House of cards?

By Birgit Matthiesen. 

The 2016 election was the longest in U.S. history. For more than 85 weeks, American households were bombarded with lofty promises and grand ambitions.

President-elect Donald Trump will assume the Oval Office on January 20, 2017, without any previous public service experience. In doing so, he will be taking the reins of the world’s largest economy, and Canada’s most prominent trading partner. How he leads, however, remains to be seen.

On trade policy, Trump went further than any other candidate, promising to ‘rip up’ existing agreements, including NAFTA, impose a 35 per cent tariff on imports from Mexico and a 45 per cent duty on imports from China, and potentially even pull out of the World Trade Organization.

He will arrive in Washington supported by a GOP-led House of Representatives, as well as a GOP majority in the Senate. Legislatively, one would expect smooth sailing for the next two years minimum, until the midterm elections. But these are not normal times.

In the weeks following the November 8 vote, my phone has blown up with calls from U.S. and Mexican companies wondering what a President Trump will mean for cross-border business. While there are some early signals, the reality is that there are still far more questions than answers — an uncertainty few businesses can afford.

Let’s start with NAFTA.

The trade debate is no longer just about the ‘if or when’ of an Asian-Pacific accord. This is NAFTA we’re talking about. This is here and now.

The grassroots anxiety over the loss of American jobs was palpable across every corner of the country — specifically in the rust belt, which was largely responsible for swinging Trump to Electoral College victory. Now, the candidate-turned-president will want to make good on his promises (or, should I say, some of them).

President Trump and his new economic team will want a ‘win’ to headline the administration’s first 100 days. Building a wall will take some time. Repealing ‘Obamacare’ will surely run into partisan delay tactics. Trade could be it. The surprise announcement from Prime Minister Trudeau that Canada would entertain the possibility of NAFTA 2.0, quickly followed by a similar gesture from Mexico City, hands the president that early opportunity.

First off, can he do it on his own? In short, the answer is yes. Since the beginning of the 20th century, the president has enjoyed considerable authority over foreign affairs, and Congress has delegated much of its role to the Executive Branch. In modern times, this transfer of power has taken the form of the Trade Promotion Authority. So, if the White House decides to withdraw, renegotiate, or revisit a trade pact, it could, although Congress would need to be properly ‘consulted’ — not an easy task, and one that would require many visits down Pennsylvania Avenue for meetings with nervous House and Senate leaders.

Secondly, is this an action he would consider? We simply don’t know — at least not yet. Many here in D.C. are readying for the possibility that the Trump administration will propose something between ‘ripping it up’ and an attempt at ‘modernization.’ It remains unclear whether the three North American leaders will go so far as to change preferential trade provisions, such as duty rates or domestic content rules.

So, NAFTA is all of a sudden back on the docket. What should Canadian manufacturers do to prepare? Start planning. Now. Do not wait.

One strong suggestion is for executives to fully take stock of bottom-line dependence on NAFTA. And, to do this, they will need to ask the right questions of the right people within their organization. They will need to understand the rulebook.

NAFTA rules, though, are two decades old; and they will need to be dusted off and analyzed anew though the prism of a company’s supply chain and customer base. What portion of your inputs and sales are subject to preferential NAFTA tariffs? What would a removal of that preferential treatment mean? How would a rule change on regional value content affect your business? Could a NAFTA rewrite bring a broader choice of component parts? Does your company use drawback rules? How would the lifting of the NAFTA exemption on U.S. merchandise process fees erode your bottom line?

These answers require information, and good information takes time to gather. But good information leads to good decisions.

Canada’s partners and competitors to the south have been strategizing for some time now. It’s time for Canadian enterprises to catch up.

This is real and the time is now. The ‘wait and see’ approach is not an option. That evaporated during the prime minister’s November 10 press scrum. There are other truths Prairie manufacturers will need to recognize:

The 70 cent loonie will not be a business buffer in the months ahead.

Global facilities will not necessarily lead to better global options (whether it’s understood or not, Canadian companies still depend on the U.S. and Mexico — especially when international trade rules are not completely comprehended).

China hasn’t gone away. Absent the Trans-Pacific Partnership, NAFTA is a firewall for North American competitiveness.

And, Canada has more to lose than Mexico. Just follow the money.

The next four years will be game-changers. Trade in the Trump agenda is the new ‘risk point,’ and the mitigation of that risk involves understanding the dynamics at play, realizing the consequences of outcomes, formulating proactive checks and balances, and seeking the best counsel to provide the ‘long view.’

In Trump’s own words, this is ‘the art of the deal.’ Companies need to come to the table with the best cards possible.

Birgit Matthiesen currently serves as co-chair of the Canada-U.S. Cross-Border Business Affairs practice at Arent Fox LLP — a prominent K Street law and lobbying firm in Washington.