Why auto suppliers need war game thinking on NAFTA
Legislation in Washington moves like the Potomac River in winter -- slowly, sometimes not at all, frozen. That’s the way the framers of the Constitution wanted it. Deliberative.
So what should auto suppliers do about what may or may not happen to NAFTA, the North American Free Trade Agreement with Mexico and Canada, given President Trump’s campaign promise to renegotiate the 23-year-old treaty?
Two pieces of advice:
First, despite the hyperbole and hold ups, stay calm. Monitor the situation -- don’t overreact. I don’t expect any huge moves anytime soon. Renegotiating a trade deal is complicated. The process almost always creeps along at a glacial pace. Negotiations for the Trans-Pacific Partnership took nine years before it died earlier this year in the U.S. Senate.
Second, use this time to strategize. Automotive manufacturing companies with an interest in Mexico and other countries need to set up what I call “war rooms.”
Gather your top brass
By war rooms, I mean game theory, really. If you were chairman of the Joint Chiefs of Staff, wouldn’t you huddle with your generals and walk through every battle scenario before it happens and not wait until a first strike? So gather your top leaders and most trusted advisers in a room. Work through different scenarios together, and see how quickly your teams can act. Don't lie around in reactive mode and then try to figure things out afterward.
For example, review and understand your reliance on foreign-made parts or materials. How will possible tariffs affect you? How will you be impacted if your Mexican operations return to the U.S.? How would a border-adjustment tax affect your financial position?
Or perhaps this would be a good time to expand your production abroad rather than export, given the strong U.S. dollar and low interest rates? What’s the impact elsewhere of these various possibilities? Is this a good time to expand operations in Asia? If so, where?
Don't wait and see
The bottom line is this: auto executives -- both for the big carmakers and suppliers -- simply can’t afford to default to watch-and-wait mode. Although Commerce Secretary Wilbur Ross (the longtime auto supplier investor who founded International Automotive Components Group, or IAC) has also indicated the desire to modify NAFTA, he has stated that it will likely be late this year at the earliest.
Even bilateral trade negotiations usually take months or years. NAFTA, which is trilateral, took several years to conclude back in the 1990s. Note, too, that the Senate has not yet confirmed the president’s pick for U.S. Trade Representative, Robert Lighthizer, who would be a key player, and any dramatic shift that affects the global supply chain will require bipartisan support, too -- something that’s been in very short supply in Washington.
And remember, even any quickly adopted replacement tariffs may be only short-term. Let nuts-and-bolts economics, not rhetoric, drive your investments and business strategy.
It’s decision-tree time. Find your best brains and break out the analytics.
In other words, let the war games begin.
Daron Gifford is the automotive consulting leader at the accounting firm and consultancy Plante Moran in suburban Detroit.