Free trade agreements have been under attack lately. While some elements of these agreements make it harder for businesses in member countries, other elements help businesses – and consumers.
Take NAFTA, the North American Free Trade Agreement. This pact created a massive free trade zone by linking Canada, Mexico, and the U.S. However, the agreement has been controversial and the current round of renegotiations is likely to change the way business is done. With that in mind, here is an overview of what every small business owner should know about NAFTA.
What NAFTA Means for Small Businesses
Even if your business doesn’t export, it is likely that you are importing the products that you sell. In that case, free trade agreements help to make it cheaper and easier to get what you need. This happens in two ways: (a) reducing the amount of time it takes shipments to pass through international borders and (b) reducing the costs associated with these purchases.
Another example would be working with a supplier in a member country or even setting up your own wholly-owned manufacturing company overseas. In fact, this is what the IMMEX program in Mexico allows companies to do and if you are a small manufacturer seeking a supply chain advantage, then this program might make sense for you.
Flip it around that and free trade agreements create the opportunity for small businesses to access customers in new markets. Granted, this won’t work for a baker or a florist but if you shop sells toys or furniture, the opportunity does exist.
In both instances, free trade can mean more competition and in some cases competitors which significantly lower cost base than you. While this can be a challenge it is really nothing new. Let’s face it running a small business means that you are constantly fighting to gain and maintain a toe hold in the market.
With a free trade agreement, it just means you need to have a compelling reason for customers to choose you over a competitor who is hundreds of miles away. While the price might be part of the reason, there is also the connection to the communities you serve and convenience. As you can see, there are many sides to free trade agreements.
A History Lesson
Few people remember but Canada and the U.S. first signed a free trade agreement in 1988. This agreement reduced tariffs on a slew of products which were regularly being traded across our northern border.
What NAFTA did was to bring Mexico into the fold. However, this was not without controversy even though the agreement had the support of George H.W. Bush and Bill Clinton. Part of the reason for this was the concern that Mexico’s lower cost base would undercut manufacturing them in the U.S.
While some proponents of bringing back old-school manufacturing jobs would point to the treaty’s ratification as ground zero in the hollowing out of American manufacturing, the reality is that a combination of global growth – which requires manufacturing in or near to the market – and automation have led to the shifting landscape.
Even though Mexico did gain some manufacturing jobs which were previously domiciled in the U.S. and Canada. The reality is that NAFTA has also opened markets for American businesses. As such, the impact of the agreement is neither all bad for nor all good.
What’s the Point of Free Trade Agreements?
The goal in pursuing free trade agreements is to reduce barriers to trade. In NAFTA’s case, there was the added benefit of creating a single market by linking the major economies of North American – all of which share significant land borders.
In some ways, this goal was met as a number of regulatory obstacles was removed. However, several complications remain and trade from the U.S. to Canada or Mexico is not quite as seamless as first envisioned in the early-1990’s.
Other protections which were added into NAFTA included mechanisms to protect intellectual property rights and for dispute resolution. However, the agreement failed to properly address issues related to labor rights or the environment.
Ironically, these are potential areas for renegotiation as President Trump seeks to rewrite the terms of NAFTA. Thus, making the agreement more like an agreement he backed out of earlier this year – TPP.
Free trade agreements are all about trade-offs. Even in Mexico, there have been winners and losers. As a small business, the important thing to remember is that you need to define what your business does and who your customers are.
If the nature of your business is inherently local, then a free trade agreement might have little impact. However, you also want to keep in mind that the agreement might provide the opportunity either sell into new markets or even buy products for resale from new suppliers. Ultimately, it is the customers who benefit from the choice and your role as a small business is to make sure customers choose you over the competition.
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