As NAFTA Talks Reveal Trump’s True Motive, How Screwed is the Nearshore Services Industry?

There’s been a dark cloud hanging over the Nearshore industry since November 2016, namely the uncertainty surrounding digital trade and services in the face of a Trump’s threats to withdraw the US from NAFTA.

In the last year, representatives from Mexico, Canada, and the US have had numerous talks and negotiations to limit the damage of this possible eventuality (the next one is scheduled for November 17 in Mexico City), and still we have no formal decision.

However, there is enough information out there to help us to understand how screwed the Nearshore services industry really is, and how we can prepare for the next steps.

Light at the End of the Tunnel for Digital Trade

Within the government’s “Summary of Objectives for the NAFTA Renegotiation”, it is clear that the Trump administration actually recognizes the importance of removing digital trade barriers.

“[The White House] has secure commitments not to impose customs duties on digital products (e.g., software, music, video, e-books),” it states in the document.

In fact, the government is actually seeking to prohibit a number of things that would harm digital trade, such as customs duties on digital products, discrimination against digital products from a NAFTA party, data localization, and government mandates to disclose source code.

This is clearly a step in the right direction, as far as Nearshore digital services companies are concerned.

Essentially, it looks like the government is walking the path of trade liberalization as it pertains to the digital industry, so ITOs should be able to breathe a sigh of relief.

However, in order to be even more supportive of digital trade, some believe that the government should also be seeking to create rules that limit data localization, promote a balanced approach to intellectual property protection, support cross-border privacy, and remove any barriers that hinder the trade of services.

Strength of US Services is a Beneficial Element

According to its summary of NAFTA objectives, the US government is also seeking to liberalize the services sector by agreeing to allow trade in all kinds of services.

The only exception will be those services that are specifically excluded from importation, decided on in advance by all countries.

The US has good reason to be more liberal when it comes to services: its own market pulled in over US$750 billion last year, so shutting the door to its neighbors makes no sense at all.

If the government sticks to its own objectives, a US services provider would be able to support Canada or Mexico online, so the same should be said for Mexican and Canadian companies to support the US. After all, why would Mexico or Canada agree to anything less?

Residual Effects of TPP

Although the government withdrew from the Trans-Pacific Partnership (TPP) in January 2017, some of its policies centered on ecommerce and digital services resonated with the Trump administration, as a few provisions have been kept intact within its plans for NAFTA.

Anupam Chander, Visiting Professor at Georgetown University Law Center and Martin Luther King Jr. Professor of Law, University of California, Davis, iterates that this is good for the liberalization of digital trade, but believes that the administration needs to do more if it is to focus the digital trade agenda on enhancing individual rights. “This can be achieved by promoting privacy, consumer protection, and balanced intellectual property rights,” he writes.

If the US government can abide by its own plans and rules laid out in its withdrawal strategy, then digital services and even ecommerce shouldn’t experience any major disruption. However, there are still certain economic and social aspects to consider that could have an indirect impact to the industry.

Localized Impacts of a NAFTA Withdrawal

Right now, the best case scenario for Mexico and Canada is that the negotiations continue for as long as necessary so that everyone can reach a mutually beneficial agreement, according to Andrés Rozental, President at Rozental & Asociados, and an experienced speaker on the topic of NAFTA.

“I’m confident that the US won’t withdraw, as this long period of time has provided space for a coalition to form in the US against Trump’s proposals and ideas,” he said. “My own feeling is that this threat to withdraw is a negotiating tactic, backed by expectations that Mexico or Canada will cave. Neither country will be interested in a trade relationship where everything benefits the US and not them.”

Overall, withdrawal from NAFTA will undoubtedly affect the US relationship with Mexico and Canada, but how much it will affect it is difficult to say, because we’re yet to see how the withdrawal will be framed, if it happens at all.

Perhaps there will be two bilateral agreements, or maybe Canada will continue to be bound by NAFTA. Or will the whole thing break down as the US begins to find ways of subverting global trading rules that previous administrations were involved in formulating?

Until the final decision is made, Mexico in particular may suffer in the short term from an economic and investment standpoint. However, if the country can establish the same trade rules in its own national legislation, then things may quiet down and economic relationships may resume.

While the Nearshore industry can definitely focus on the bright side to all of this, we have to be aware that the withdrawal from NAFTA might just be the beginning of a plan to totally overhaul global trade relations for the US.

“Many people in the States strongly believe that this NAFTA issue is just a prelude to the eventual change or attempt to change global rules,” said Rozental. “If the US also goes against the WTO, then it will be a new ball game, and we will have to see how the whole world will react.”

For now, at least, Nearshore can continue to thrive, and looks to be safe from any massive disruption in the event of any changes to NAFTA, providing that the US government sticks to its promises on digital trade and services.

Conclusion: Nearshore is definitely not screwed.

What are your observations on the ongoing NAFTA conversation? As a services provider, how does the issue concern you? Let us know in the comments.