  • Political Shifts – Mexico is preparing for its next presidential election in 2018. Current reports show that a nationalist candidate is in the lead, which could impact support for the renegotiated agreement. Also, U.S. congressional elections are set for the fall of 2018, which could influence the final vote on the agreement. 

 

What To Do Now

Business owners, policymakers and educators can take three simple steps to prepare for both the opportunities and challenges associated with the NAFTA renegotiation:

  • Follow discussions surrounding the e-commerce provisions within NAFTA;
  • Educate companies on the final chapter on e-commerce; and
  • Develop a NAFTA e-commerce strategy.

In sum, the modernization of NAFTA to include the digital economy presents opportunities and challenges for U.S. businesses. For this reason, it is important for business owners to stay abreast of the NAFTA talks surrounding this issue. The talks at the governmental level drive the amount of access that businesses of all sizes may enjoy throughout the North American market.

 

 

 

 

 

 

 

 

 

 

[1] Follow GRIIT on Facebook and Twitter for updates from our blog, International Trade Examiner, on the e-commerce provisions of NAFTA as they are being negotiated and the positions of each country.

 

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