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What Trade in the Trump Era Means for Sourcing

Though there’d been hope that the term “uncertainty” would retire with 2017, it’s still front and center in 2018—especially where trade is concerned.

For President Trump, who has taken to a sweeping revamp of U.S. trade policies, upending more than he’s upgraded so far, trade is a zero-sum game with winners and losers.

And if that’s the perspective, as Josh Teitelbaum, counsel for international law firm Akin Gump Strauss Hauer & Feld, explained during a panel at Sourcing at Magic Monday, then the key indicator for what’s working or not in a trade deal, is the trade deficit. In this case, the losers are those on the negative end of a trade deficit, and the winners are those reaping the benefits. That has been precisely what Trump has sounded off on the most when it comes to his reasoning for reworking a trade deal, as he’s been very clear that the U.S. won’t be on the losing end of anything.

Since taking office, Trump has pulled the plug on the Trans-Pacific Partnership, alluded to rejoining it, threatened to pull out of NAFTA, for which talks are still ongoing without substantial headway, and frozen talks on the Transatlantic Trade and Investment Partnership (TTIP) the U.S. had been negotiating with the European Union, among other things.

“It’s been one hell of a year in trade policy,” Teitelbaum said.

The sixth and latest round of NAFTA talks wrapped at the end of January with the U.S., Mexico and Canada agreeing that “some” progress was made, while also agreeing that there’s still a long way to go and things they can’t reach common ground on—like rules of origin.

The U.S. has proposed increased American inputs on things like autos, and Canada and Mexico aren’t on board. In statements following the round six talks, U.S. Trade Representative Robert Lighthizer said there’s yet to be any compromise. The U.S. has also proposed eliminating the agreement’s tariff preference levels, which provide duty free access for certain raw materials that Canada or Mexico source outside of the NAFTA nations for their apparel exports.

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“The initial U.S. proposal was for the U.S. to eliminate all 24 tariff preference levels,” Teitelbaum said. The move wasn’t met well in the talks as it would hurt both Mexico’s and Canada’s competitiveness, and very likely see U.S. consumers spending more for goods with higher-priced inputs. “As these negotiations have progressed,” Teitelbaum added, “the U.S., as I understand, has signaled that there’s some flexibility in this area.”

What’s at stake if NAFTA goes belly up, is $682 million worth of apparel imports from Canada and $3.13 billion from Mexico, according to Teitelbaum.

What’s also at stake, is U.S. manufacturing for brands like Levi’s.

“We’ve been using NAFTA since day one and we designed our sourcing model to really capitalize on what NAFTA has to offer,” Anna Walker, who does global policy and advocacy at Levi Strauss & Co., said during a separate panel on trade. “We know that with NAFTA—that should the president follow through on some of his threats, we’ll continue to make those products, we just won’t do it using U.S. inputs. Those products will move to countries that have their own supply chains.”

Using Mexico as a supplier hasn’t been just about manufacturing for Levi’s either, it’s also been about the country’s ideal proximity to the U.S. and suppliers that have grown to become what Walker called “innovation partners,” as they’ve worked to deliver on new, smarter, more efficient ways for Levi’s to develop denim.

“To lose that would be really unfortunate,” Walker said.

Two more rounds of NAFTA are expected before April as all parties have said they want to settle on a deal sooner than not, but those two rounds may not bring the clarity needed to remove the black cloud that’s been hanging over NAFTA since Trump said—and continues to say—that he’d be willing to scrap the deal if he couldn’t settle on terms that would serve the U.S.

“My forecast, unfortunately, is more uncertainty and volatility in U.S. trade policy,” Teitelbaum said.