What Californians should watch for as NAFTA negotiations begin

Representatives from the U.S., Mexico and Canada meet in Washington D.C. Wednesday for the first round of NAFTA renegotiation talks.

The trade agreement, which went into effect in 1994, eliminates most tariffs on trade between between the United States, Canada and Mexico. 

Here are a few local industries that could be affected if there are changes to the current agreement:

Logistics and e-commerce

NAFTA was signed before the rise of the modern internet and e-commerce, which have become dominant sectors in the modern economy.  All three countries agree that they need to add new rules for e-commerce and data management.

Michael Camuñez, CEO of the consulting firm Monarch Global Strategies, said these new disciplines are essential to a range of e-commerce companies that specialize in cross-border online transactions. Companies are often forced to comply with separate rules and standards governing data privacy and protection in different jurisdictions, he said.

It would be preferable if the NAFTA countries "take similar approaches to the collection, management and enforcement of data collection and data privacy rules," Camuñez said.  "It’s helping to ensure that the rules of the road for e-commerce are consistent across jurisdictions to help promote the growth and development of digital commerce while also protecting consumers."

Such changes would streamline compliance costs, he said.

E-commerce is a key driver of the Southern California economy. It supports the local ports, trucking companies and logistics warehouses in the Inland Empire. So if e-commerce compliance costs drop, it will likely mean extra money for added investment in e-commerce businesses – a win for the local logistics ecosystem.

Manufacturing

Since his days on the campaign trail, President Trump has promised to make better trade deals, which he said would stimulate U.S. manufacturing.

That message resonated with workers in Ohio, Michigan and Pennsylvania, but it also has significance in Southern California. Los Angeles is one of the largest manufacturing hubs in the U.S., employing more workers than any other U.S. city.

U.S. negotiators want new provisions added to NAFTA that would increase U.S. exports and lower the trade deficit. To do that, trade experts believe the U.S. will ask for new "rules of origin."

Camuñez explained the term, using an example from the automotive industry:

Under NAFTA, a car that is manufactured in Mexico can be exported to the U.S. tax free if at least 62.5 percent of the value of that car (i.e, the value of all of its parts) originated in Canada, Mexico and/or the U.S. 

The U.S. negotiators will likely try to convince Canada and Mexico to increase that percentage – the assumption being that it would stimulate more North American car part manufacturing (and part manufacturing for appliances and other products).

But Camuñez, the former assistant secretary of commerce under President Obama, cautioned that a higher rule of origin percentage could have unintended consequences.

"If we make the rules of origin overly restrictive and therefore force automakers to source components that aren’t competitively available in the U.S. or in North America just for the sake of improving the trade deficit numbers, you could actually hurt the competitiveness of the industry because you’re forcing them to buy products either that aren’t the same quality or are much more expensive to produce domestically," he said.

KPCC attempted to reach UC Irvine business professor Peter Navarro, who directs the White House National Trade Council, but he did not respond to email requests for comment.

Agriculture

California farmers export billions of dollars worth of produce, wine, dairy, nuts and meat to Mexico and Canada. Under the current rules of NAFTA, they are able to do that tax-free.

With a few exceptions, U.S. farmers and ranchers generally support NAFTA as is. In April, President Trump's own Secretary of Agriculture Sonny Perdue convinced him not to pull out of the deal.

At the time, Trump admitted that a full withdrawal would be a "shock to the system" and he opted to renegotiate the deal. But he insists that he will follow through with his withdrawal threat if there is an impasse in the new talks.

If that happens, California's farmers will likely face higher taxes on their exports to Canada and Mexico. The state's tomato, almond and grape growers would be hit hardest, since those are among the state’s top farm exports to Mexico and Canada. In addition, experts say, food prices would rise to compensate for the added taxes.