Preparing for a weakened NAFTA

Here in Canada, we’re anxiously following the twists and turns of the North American Free Trade Agreement (NAFTA) negotiations, the results of which could have a huge impact on our economy and on our overall standing in the global marketplace. Regardless of the final outcome, however, the damage may have already been done.

Like paper currency, the value of any trade agreement largely comes from the fact that all parties believe in its value and have faith it will be honoured in the future. Without that faith, an agreement has no more value than the paper it’s written on. Now that the United States is actively challenging the terms of NAFTA—and has even threatened to abandon it altogether—it will be hard for investors and other key stakeholders to maintain their faith in the agreement, no matter how the negotiations ultimately shake out.

That’s bad news for Canada because, despite our strong economic progress in recent years, the cold, hard truth is that much of our appeal as a place of business and a prime market for mergers and acquisitions (M&A) is due to the fact we provide an easy back door into the US market. This favourable position was formalized by NAFTA and helped our economy boom. But now, all bets are off.

Many Canadians may be quietly hoping for a reversal in the US political environment over the next few years. But hopes for preserving NAFTA and free trade are likely in vain, as the American party currently in power—long a champion of free trade and open markets—is becoming more staunchly protectionist with each passing day. What’s more, many of the recent tax reforms in the US have a distinct protectionist bent, which are now the law of the land.

As well as taking care of their own business, Canadian leaders and M&A experts should be working with their government counterparts to develop strategies and objectives for the ongoing NAFTA negotiations—for the sake of all companies contributing to the Canadian economy.

• Which decisions can I safely make despite the uncertainty, and which decisions should I put off? In uncertain times, it’s tempting to put all decisions—such as merging or acquiring a business—on hold until things clear up. But as a business leader, that isn’t really an option for you. Instead, for every major decision, you need to purposely ask: Is this decision safe to make because it is relatively unaffected by what happens with NAFTA, or should I defer because it depends too much on NAFTA?
• How will my supply chain be affected? In Canada, the US, and Mexico, supply chains are designed from the ground up on the assumption that borders are open and trade barriers are minimal. If that assumption is invalidated, the ripple effect will be massive, especially in industries like automotive that involve complex components, countless parts from around the world, and rigorous local content requirements. Understanding the extent to which your supply chain will be affected by a weakened NAFTA is the first step in designing an effective response.
• How will my capital investments be affected? Trade agreements and trade barriers have a major impact on where your company chooses to invest and what foreign investment you’re able to attract. In a highly protectionist business environment, money and resources tend to flow toward the strongest protectionist market, which in this case is the US. In fact, many Canadian companies are already revisiting their capital investment plans due to the protectionist effects of the new US tax laws. If NAFTA is scaled back or revoked, the impact will be even greater and we may see M&A deal flow stagnate.
• Which parts of my business will be affected most quickly, and am I ready? When developing strategic response plans, it’s essential to set priorities. As NAFTA changes begin to emerge, you need to understand which parts of your business will be hit the hardest and fastest, then plan accordingly. In some business areas, you’ll have plenty of time to carefully plan your next move. But in others, you might need to race ahead to avoid getting crushed in the pack, so you need to prepare in advance.
• How will my competitors be affected? Change affects different companies in different ways. If your competitors are disrupted more than you, you might actually come out ahead; there may even be opportunities to acquire and grow using your competition’s operations. To make the right strategic moves, you need to understand where you have an advantage over them, and where they have an advantage over you.

As well as taking care of their own business, Canadian leaders and M&A experts should be working with their government counterparts to develop strategies and objectives for the ongoing NAFTA negotiations—for the sake of all companies contributing to the Canadian economy.