Could American protectionism be an opportunity for the UK?

Since he came into office, President Trump has consistently threatened to withdraw the United States from the North American Free Trade Agreement (NAFTA), and with negotiations looking troubled, that risk could soon become reality. Withdrawing from the pact would bring big changes for the economy and for consumers.

Since the pact came into effect in 1994, United States trade with Mexico and Canada has more than tripled, growing more rapidly than American trade with the rest of the world. Mexico and Canada are now the second and third largest exporters to the United States, after China. And the two countries are the leading importers of American products.

Mr. Trump has accused Nafta of creating an unfair playing field, allowing Mexico to steal US jobs and opening the border to cheap, tariff-free goods. He wants to bring factory jobs back to the US.

While Congress could potentially stall Trumps attempts to pullout of the Nafta agreement, the treat allows any of the countries involved to withdraw six months after notifying the other parties. There is no language in Nafta’s authorising US law passed by Congress that requires Congressional assent before leaving the pact. So Mr. Trump could easily dissolve Nafta with the stroke of a pen.

Under Nafta, the three countries pay nothing on most goods that cross the border. After the United States exits the pact, the tariffs, or taxes, that Canada and Mexico put on its goods would rise. For some goods, tariffs could go as high as 150 percent. That would cause prices to spike and cut into company profits. All three countries are members of the World Trade Organization, so tariffs should revert to those levels.

Tariffs on agricultural exports to Mexico are particularly costly, including a 15 percent tariff on wheat, a 25 percent on beef and a 75 percent tariff on chicken and potatoes. But goods like soap, fireworks, handbags and many articles of clothing face tariffs of 15 to 20 percent. Mexican goods would, in turn, face an average United States tariff of 3.5 percent.

Companies have spent decades building up complex supply chains that snake across North America’s borders to take advantage of differing costs and resources. American automakers are especially reliant on parts imported from overseas — but other industries, including agriculture, energy and retail would also be affected. These trading relationships help keep the price of the final product competitive with other major global manufacturing hubs in Asia and Europe.

The White House argues that a better trade deal would support companies making goods in America, thus creating more American jobs. That would likely be true in some cases. The American market is a very large one, so some companies would probably relocate production to the United States to avoid paying tariffs.

But other companies might decide its cheaper to relocate their manufacturing out of North America entirely.  The United States tariff on passenger cars is only 2.5 percent, so if Nafta falls apart it may be more cost-effective for companies to make cars elsewhere.

It’s important to note that the European Union has signed free trade agreements with both Mexico and Canada that lowered tariffs on most products to zero, meaning that European companies may have an edge over American competitors in those markets.

In the aftermath of Nafta, the most likely scenario is that Canada and Mexico would push ahead with trade agreements with other countries. Both are still in discussions to pass the Trans-Pacific Partnership, a multicountry trade pact that President Trump withdrew the United States from on his fourth day in office. That deal would give Canada and Mexico tariff-free access to several lucrative markets, including Japan.

While Trump has been against multilateral trade agreements, he has preferred bilateral trade agreements.  He is particularly keen to strike a deal with a post brexit UK.

With trade breaking down between the US and it’s neighbours, and with a cheap pound, there could be opportunities for the UK to enter new and interesting deals with the worlds biggest market. With our commonwealth links to Canada, there could be further opportunities with their northern neighbour.

All in all, the fall of NAFTA could create exciting opportunities for the UK and its companies.

The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you! We provide international reports to those looking to trade with companies overseas, including with those in the US,  Canada and Mexico.

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