With NAFTA on the Chopping Block, Implications For Nearshore IT Are Very Real

With Trump's plans to collapse, or at least disrupt, NAFTA, there implications for nearshore IT services are real, but are they a death-knell for the industry?

nafta

Last week, news agency CNN reported on a leaked memo suggesting that President-elect Donald Trump’s new administration will immediately focus on renegotiating NAFTA. While Trump’s goal is to get more U.S. citizens working, they may not necessarily have the right skills that U.S. companies are looking for, skills that – thanks to NAFTA – have been sourced from talent found in Mexico and Canada.

Unsurprisingly, many Mexicans in the border region are concerned about Trump’s plan for undoing NAFTA, but treaties like this are not necessarily easy to undo. NAFTA provided clear rules of the game and certain guarantees for trade and investment, which stimulated more regional trade and investment between the U.S., Mexico, and Canada.

paul ganster
Paul Ganster, San Diego State University professor

“Tinkering with these established policies would send a chill throughout the investment world and make it more difficult for Mexico to attract investment, particularly with manufacturing plants and startups,” said Paul Ganster, a San Diego State University professor with a specialty in Latin America. “NAFTA did not invent Mexico’s exports to the U.S.; the whole series of trade arrangements that the U.S. is involved in, such as GSP and duty free imports from certain countries, also facilitated trade with Mexico before NAFTA was in place. Things like offshore manufacturing were very well-established; NAFTA simply accelerated all of that.”

History of Border Limitations

After 9/11, people that lived and worked in the Mexican border region were hugely inconvenienced by an implementation of security efforts that affected legitimate crossers and legitimate flow of cargo. The cost of these restrictions and slowdowns has had a huge economic impact – around $6-8 billion in the San Diego/Tijuana region alone. Approximately 40,000 people live in Tijuana and work in San Diego, many of whom are daily commuters, so heightened security makes things difficult. As a result, any further tightening up of border control by Trump and his administration with only serve to hinder these workers even more.

“Border infrastructure tends to lag behind demand and growth of trade,” said Ganster. “A good chunk of that money needs to come from Washington, so with an unsympathetic administration at the helm, and Congress, the act of pulling together the funds to reduce related bottlenecks will prove to be more difficult.”

antonio garza
Antonio Garza, former U.S. ambassador to Mexico

“The cross-border relationship is far more complex than any one president or policy,” writes Antonio Garza, former U.S. ambassador to Mexico in a blog post. “It will be shaped by the many disparate relationships between communities, between businesses and between policymakers. Adding a heavy dose of realism to Trump’s policies will be critical for resetting the tone, but it’s only the starting point for managing bilateral relations over the next four years.”

Inaccurate Border Perceptions

It’s clear that the national political conversation does not include an accurate understanding of the border region, and stereotypes it as a violent place, a place of crime, a place where narcotics come from. This perception is so prevalent in the United States, that simply bringing up an image of the border, or saying “build a wall”, has become a metaphor for all those negative things. Over the years, that metaphor has come to be a highly inaccurate stereotype that fails to take into account realities on the ground in the region.

“The only documented cases of terrorists trying to sneak into the U.S. across the border have been from the Canadian border, not Mexico,” said Ganster. “This all comes from the negative images and stereotypes that have been fueled over the years. Donald Trump has used these stereotypes effectively to rally a core base of voters, picking up on anti-immigrant sentiments and playing a huge part in his successful election.”

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“The popular image of NAFTA is that it facilitated the export of factories to Mexico, which led to loss of jobs,” said Ganster. “When the impact of NAFTA was being discussed in 2004, a number of people pointed out that the closing of a factory in the rust belt always made headlines due to the loss of jobs, but there were never any headlines when jobs were added to create more components. The illusion of losing jobs and not gaining any is not very accurate.”

Practical Policy Impacts

One of the key provisions of NAFTA is the non-immigrant NAFTA Professional (TN) visa, which allows citizens of Canada and Mexico, as NAFTA professionals, to work in the United States in prearranged business activities for U.S. or foreign employers. If NAFTA is collapsed, many Mexicans and Canadians already working in the U.S. could soon find their jobs in jeopardy, causing plenty of uncertainty in places like Silicon Valley, where numerous foreign developers are currently residing.

Furthermore, restricting the ability of U.S. companies to manufacture or provide services from within Mexico would bring incredible complications for any administration. Once companies and U.S. regions understand the implications of this there will be significant pushback to the NAFTA breakup, because for every dollar’s worth of goods imported from Mexico, approximately 40 cents of the components originate from the U.S., representing a huge number of jobs spread all over the country.

“It is clear that a large cross-section of the United States expects to bring home all its offshore and nearshore jobs, but the President Elect perhaps doesn’t realize that location decisions aren’t the result of high-level deal making, they are determined by lots of factors, primarily the bottom line of cost. To reject NAFTA would be to reject the basic economic trends and forces that exist in global free trade,” said Ganster.

For nearshore services, while the threat to border region communities might currently seem high with the loss of NAFTA, when you think about it, how great a prohibition can a government enforce in terms of cross-border flow of information and knowledge?

Considering the many complications of breaking up something so ingrained in today’s cross-border trade environment, and once the negative impacts and implications become clearer to U.S. firms, NAFTA could weather the storm. But even without it, there is minimal chance that cross-border relations and regional trade will be choked to death. Like with all of Trump’s plans and promises, we just have to wait for the impacts to emerge.

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