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July 14, 2017

In May, the Trump administration announced its intention to renegotiate the North American Free Trade Agreement (NAFTA). The goal is simple: facilitate the export of goods where the U.S. has a comparative advantage. But getting there is not as straightforward.

It’s too early to predict what a new agreement would look like or whether the agreement will be modified at all. Given the magnitude of the potential impacts, companies would be wise to start analyzing their operations and considering their options.

First, a brief history lesson. NAFTA has been in place since 1994. Among other things, it lifted many of the tariffs on trade between the U.S., Canada and Mexico. The agreement, however, has not been updated since its inception. Obviously, much has changed during that time with things like digital trade, intellectual property rights and regulatory practices.

While there’s a strong case for modernizing the agreement, modifications would significantly alter the way many companies have been operating over the last quarter-century. Most have adapted and reduced production costs during that time. Consider that today, products might cross our borders multiple times before the finished good is shipped.

Paying particular attention to how this plays out are those responsible for developing corporate supply chain strategies. After all, it was NAFTA that essentially gave rise to today’s corporate supply chains. Integrating these complex structures across the continent helped companies achieve new economies of scale, cost savings and efficiencies not previously attainable because of tariffs and other obstructions.

In particular, supply chains are impacted by the “rules of origin” component of trade agreements. These highly complex rules establish whether a product qualifies for a zero-tariff rate under the agreement. Again, predicting what a renegotiated NAFTA will look like is difficult at this stage, but experts caution that stricter standards could shake up the flow of goods across borders.

“Any changes to the rules will require a rethinking of how products are sourced,” said Walter Kemmsies, Managing Director, Economist and Chief Strategist, JLL Ports, Airports and Global Infrastructure. “There would certainly be a ripple effect on logistics real estate and transportation. Ironically, stricter rules of origin could result in more inputs coming from outside North America, which is the opposite of what renegotiating is trying to accomplish.”

Currently, more than three-quarters of goods traded between the U.S. and Mexico is moved via truck or rail. If NAFTA renegotiations reduce trade activity between the countries, it would likely reduce trans-border truck and rail volumes.

That could impact investment in certain U.S. industrial property markets. Secondary logistics markets like Phoenix, San Diego and Kansas City, which serve as key corridors for trade with Mexico, might be most exposed to risk if trade activity declines.

That said, other markets could benefit. Major industrial warehouse and distribution centers already in and around large population centers (think places like Dallas, Northern California and Los Angeles) would likely become the go-to for domestic business if imports drop off. These are already some of the nation’s busiest domestic trade corridors and are a natural choice for increased domestic trade flow.

“Overall, the industrial and logistics real estate sectors are in a pretty solid position to weather uncertainty,” Kemmsies said. “Domestically, growth is being driven by a mix of low interest rates, healthy consumer spending and strong e-commerce. Regardless of global economic uncertainty, investments in infrastructure and corporate expansion are likely to fuel warehouse and distribution space demand.”

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Walter Kemmsies

Managing Director, Economist and Chief Strategist, JLL

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