CEOs Brace for Potentially Sweeping Changes to NAFTA by Negotiator-in-Chief

The day that many U.S. CEOs dreaded during the 2016 presidential campaign finally may be here: Donald Trump is moving to upend or at least radically alter the North American Free Trade Agreement, which has governed trade relations and shaped companies’ investment decisions on the continent for 23 years.

The Trump administration has made clear in recent days that it wants to renegotiate NAFTA, watering it down and reducing its influence on CEOs’ investment decisions – a big part of the president’s “America First” philosophy that he expressed on the campaign trail and has pursued vigorously in office. He wants to discourage outsourcing and offshoring by U.S. manufacturers and cut the trade deficit with Mexico.

Specifically, American negotiators want to add a five-year termination clause to NAFTA, roll back the access of Canadian and Mexican firms to U.S. procurement contracts, and raise so-called rules of origin thresholds.

The possibility for imminent changes in NAFTA was highlighted as a new round of talks began on Wednesday, underscored by a meeting between President Trump and Canada’s Prime Minster Justin Trudeau. “If we can’t make a deal,” Trump said, NAFTA “will be terminated and that will be fine.”

“We’re increasingly concerned about the state of play in negotiations. We see these proposals as highly dangerous, and even one of them could be significant enough to move the business and agriculture community to oppose an agreement.”

But it wouldn’t be fine with many American CEOs and their representatives who’ve been turning up the volume on their concern as the Trump administration finally has gotten around to addressing NAFTA in earnest. They’re worried not only about what Trump might do but about the uncertainty he’s created.

“We’ve reached a critical moment,” Thomas Donohue, president of the U.S. Chamber of Commerce, said in a speech Tuesday in Mexico City, as he sought to tighten cooperation with Mexican government and business leaders in fighting Trump’s plans. “The chamber had no choice but to ring the alarm bells.”

John Murphy, senior vice president for international policy for the chamber of commerce, America’s biggest business organization, added, “We’re increasingly concerned about the state of play in negotiations. We see these proposals as highly dangerous, and even one of them could be significant enough to move the business and agriculture community to oppose an agreement.”

CEOs in the auto industry are especially on edge because of how completely most carmakers have built their manufacturing and distribution footprints around NAFTA requirements – and on the expectation that they would continue.

One CEO, Jim Hackett of Ford, made a significant pre-emptive move recently as he saw NAFTA’s fate becoming more uncertain. Barely a few weeks in the job after taking over from Mark Fields, Hackett decided to move production of the Focus small car from Mexico to Asia. Trump’s criticism of Ford’s move of Focus production to Mexico from Michigan a couple of years ago was a few years ago that became a stump meme last fall.

Among other things, U.S. negotiators are pushing the idea of raising the minimum for North American content in autos to 85 percent from 62.5 percent – and adding a requirement for 50 percent U.S.-specific content. The prospect for stiffer domestic-content requirements is reverberating in Asia as well.

“That is going to be a tough hurdle,” Charlie Chesbrough, chief economist at Cox Automotive, told Chief Executive, “especially with all the high-tech components currently made in Asia.

Opponents of big changes to NAFTA cite the prospect of huge increases in manufacturing costs that would be passed on to American consumers in the form of higher vehicle prices, and depress sales that already have leveled off this year after a seven-year string of robust gains.

“While NAFTA modernization is important,” said Cody Lusk, president of the American International Automobile Dealers Association, which represents foreign-nameplate auto franchises, we urge caution in considering the jobs that might be lost and the prices American consumers may incur as the result of changes to key aspects of the agreement.”

Chesbrough said that any of a handful of outcomes is possible as the author of The Art of the Deal negotiates the economic fates not only of companies but of the continent.

“The real unknown here [is] if he’d really pull out altogether – no one wants that,” Chesbrough said. “It’s all very fluid still, and few really know the details of the discussions.”