Guest Column | August 1, 2018

Retailers Need To Keep Their Eyes On NAFTA As Trade Battles Unfold

By Jim Singer and Johan Gott, A.T. Kearney


Trade policy has been in the headlines quite a bit in 2018. From steel and aluminum tariffs, to proposed automobile tariffs, to back-and-forth negotiations with China, each day seems to bring a new wrinkle. But the single-most important development as far as U.S. retailers are concerned is the potential end of the North American Free Trade Agreement or NAFTA. The three parties to the agreement — the U.S., Canada, and Mexico — have been in negotiations since last August, yet there has been very little progress. Should talks break down and the treaty be terminated, the impact on retailers will be significant.

How significant? A.T. Kearney, in partnership with the Food Marketing Institute, the National Retail Federation, and the Retail Industry Leaders Association, conducted an in-depth study to find out.

The Cost Of Loss

Without NAFTA, the trade relationship between the U.S., Mexico, and Canada would be governed by rules set by the World Trade Organization (WTO), and tariffs on imports would reflect rates applied to other nations under those rules. While the return of tariffs could benefit some domestic industries, retail is not one of them. According to our model, U.S. retailers carry $182 billion-worth of products from NAFTA partners that would be subject to tariffs without NAFTA. We see three major impact areas for the U.S. retail industry.

Impact on retailer costs. New tariffs on goods imported from Canada and Mexico would increase retailer costs by $5.3 billion annually. They would then face two choices: absorb the financial hit and suffer squeezed margins, or pass costs on to consumers. Given most retailers’ thin margins, the latter is likely. Retailers will also feel cost pressures as they seek to reorganize their complex, but nevertheless efficient, supply chains.

Impact on retailer revenues. Assuming that tariffs translate into higher prices, consumer purchasing power will decrease. This, combined with lost economic efficiencies, would reduce growth of U.S. gross domestic product (GDP). We estimate a resulting $39 billion drop in retail sales, which would reduce gross margins by $10.5 billion.

Impact on labor. A decrease in demand would force retailers to adjust their labor force in response. Shrinking margins due to the higher cost of goods would further reduce their ability to hire workers. The correlation between retailer revenue and employment is well understood, and we estimate that this scenario would translate into 128,000 fewer jobs in retail over the next three years.

Who Loses The Most?

Depending on a variety of factors, including import volumes, tariff rates, supply chain complexity, and scarcity of alternative sources, some categories of goods will be more affected by the end of NAFTA than others. Top on the list is the food and beverage category, with a potential total of $2.7 billion in increased costs. Apparel and footwear could be hit with a $501 million increase, electronics and appliances with $390 million, household goods with $498 million, and auto parts could experience $240 million in increased costs. Let’s take a quick look at a few specific products in more detail.

Chocolate: U.S. consumers gobble up $18 billion-worth of chocolate every year, and $2 billion-worth of it comes from Canada and Mexico. If NAFTA ends, 10 percent of all chocolate eaten in the U.S. would be hit by tariffs, costing consumers $261 million annually. For Valentine’s Day alone, they would need to shell out an additional $13 million.

Seasonal vegetables: The fresh vegetable aisles of many U.S. grocery stores are filled with products from Canada and Mexico. U.S. consumers have benefited from the availability of these foods year-round at a relatively low cost. Take asparagus, for example. Large-scale production in Mexico has made it affordable to U.S. buyers for more months of the year. Without NAFTA, asparagus hailing from Mexico would face tariffs of anywhere from 5 to 21.3 percent, resulting in an average $50 million in higher costs annually.

Jeans: While many jeans are made in Mexico, like many other Mexican imports, the value chain actually includes a number of production stages that occur in the U.S. As a result, on their way to becoming finished goods, cotton, fabric, rivets and labels may cross the U.S.-Mexico border multiple times. In a post-NAFTA world, each crossing would trigger a tariff. Tariffs on the finished jeans would be an estimated $124 million annually. But adding in all of the border crossings involved would bump this up an additional $42 million to a total of $166 million.

Companies Are Ill-Prepared And Need To Act Quickly

In our work with retail clients, we have found that many are ill-prepared for assessing and mitigating risk from trade policy, even though the impact is likely to be in the billions of dollars. Given that trade policy has not been a risk for decades, companies have not built up capabilities to deal with it as they have with other risks such as interest rates, oil price fluctuations, and currency movements.

The good news is that within the problem lies the solution. Organizations already have most of the data and organizational horsepower to address the issue, but it will take a dedicated effort to bring everything together. Given the fast-moving — yet not fully unpredictable — nature of trade risk, we recommend that companies invest in collecting the necessary data, identify the country of origin throughout their supply chain, and assign responsibility within the organization to manage this risk.

If companies take these steps, they will develop a higher awareness of the scale and nature of trade risk to their organization, understand their relative position with respect to the competition, and be able to start crafting responses to an increasingly volatile trade environment.

Regardless of how the NAFTA negotiations pan out, it is likely the environment will change and that there will be an outsize impact on retailers. For that reason alone, complacency is not an option. Planning for an uncertain — and potentially more challenging — future starts now.

REx Johan Gott, A.T. KearneyREx Jim Singer, A.T. KearneyAbout The Authors

Jim Singer (left) is a partner at global strategy and management consultant A.T. Kearney. Johan Gott (right) is a principal, and author of the recent report, How NAFTA Affects U.S. Retail. They can be reached respectively at and