NAFTA collapse could be catastrophic for US retail
The prospects of the US withdrawing from NAFTA appear increasingly likely after the Trump administration’s efforts to renegotiate the trade agreement hit a standstill. If the era of tariff-free North American trade comes to an end, a new report from consulting firm A.T. Kearney projects a huge $15.8 billion hit for US retailers, and the loss of hundreds of thousands of jobs.
Chocolate, beef, jeans, and electronics could become considerably more expensive for US consumers if the gridlock plaguing NAFTA renegotiations proves insurmountable. The collapse of the North American Free Trade Agreement would almost certainly lead to higher tariffs, reduced spending, and lost jobs, concludes a new report from A.T. Kearney.
The consulting firm has done its best to quantify the impact a US withdrawal from NAFTA would have on the nation’s retail sector. Headline figures are alarming. The study – conducted in partnership with the National Retail Federation – assessed census data on imports flowing in from Mexico and Canada. It estimates the total cost to the industry at $15.8 billion within three years.
Consequences for employment in the retail sector would be devastating should the report hold true. Job losses from exiting the agreement – signed in 1994 by Bill Clinton – would potentially exceed 125,000. Retail sectors most likely to be severely affected include food & beverage, electronics, household goods, auto parts, pharmaceuticals, and footwear.
In 2017 US retailers imported $182 billion worth of goods from its NAFTA partners – $128 billion from Mexico and $54 billion from Canada. The neighboring nations are the second and third exporters to the US for all products, behind only China – which itself is bracing for a trade war with its rival across the Pacific.
President Trump – who campaigned on securing better trading conditions for the US and vowed to renegotiate NAFTA – has met strong resistance from his Canadian and Mexican counterparts. With the future of the agreement hanging in the balance, A.T. Kearney consultants looked at what would happen if default World Trade Organization (WTO) rules came into force.
Without NAFTA the authors estimate that US retailers would have to pay an extra $5.3 billion in tariffs. More than half ($2.7 billion) would directly affect the food & beverage sector. One example cited by the study is chocolate. Americans munch their way through $18 billion worth of chocolate a year, roughly $2 billion of which comes from Mexican or Canadian factories. Falling back on WTO tariffs would force US retailers to cough up an extra $261 million per year for Canada/Mexico produced chocolate alone.
Another complicating factor is the globalized nature of supply chains. Mexico exports almost $750 million worth of jeans to the US each year. But those jeans are made with US-sourced cotton, which is exported to Mexico to produce the fabric. Kentucky and Georgia make buttons and labels, separately sent south of the border, then fixed onto the fabric and exported back north as a final product. If this process were to continue without NAFTA, it would be hit with multiple tariffs and retailer costs would skyrocket by $124 million a year.
The knockout blow for retailers would come from decreased consumer spending as they are forced to ramp up prices to maintain supply chain margins. A.T. Kearney estimates that retailers would absorb an $11 billion hit as US households reeled in their spending on non-essential items.
Food and pharmaceuticals would see only slight contractions, but with the average US household spending 73% of its budget on absolute essentials, the electronics and appliances sector could take a $5.3 billion hit over three years.
A knock-on effect would see retail job creation hampered and severe job losses in the sector. The severest impact would be in sales – with 35,000 job losses projected. Waitresses, pharmacists, mechanics, managers, IT experts, drivers, clerks and warehouse workers would be other casualties of a domino effect costing the retail sector 128,000 jobs.
"NAFTA has dramatically influenced the US economy, the retail sector, and Americans' standard of living,” said Johan Gott, Principal at A.T. Kearney and co-author of the report. “From the time it came into force, retailers have gradually become de facto importers, because their customers demand the products that NAFTA allows them to purchase easily, affordably, and with great variety. Retailers, then, are agents without the protections that other importers enjoy."
Apocalypse Now
Whether NAFTA is successfully renegotiated remains to be seen. Warnings have been issued that, should it collapse, millions of manufacturing jobs would also be at risk. But it is unclear if the imposition of WTO trade rules would be the automatic result of the NAFTA partners’ failure to reach a compromise. A middle ground could emerge by which the agreement is replaced by another less-overreaching regime that still reduces tariffs and protects jobs.
A potentially larger threat to jobs and retail comes from automation. Consulting firms from McKinsey to Deloitte have been actively researching the impact of Industry 4.0 on the US economy. Projections range from the moderate shifting of skill sets, to executive excitement about the new possibilities offered by disruptive technology, and more apocalyptic scenarios where machines replace millions of American jobs.
