How Trump’s NAFTA Threats Could Be the Dynamism Mexico’s Local Supply Base Has Been Craving

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Spend Matters welcomes this guest post by Ana Gomez, manager at GEP.

During the presidential campaign, Donald Trump threatened to renegotiate the terms of the North American Free Trade Agreement (NAFTA). This has generated much uncertainty for companies in Mexico that for many years have exchanged raw materials and finished products without the payment of certain tariffs. According to some economists, NAFTA, signed in January 1994, has benefited Mexico to a greater extent related to the import and export of raw materials and finished products.

The objective of NAFTA was to eliminate barriers between North American countries to facilitate trading and investment. The implementation of this agreement eliminated tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico.

In the worst-case scenario, if the treaty no longer existed, this could cause many Mexican companies to increase the price of importation and exportation of raw material and finished products. Even though the worst affected sectors would be textiles, agriculture and automobiles, other industries that have suppliers in Canada and U.S. will be affected when accessing the products and raw materials required to produce in Mexico and other Latin American countries.

This situation generates an opportunity for local suppliers to look for alternatives and be more creative to minimize the cost impacts. This opportunity could challenge sourcing managers to seek sourcing through local suppliers or other countries, and could cause some organizations to create supplier development strategies so that they can meet the quality, delivery and service requirements currently held with suppliers in the U.S. and Canada.

The opportunity to focus on the development of local suppliers in Mexico or other Latin America countries could be an opportunity that promotes competitive improvement of the supplier in these areas. This will require time and investment on Mexico’s behalf to help develop and leverage local suppliers to become as competitive and attractive as their global counterparts.

Many experts point out that it is not feasible for the U.S. to get out of the treaty easily, or that the process would take many years. Despite this situation, companies should not lower their guard but instead continue to look for local or regional alternatives, which would have many benefits, such as exchange rate variation. In the end, a local relationship and development strategy could strengthen Mexico's economy in the long term, and help Mexico become more competitive on the global stage.

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