NAFTA RENEGOTIATIONS AND ITS EFFECT ON FDI

The U.S. is Still the Top Destination for Investment

The 2017 World Investment report showed a slight (2%) decrease in global foreign direct investment, but looking closely you see that the 14% decline suffered by the developing world was offset by a healthy increase in FDI to developed and transition economies.

Source: ©UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics)
Source: ©UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics)

Since 2010, inward FDI to the NAFTA countries has increased 63% to $7.8 trillion last year. However, the U.S. receives the lion share of those investments (90% last year). Globally, the U.S. is the number one recipient of FDI inflows ($391 billion). If you take out M&A and other investment and look at just new greenfield projects, the U.S. is still first in terms of number of projects.

 

Could NAFTA Renegotiations Affect FDI in 2017?

The U.S. is the world’s largest outward investor with outflows evaluation at $303 billion. Although NAFTA houses less than 7% of the world population,[1] it is home to 30% of global multinational enterprises – the group responsible for most of the world’s foreign investments.[2]

The United Nations Conference on Trade and Development (UNCTAD) expects 2017 and beyond to see an increase in overall FDI but cautions that current political uncertainty could have an impact on the scale and may contour the recovery in 2017. One of those uncertainties is the NAFTA renegotiations. Moves by the Trump administration to abandon the Trans-Pacific Partnership (TPP) and to renegotiate key trade agreements such as the North American Free Trade Agreement (NAFTA), have all heightened uncertainty. In its World Investment Report, UNCTAD cautions that if additional barriers to trade were to be imposed, this could lead to more reshoring into the U.S. and less outward investments from the U.S. Although all three countries stand to lose from tearing up NAFTA, the U.S. often holds more negotiation power. It has a much larger market than Mexico and Canada and has by far the world’s largest consumer spending at $14. trillion. As Réal Bélanger, Executive Vice President, Business Development and Special Projects, Héroux-Devtek, points out, “Canada’s internal market is more restrictive for its domestic manufacturers compared to the U.S. It’s a country of 36 million, whereas the U.S. is ten times the size and China is 1.4 billion people. This means Canadian companies rely on exports much more than some of their counterparts… American companies can grow domestically and have more leverage when it comes the time to export and invest outwards.” The growth strategies for firms in Mexico, the U.S. and Canada are very different given the different dynamics.

 

Difficult to Go Back: Large Enterprises Operating in NAFTA Countries Are Interconnected Today More than Ever

Since the signature of NAFTA in 1994, trade between the three countries has increased three-fold to over USD$1.0 trillion a year.[3] Companies in the three countries went from making things for each other to making things together. After over 20 years of near free-trade between the three countries, North American industrial supply chains have become interconnected. Some manufacturing sectors such as aerospace and automotive have used the largest free trade area in the world to reorganize their supply chains.

According to a Christopher Wilson paper written in 2011 for the Woodrow Wilson International Center for Scholars, an automotive part can cross the border as many as eight times before being installed in the final assembly plant. Many North American manufacturers are vertically integrated which means plants in the U.S. and Canada rely on each other for input materials and clientele. When asked about the potential impact of tearing up NAFTA, an executive from a large paper products manufacturing company said that “for its American plants to do well, the Canadian plants have to also do well.” If tariffs were imposed on the Canadian plants, that would negatively affect the profitability of the American plant since the supply chain is not limited to traditional geographic boundaries. This wasn’t always the case; many companies including Cascades initially set up their foreign plants as independent manufacturing facilities. As illustrated below, trade in the 20th century had complex two-way flows of goods, people and ideas, but primarily within a same factory. Today (21st Century), these complex flows of goods and information take place across international borders.[4]

Source: Foreign Direct Investment as a KeyDriver for Trade, Growth and Prosperity: The Case for a Multilateral Agreement on Investment, Richard Baldwin
Source: Foreign Direct Investment as a KeyDriver for Trade, Growth and Prosperity: The Case for a Multilateral Agreement on Investment, Richard Baldwin

The interconnectivity of plants is not only present in automotive and aircraft manufacturing industries, but also in industries like oil and gas. Cynthia Hansen, Executive Vice-President, Utilities and Power Operations, at Enbridge says “There is a natural flow of goods in our industry across the US/Canada border. For example, we export crude from Canada into the US, but import diluent that allows us to blend that crude in Canada. Over the years, the industry has become very interconnected, to the benefit of both countries. That free flow of goods has worked very well for Enbridge.” Most businesses in North America have benefited from free trade and have voiced their concerns with their respective governments.

Tim Johnson, President of Winpak Heat Seal, a manufacturer of flexible packaging, manages plants in Canada, the U.S. and Mexico. He said: “In our Industry, if we go back to a system of tariffs on everything, that would be very bad. And, it may even be worse for our Illinois plant than for our Mexican and Canadian plants… But throwing out NAFTA would be almost inconceivable… Being against NAFTA is regressing to the 1970’s or 1980’s. I can’t imagine the younger generation accepting anything less than the status quo on NAFTA as they increasingly look to foster business models of collaboration. As such, it’s going to be more and more about free markets and letting companies compete globally without barriers.”

However, after Brexit and comments made by the Trump administration, many executives today are fearing a return to protectionism in the U.S. As a result, some companies are taking the NAFTA renegotiations seriously and some foreign-owned companies in Canada are being asked by their global head office to prepare contingency plans. Even with uncertainty and perceived risk, companies continue to invest in North America. CAI Global worked with many foreign companies that announced investments in North America in the past year. Although political risk is factored in investment decisions, the main reason greenfield investments are made abroad are for market-seeking reasons. The U.S. also happens to be one of the most innovative and productive places to do business, according to the World Economic Forum’s competitiveness index.

Source: World Economic Forum, Global Competitiveness Index 2016-2017
Source: World Economic Forum, Global Competitiveness Index 2016-2017

Mr. Bélanger says that the NAFTA renegotiations “won’t stop us from looking at opportunities to grow in the U.S., but we would be more cautious.”

 

The Truth about NAFTA: Mixed Reviews Means a Renegotiation can be an Opportunity

Many experts believe that NAFTA has benefited all three countries including the U.S. by increased goods and service trade. Although the U.S. has a trade deficit with Mexico, NAFTA helped grow Mexico’s economy and that may be linked to increased stability in the country and a decrease in border crossing into the U.S. Nonetheless, Donald Trump has repeatedly said that NAFTA was “a bad deal” and there may be some truth to that. Bill Clinton predicted that “NAFTA will tear down trade barriers between our three nations, create the world’s largest trade zone, and create 200,000 jobs in the U.S. by 1995 alone. The environmental and labor side agreements negotiated by our administration will make this agreement a force for social progress as well as economic growth.” Meanwhile, the Mexican President at the time, Carlos Salinas de Gortiari, saw it as an opportunity to modernize the Mexican economy so that it would “export goods, not people.” Whether the economic growth seen in the last 23 years was due to NAFTA or not is still debated today. With the rising gap between rich and poor, some studies have shown an adverse affect on a portion of the population who were dependent on the types of jobs that are less available in developed economies. An example is the study by CEPR economist Mark Weisbrot that estimates 2 million small-scale farmers lost their jobs in Mexico because of NAFTA.[5] For Canada, it was important to exclude the Dairy industry from NAFTA and preserve the quota system. On October 15th, during the fourth round of renegotiations of NAFTA, the U.S. made an aggressive request for Canada to give up 10 times what it had conceded in the Trans-Pacific Partnership (TPP) discussions according to a CBC report. During a CORIM luncheon speech, the President of Agropur said the demands were “unacceptable.” He quoted the Boston Consulting Group study that states 24,000 jobs in rural areas would be threatened and $2.2 to $3.5 billion in Canadian GDP could be lost if the Dairy quota system is abolished in Canada.

If we agree that NAFTA was good overall for trade between the three parties involved, we can also agree that there may have been some adverse effects felt in some pockets of the population. As such, it is important for each country to have a deep understanding of the effects on each industry and region, and provide solutions to offsets any potential negative affects. It is also important to see the current renegotiations as an opportunity to improve on the current act and be creative in finding a way that Canada can benefit from this.


 

Isabel Cyr Isabel Cyr, Senior Consultant, The CAI Global Group Inc.

Isabel Cyr has been with the company for over 8 years specialising in Site Selection. She is also often invited to speak at Economic Development conferences using her experience working with investors to provide insights to communities looking for strategies to attract and retain investments.

 

[1] Based on The World Bank’s 2016 population estimates

[2] UNCTAD’s 2017 World Investment Report

[3]According to Global Affairs Canada, using 2015 figures

[4] 2013 World Economic Forum Report: “Foreign Direct Investment as a Key Driver for Trade Growth and Prosperity: The Case for Multilateral Agreement on Investment”

[5] “Did NAFTA Help Mexico? An Assessment After 20 years.” By Mark Weisbrot, Stephan Lefebvre, and Joseph Sammut. CERP. February 2014.

 

 

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