Trump Deals with Canada and Mexico – the “NAFTA 2.0” - Reduce Market Uncertainties

Posted On 2nd October 2018

NAFTA 2.0

Love Trump or hate him, at least this agreement by the Trump administration reduces the uncertainty in the North American trade relationships that underpin many of the supply chains in the US. 

The auto industry especially relies on suppliers who source work and parts in various locations in North America.  It is often difficult for those suppliers to calculate the actual value added as a part could receive value-adds in different company locations spread transnationally in plants they own in Mexico, US and Canada – not to mention some or all the engineering at each plant might be from Europe.  And this happens in other industries as well.

The auto industry feared that new tariffs would essentially trap their investments in subsidiaries in Canada and Mexico.  Without the export markets, the assumptions underlying the calculations supporting such investments are negated, leading very quickly to full closures at those factories.  Relocating all production to within US borders or, more likely, to other nations with “cheap labor” such as Vietnam or countries less at risk of attracting Trump’s new tariffs, would be expensive and supply chain disrupting.  The consumer usually ends up paying for such inefficiencies as price increases become inevitable.

In a victory for Big Food, Monsanto, and their lobbyists in DC, the new agreement does loosen oversight across borders of GMO-foods so US Ag can sell more to Canada and Mexico, something that should in theory help support the sagging prices of US agricultural products including pork, cheese and more broadly foodstuffs.  Already at $39 billion and having quadrupled since NAFTA started, this does rationalize and simplify (at least on paper) the export procedures and approvals for additional GMO-containing foodstuffs for the US to move into Canada and Mexico.

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