Slow NAFTA progress on key issues: KPMG says prepare for potential risk

Consider the impact withdrawal could have on customers, suppliers and employees.

September 18, 2017   by PLANT STAFF

TORONTO — Progress on the key issues in the NAFTA negotiations has been slow, so it’s wise for businesses to work on backup plans, says a KPMG report.

The global tax, accounting and advisory firm thinks a withdrawal from the trade agreement is unlikely, but notes strong divisions across the three countries on key issues increase the risk a deal can’t be reached in the near term.

The following are the sticking points:

1. Canada, backed by Mexico, continues to reject the elimination of the dispute resolution mechanisms stipulated in Chapter 19.

2. The US will try to increase the rules of origin and potentially promote US content in manufactured products, especially in the automobile sector.

3. Labour has taken a central spot, with both Canada and the US demanding Mexico raise wages and implement stricter enforcement of labour laws and union rights.

“You may think that NAFTA renegotiations are not likely to pose a material threat to your business, but in these uncertain times, these risks may be unpredictable,” says Russ Crawford, partner at KPMG in Canada.

Crawford observes the NAFTA Implementation Act (NIA) offers no explicit authorization within the NIA for the president to unilaterally invoke the termination clause without Congressional approval.

Unless a US law has a ‘sunset’ date of self-termination, only Congress has the authority to repeal an existing law. Should Trump move unilaterally to withdraw without Congressional approval, Crawford predicts the issue may be litigated before the federal courts.

If the US does withdraw, expect an increase in tariffs, challenges with US customs.

“Withdrawal from NAFTA does not mean loss of access. Geography and size of the respective markets – and inertia – will ensure trade flows within North America remain an attractive proposition,” says Crawford.

But the removal of NAFTA’s preferential treatment may see focus directed to on other markets such as the EU, BRICs and the ASPAC region (TPP minus the US).

KPMG recommends the following in the report prepared with the Eurasia Group:

• Decide upfront if you want to have a voice. Any business with trading links through Mexico, US and Canada must understand the implications of possible outcomes.

• Become a scenario player. A withdrawal from NAFTA increases uncertainty around the long-term prospects, costs and compliance obligations of doing business across North America and globally. Consider the impact it might have on customers, suppliers and employees, and develop contingency plans to deal with any potential changes to business and supply chains.

• Embrace the idea of planning with flexibility. Separate the knowns from the unknowns to have a manageable set of business responses.

Click here for more on the report.

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