With the North American Free Trade Agreement (NAFTA) positioned precariously under the executioner’s blade, companies throughout Mexico, Canada, and the U.S. are understandably concerned about what’s next for their nearshore partnerships.
Thankfully, while many believe nearshore to hinge on the strength of this decade-old agreement, some experts are starting to agree that any changes to the NAFTA could actually be good for business, particularly in the professional services and BPO industry.
“Discounting automotive manufacturing, leaving the NAFTA would benefit the IT and services industry, and could become a positive opportunity for Mexico and Canada,” said Elisa Munoz, Cluster Strategy Specialist and Mexican Outsourcing Expert.
“On top of that, the U.S. is turning away foreigners, so Canada and Mexico will become safe havens for them. If we get an influx of IT immigrants, we can share knowledge and experience, creating a great opportunity for both countries.”
Prepare for the…best?
In preparing for any changes to the NAFTA in the coming year, companies in Mexico should remain positive, vigilant, and flexible, according to Jose Zozayacorrea, Partner at Ernst & Young.
“First, I would say that since TPP has been rejected by the U.S., Mexican companies should focus on other jurisdictions, such as Asia,” he said.
“Second, I believe that the NAFTA will not be entirely eliminated but strongly modified and, therefore, providing services to other jurisdictions from or to Mexico is very important. Finally, the rules of the WTO still apply, which enable and strictly specify duties, taxes, and other similar expenses. Basically due to globalization and the WTO and its rules of origin, it would be a nightmare to modify those.”
In fact, the ripple effects are already being felt in the IT sector, as talent begins migrating away from the U.S., spurred on by changes to working visas and new initiatives of certain locales, such as the state of Jalisco in Mexico.
“Demand is already increasing in Mexico due to the current situation,” said Munoz. “It’s a little unbelievable, but recruiting firms are already seeing an increase in demand, so IT companies are not going to be affected. The U.S. and Canadian companies that have already decided to come to Mexico will remain in Mexico.”
Modernizing the Agreement
Despite its many benefits, NAFTA is far from perfect, so maybe a fresh coat of paint will do it some good.
“Each country has certain areas where they would like to improve and modernise the NAFTA, so most are hopeful that this could be a constructive update to address the bi-lateral irritants that have been around for the last 20 years, and making changes that reflect the global supply chain network that we are in,” said Cathleen Cimino-Isaacs, Research Associate at Peterson Institute for International Economics.
“In terms of disciplines on digital trade, intellectual property, e-commerce, and state-owned enterprises, I think we could see an update to the rules, which would be very beneficial.”
On the other hand, Cimino-Isaacs recognizes that it won’t be plain sailing to achieve this. “It’s unclear whether we have an administration that is willing to be ambitious about those areas and they seems to be a bit more narrow-minded about what they want to achieve. Either way, it’s clear that the decision to undo NAFTA will certainly disrupt the relationships between the three nations,” she concluded.
Furthermore, the cloud of Mexico’s continued currency devaluation might have a silver lining if Trump’s tariff proposals are implemented.
“Currently, the exchange rate advantage between the U.S. and Mexico is more than the proposed 20% border tax,” said Munoz. “If they then try to tax 50% instead, IT companies will strongly oppose the measure. The real issue is, how long can a government against trade and against knowledge really last?”
Tracking Digital Services, or Not
For digital services companies and clients, any respective government’s ability to track their transactions for taxation purposes does not yet exist, and advanced tools to such effect would cost a substantial amount to implement.
“I do not foresee a major impact to IT or BPO services if NAFTA is dissolved, since they are migrated from different jurisdictions, so pursuing the origin of services rendered is extremely difficult for the authorities,” said Zozayacorrea.
“As to the tax impacts, the reasoning will be the same unless in the near future there may be mechanisms which can technically be enough to locate the origin of these services being provided.”
Ultimately, the main concerns for industries in each country, at the bare minimum, is retaining the status quo of duty-free trade, and not breaking down some of the well-established supply chains.
With U.S. companies fearful of their partnerships becoming public, new contracts in IT and BPO are already being affected, but the core of the trade history between these three nations remains intact, with or without NAFTA – something that any opposing party would be extremely tough pressed to get rid of.