3 Reasons Why Procurement Needs to Worry About Mexico

President Donald Trump followed through on one of his central campaign promises Monday by officially withdrawing from the Trans-Pacific Partnership (TPP). And while trade with China, Vietnam and other Asian countries is certainly of concern to most procurement groups, our neighbor to the south also needs to be on your radar for 2017.

The abandonment of TPP means that the North American Free Trade Agreement (NAFTA), which Trump criticized as the worst trade deal the U.S. ever signed, is likely about to face serious scrutiny. Add to that recent unrest in Mexico surrounding spikes in gasoline prices and a proposed border tax, and the risks of sourcing and managing suppliers from that country rise significantly.

Mexico is in the Trump administration's sights. Procurement organizations need to be seriously concerned about upcoming policy moves and developing risks — or prepare to suffer the consequences.

Rewriting Trade Agreements

Trump only needed the stroke of a pen to pull the U.S. from TPP. Protecting American jobs from moving overseas was the main thrust behind that decision. And the administration is about to apply the same thinking to NAFTA.

White House Press Secretary Sean Spicer told reporters Monday that Trump is planning to hold talks with the leaders of Canada and Mexico about modifying NAFTA within the next 30 days. The possibility of piecemeal reforms is on the table, Spicer said, but if the other pact members are unwilling to proceed with changes to the existing framework, Trump may still decide to pull out, and “then we would have to go back to the drawing table in the future.”

Withdrawal would be the extreme, but what would it look like? It wouldn’t be pretty.

While the U.S. would have to provide notice six months in advance of officially leaving NAFTA, the process of bringing existing components of supply chains back into the U.S. — to avoid tariffs and other penalties threatened by Trump — would likely take far more time than that. It would also cost companies a lot of money to shift their supply bases so drastically, potentially increasing costs going forward — the antithesis of procurement’s usual goals.

To get a clearer picture of what withdrawing from NAFTA would look like, all you have to do is think back 15 years. “After the 9/11 terrorist attacks, we sealed the border with Mexico and Canada, and within a week auto plants in Michigan had to begin shutting down because they were not getting access to parts they depended on from Mexico,” Rob Scott, director of trade and manufacturing at the Economic Policy Institute, a left-leaning think tank in Washington, DC, told Vox.

Financial Barriers

Sealed borders, whether in response to terror attacks or through an improbably Mexican-financed wall, are far from the only barriers procurement will need to worry about. The looming threat of a border tax could be just as obstructive.

Building on the same agenda that is endangering NAFTA, Trump gathered the CEOs of several top U.S. companies at the White House Monday and Tuesday to tell them they must move their overseas manufacturing operations or face a “substantial border tax.”

The basic idea is to prevent companies from selling products to American consumers that, Trump argues, could just as well be made in the U.S. The White House is eyeing an across-the-board tax on imports as high as 10%, according to CNN, which would surely complicate the process of working with the extensive base of suppliers in Mexico many U.S. companies rely on.

Two industries that should be vigilant about any border tax developments are the auto industry and retailers. When considering cost models for new vehicles, auto manufacturers will be faced with a difficult choice: Is it worthwhile to pay a hefty tax at the border but get the parts at a lower cost, or will it be less expensive to build new plants in the U.S. and pay the wages American workers expect?

Similarly, chains such as Wal-Mart will have to consider whether sourcing food and other consumer goods from Mexico will require shoppers to absorb higher prices at checkout.

Throwing Gas on the Fire

Beyond possible and proposed changes to the U.S. trade relationship with Mexico, there are factors brewing from within the country itself that procurement should take note of.

Large and sometimes violent protests have gripped the country since the beginning of the year, at first in response to gas prices increasing around 20% on Jan. 1. That was the result of reforms ending a state monopoly on the energy industry.

"The number-one argument for convincing Mexican people was that gas was going to go down," law professor John Ackerman told CNBC. The reality at the pump has turned into lines of people waiting for gas and a difficult situation for the country’s government (not to mention for Spend Matters Founder Jason Busch and his family, caught in a protest roadblock lasting several hours in late December, as seen in the photo below):

Rolling back the energy reforms is unlikely, as it would undermine investor confidence in Mexico and indicate that street action is capable of drastically altering policy. But raising prices any further, an option still on the table, will likely infuriate protesters even more and put the ruling Institutional Revolutionary Party at serious risk of losing power in 2018.

The combination of growing political instability and threats from the Trump administration stands to harm Mexico’s financial picture, adding yet more risk and volatility that could make the country less attractive to procurement groups looking to source from there.

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