Trump's Nafta Withdrawal Threat Casts Pall Over Business Plans

By William Mauldin Features Dow Jones Newswires

Nebraska cattle rancher Craig Uden is taking President Donald Trump at his word.

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Mr. Trump's threat to withdraw from the North American Free Trade Agreement strikes some as tough talk aimed at winning concessions from Canada and Mexico. But the 56-year-old Mr. Uden, who heads the National Cattlemen's Beef Association, has decided to freeze his cow herd at 1,500 head.

A Nafta breakup and tariffs that could follow, he said, could curtail Mexico's demand for American beef, valued at around $700 million a year -- in part because Mexican consumers like cuts, such as oxtail and tripe, that Americans generally pass up.

Mr. Uden's caution underscores a new reality: Nobody with business interests that span North American borders can afford to ignore the possibility of an end to the 23-year-old agreement, under which $1 trillion in goods flows across U.S. borders each year.

The U.S., Canada and Mexico are set to resume Nafta renegotiations, instigated by Mr. Trump, on Nov. 17 in Mexico City with the goal of wrapping up by March.

The most contentious issues include the Trump administration's proposals to add a "sunset provision" that would force Nafta's expiration in five years unless all three countries act to renew it, to weaken the pact's dispute-resolution system, and to require even higher levels of North American or U.S.-specific content in vehicles and car parts traded duty-free in the bloc.

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Should the U.S. fail to achieve these goals, which trade and business groups see as extreme, the U.S. has said it may withdraw from the treaty.

In recent weeks, as the Trump administration's efforts to renegotiate Nafta have grown contentious, concerns of a withdrawal have clouded the outlook for a range of businesses, including Midwest farms, Detroit auto makers, vegetable importers and more.

These businesses are increasingly being warned of potential risks on all sides of the borders. On a conference call with investors last week, Alberto Chretin, chief executive of real estate investment trust Terrafina, a commercial landlord with interests in Mexico, said it is discussing contingency plans with its manufacturer tenants in case they face new tariffs after a potential collapse of Nafta.

Cement company Grupo Cementos de Chihuahua SAB, based in a Mexican state bordering Texas and New Mexico, told investors in October that construction projects are being delayed "because of the uncertainty regarding Nafta," according to chief executive Enrique Escalante.

In a survey published this week by the Trade Leadership Coalition, a nonprofit that promotes international trade, some 60% of Wall Street portfolio investors said the chances are at least even that the U.S. will withdraw from Nafta or that the negotiations will collapse, while 76% said the stock market isn't fully pricing in the possibility. The U.S. agriculture and vehicle industries would be hit hardest, respondents said.

The Trump administration defends its approach by saying the pact has hurt American workers and that its proposals -- which would weaken key elements of Nafta -- have wide support from U.S. workers and domestically focused businesses. Asked about the withdrawal warnings, Commerce Secretary Wilbur Ross said in New York last week that Mr. Trump is "not a bluffer."

Yet some businesses say it is too early to change their plans. Railway operator Kansas City Southern, which is heavily reliant on U.S. corn exports, is proceeding with efforts to diversify with construction of a new oil-products terminal in Mexico.

Kansas City Southern Chief Executive Patrick J. Ottensmeyer said his customers aren't ready to alter their plans just yet, but he is warning investors that some freight customers likely are rethinking their Nafta-related investments.

"What about investment decisions that were thought about and talked about behind closed doors that were never public? Have some of those been delayed? My sense is yes," Mr. Ottensmeyer said.

Kathleen Wynne, premier of Canada's Ontario province, who regularly hears from businesses concerned about Nafta's future, echoed that sentiment.

"If I were a betting woman, I would say there probably are decisions that are stalled," she said, adding, "It's hard to quantify decisions not taken."

Some businesses, after 23 years of investing in supply chains predicated on Nafta's low tariffs, would have difficulty reshaping their operations should the U.S. withdraw.

Auto makers, the parts producers who supply them and the dealers who sell their vehicles would bear the cost of $10 billion in tariffs should Nafta collapse, or the Trump administration succeeds in inserting new provisions to penalize vehicles with foreign content, according to auto industry estimates.

Some recent moves among car makers would mitigate these risks. General Motors Co., whose Arlington, Texas, plant relies heavily on Mexican parts, in June announced it would build a supplier park near the main plant where it assembles Cadillac Escalades, Chevrolet Suburbans and other large sport-utility vehicles.

GM said a variety of factors were at play in the decision, which will move 600 supplier jobs out of Mexico.

GM and Toyota Motor Corp. have significant pickup truck production in Mexico that could face a 25% tariff on shipments to the U.S. if Nafta disintegrates, putting a huge financial burden on their operations that ultimately would lead to higher truck prices for consumers. Neither company has publicly discussed any plans to alter that production.

"We plan according to the actual situation," said Luis Lozano, general counsel and head of external affairs for Toyota in Mexico. "As of today, there is Nafta."

In agriculture, Mexico is looking to buy wheat from Argentina and limit dependence on grain from U.S. Midwestern states. Chip Councell, chairman of the U.S. Grains Council, said his family hedged its entire 2017 corn harvest for the first time ever to protect against the risk of Mexican buyers shifting purchases to Latin America.

"Much like our customers in Canada and Mexico, we needed to protect ourselves," Mr. Councell told a government Nafta hearing this year.

Meantime, U.S. produce importers who agree to sell avocados and tomatoes to U.S. food-service companies up to a year in advance are writing new contingency clauses into contracts that allow them to avoid delivery if Nafta is altered or canceled, according to Lance Jungmeyer, president of the Fresh Produce Association of the Americas.

"Everybody's watching trade very, very closely," said Mr. Uden, the Nebraska rancher. "If trade gets disrupted, there's going to be a drop in price, and everybody liquidates their cows."

--Dudley Althaus in Mexico City contributed to this article.

Write to William Mauldin at william.mauldin@wsj.com

(END) Dow Jones Newswires

November 02, 2017 13:06 ET (17:06 GMT)