The near-term cost to retailers of exiting NAFTA (North American Free Trade Agreement) is estimated at $15.8 billion, according to a study released by A.T. Kearney, Chicago.
The study, “How NAFTA Affects US Retail,” quantifies the impact of a potential withdrawal from the treaty, and outlines what changes retailers should expect in the event that the United States exits from the pact.
“The three macro areas we researched were tariff increases, reduced consumer spending and lost jobs, each and collectively amounting to losses of billions of dollars and displaced lives,” says Johan Gott, principal and co-author of the study. “Retailers in different sectors would be affected in different ways—even from product to product. But, bottom line, the impact will extend to millions of products imported into the U.S.”
The study points to how the American retail landscape is in danger of being undercut. It quantifies direct and indirect margin impact across all sectors of retail, including food and beverage, electrical and appliances, pharmaceutical, auto parts, household goods, apparel and footwear. Additionally, the study quantifies the impact on retail employment, projecting losses of over 100,000 jobs within the next three years.
“NAFTA has dramatically influenced the U.S. economy, the retail sector and Americans’ standard of living. From the time, it came into force, retailers have gradually become de facto importers because their customers demand the products that NAFTA allows them to purchase easily, affordably and with great variety. Retailers then are agents without the protections that other importers enjoy,” adds Gott.
Should NAFTA be terminated, the report suggests that retailers:
- Take steps to quantify the impact on their cost of goods sold.
- Outline a response in terms of several different scenarios that factor in potential impact.
- Become an active voice with policymakers, industry groups and peers to share the real, direct impact that the end of NAFTA would have.
- Be prepared to share confidential data with government officials to demonstrate this impact.
“If the United States terminates NAFTA, many importers would likely be covered by other protective sanctions against foreign competition,” adds Gott. “U.S. retailers do not face the same kind of foreign competition, but they would be left to face higher costs for the goods they sell—a prospect whose ramifications would reverberate throughout the U.S. economy.”
This study was done in partnership with the National Retail Federation (NRF), Washington, D.C.; Retail Industry Leaders Association (RILA), Arlington County, Va.; and Food Marketing Institute (FMI), Arlington, Va. The methodology aimed at quantifying direct cost increases, indirect revenue loss and jobs impact. For the first, U.S. Census data was used to identify imports coming into the United States from Mexico and Canada, and a filtering process to categorize which of these, directly or indirectly, winds up on the shelves; from there they were extrapolated out, adding in U.S. Most Favored Nation tariffs and percentages of retail-relevant and flow-through costs, to determine end cost. Indirect revenue losses were assessed based on an average of expert estimates of the GDP impact on the U.S. economy of withdrawal from NAFTA, and correlated to consumer spending to estimate a total retail revenue loss. For jobs impact, government statistics on retail employment were used to calculate the total number of employees either directly employed or supported by the operations of retail companies; these were then correlated to consumer spending reductions to arrive at a figure for retail employment reduction.