Reports have to come light that the Trump Administration is keen to renegotiate a part of the 23-year-old NAFTA trade agreement that would equalize import duty thresholds between the three countries.
Currently, the U.S. allows importation of products from NAFTA countries of up to $800 per shipment that is tax exempt. Canada and Mexico have much lower duty-free thresholds of $50 and CAN $20, respectively.
Raising the threshold would significantly improve conditions for cross-border trade for U.S. businesses, especially eCommerce merchants.
A LITTLE HISTORY ABOUT NAFTA
NAFTA (North American Free Trade Agreement), was initially signed into law by President George H.W. Bush in 1992, approved with bilateral support in Congress in 1993, and the NAFTA implementation act signed into law by President Bill Clinton in 1994.
The free trade agreement has been controversial from the beginning as this agreement was the first time two developed nations entered into a free trade agreement with a developing nation.
Critics of NAFTA complain about job losses in U.S. manufacturing sectors while proponents of NAFTA claim it opened up consumer markets to U.S. companies that more than made up for those job losses.
Since 1993, trilateral trade between the three countries increased from $288 billion to just over $1 trillion in 2015.
The criticism about NAFTA from the U.S. side is that unions and workers, mostly in Midwestern manufacturing states, claim that jobs moved to Mexico. The reality is that manufacturing in the U.S. was already on a downturn when NAFTA was enacted due to cheap labor markets such as China expanding globally and increased use of automation in U.S. manufacturing plants.
The auto industry around Detroit and other Midwestern cities and states took a particularly hard hit in the 90s, and to date, NAFTA is still considered the chief culprit. Nevermind the fact that the American auto industry produced poorly designed and manufactured cars which led to many consumers switching to imports from Germany, Japan, and Korea.
A recent report by the nonpartisan Congressional Research Service concluded “The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment.”
Because most major U.S. multi-national corporations enjoy significant benefits from free trade agreements, as a lobbying group to Congress and donors to political candidates, NAFTA has stayed mostly unchanged.
This “bought silence” about changes to NAFTA ended with Donald Trump entering his mostly self-funded campaign for President of the United States in 2016.
He took advantage by promoting all the stereotypical criticism about NAFTA in Midwestern states and was able to gain voters that traditionally did not vote for a Republican candidate.
CAMPAIGNING VS GOVERNING
While the candidate Donald Trump promised to tear up NAFTA, Donald Trump the President decided to renegotiate portions of the agreement.
This change in a position, not untypical in politics when faced with the reality of governing, was due to pleas by the Canadian and Mexican governments that NAFTA should be saved. Both countries promised a willingness to enter into new negotiations to address concerns by the U.S. about inequalities in the agreement.
ECOMMERCE, NOT JUST MANUFACTURING, THE NEW STICKING POINT
It has now emerged from a report by Reuters, that U.S. trade representatives tasked with renegotiating NAFTA are pushing for a change in the duty-free thresholds.
As mentioned earlier, the U.S. has the highest duty-free threshold among the three NAFTA member countries. In comparison, the Canadian and Mexican thresholds are extremely low.
This creates the problem that products sold by U.S. businesses to Canada or Mexico are far more likely to be taxed by Canadian and Mexican governments. In turn, this makes many products from the U.S. less attractive to cross border trade for Canadian and Mexican consumers.
U.S. PUSH FOR EQUALIZATION OF DUTY-FREE ALLOWANCE
The trade representatives for the U.S. are pushing to have all three countries on equal footing when it comes to the duty-free allowance. And they are pushing for Canada and Mexico to raise their duty-free allowance to the current U.S. level of $800 per shipment.
But Canada and Mexico are showing concern about this proposal. They fear the lead the U.S. has in eCommerce will hurt their local businesses as U.S. eCommerce merchants will gain easier access to markets.
Ironically, Mexico is concerned about cheap imports from Asia producers making their way into the country via the U.S. While NAFTA’s primary focus is on products produced in North America, this provision is more about shipment value, then the point of manufacturing origin.
Currently, both Ottawa and Mexico City are formulating official responses to this U.S. proposal, but Reuters quoted some government officials and industry group representatives from both countries, clearly showing there is a lot of push back.
The proposed $800 level “opens a completely unnecessary door” to imports from outside the NAFTA trading block, Mexican Economy Minister Ildefonso Guajardo said recently on the sidelines of a NAFTA-related event, calling it “a very sensitive topic.”
Canadian opposition is being led by retailers, whose industry association said it was concerned about “the behavioral shift that would inevitably result if shoppers can buy a far wider range and higher value of goods tax-free and duty-free.”
“eBay in particular has lead this charge to three different finance ministers in a row – Jim Flaherty, Joe Oliver, and Bill Morneau – and in each case, they have failed,” said Karl Littler, a spokesman for the Retail Council of Canada.
NEW SHERIFF IN D.C. CHANGES DYNAMIC
But with a new sheriff in Washington needing some positive news and a win for U.S. businesses on international trade, Canadian and Mexican governments are dealing with a new dynamic.
President Trump has threatened to pull out of NAFTA, a move also widely seen by U.S. businesses as very difficult to execute as many inter-dependencies exist today and would create havoc in some industries, especially auto manufacturing.
However, he still enjoys backing from a significant base of voters that would applaud this campaign promise, even if for no other reason but to punish Canada and Mexico.
The question is how far will Canada and Mexico bend on U.S. proposals to keep the Trump Administration from starting a trade war that would be damaging to both countries.
There is no doubt that Mexican and Canadian negotiators will have to sell U.S. proposals or versions of them, to their industry lobbying groups.
DUTY-FREE PROPOSAL BENEFITS U.S. ECOMMERCE AND SMALL BUSINESS
Few economists believe that protectionist policies as proposed by Trump actually would bring back any meaningful manufacturing jobs.
But this proposal could be a huge win for eCommerce and the millions of U.S. eCommerce small businesses.
The fact that eBay had openly pushed for this change previously just shows how much they believe it could benefit their sellers. Amazon could be the biggest benefactor of this policy change as it would open up more cross-border trade for them as well as their marketplace sellers.
With the uneasy relationship between the Trump administration and the tech industry, don’t expect the tech eCommerce giants to promote this proposal openly. They are likely staying on the sidelines to see how serious Trump is about bringing forth a change in the duty-free threshold.
WHY THE $800 LEVEL IS IMPORTANT
The U.S. currently allows duty-free imports up to $800 from Canada and Mexico. In contrast, as we already mentioned, the duty-free thresholds by Canada and Mexico and minuscule.
Some Canadian and Mexican consumers are already circumventing the low duty-free thresholds by either shopping in the U.S. and not declaring the goods at the border, asking friends to ship products as personal items, or blatantly requesting U.S. merchants to declare merchandise value below the low existing thresholds.
The savings for Canadian and Mexican consumers can be huge when shopping in the U.S. Some products, even popular items like smartphones can be 10 to 30 percent cheaper in the U.S.
Raising the duty-free threshold will make lower priced U.S. goods more accessible to Canadian and Mexican consumers. While Amazon already is offering a “local” method for Mexican Prime users to gain access to U.S. goods, eBay, Etsy, and merchants running their own websites do not have that option.
TRADE WAR NOT IN BEST INTEREST FOR NORTH AMERICA
If Canada and Mexico do not raise their duty-free thresholds, there is a good chance that the U.S. will lower its threshold. That would increase prices for U.S. consumers and in turn reduce demand for Mexican and Canadian products.
But because this proposal is about individual shipments, the impact of lowering the U.S. threshold would not create U.S. manufacturing jobs. Most U.S. consumers do not buy directly from Canadian or Mexican firms, but Canadian and Mexican consumers are far more used to buying from the U.S. companies.
As complex as trade agreements are, and as much back and forth concessions are necessary to finalize them, this appears to be a proposal that is hard to back down or replace with something else meaningful for U.S. businesses.
A full out trade war over this issue would not be in the best interest of all three countries, so some agreement opening up the threshold appears very likely.
If the Trump administrations back down on this proposal or accept a lower threshold, it will need another win in a different area of the agreement that it can easily explain to the U.S. public.
It seems the duty-free threshold is an easily explainable (in 140 characters or less) win with actual positive impact on all sizes of U.S. eCommerce businesses.
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