Magazine article Business Credit

Free Trade between North American Neighbors May Cause New Risks

Magazine article Business Credit

Free Trade between North American Neighbors May Cause New Risks

Article excerpt

The North American Free Trade Agreement (NAFTA) could potentially have a big impact on trading patterns. Already, we are seeing Canadian and American firms relocating in Mexico in order to take advantage of cheaper labor, more favorable taxes, or preferable infrastructure. This in turn is leading to lower costs, and companies that take advantage of these arrangements have the capability of becoming the supplier of choice for their industry.

Our company is analyzing the effect that NAFTA will have on the risks trade creditors face. Broadly speaking, there are two classes of risk: political and commercial.

Political Risks Will Still Exist At first blush, we would expect that the implementation of a free-trade agreement would eliminate any political risks. The concept is that NAFTA would presumably create one large, integrated marketplace in which national boundaries are of no consequence as goods and services move freely over invisible borders.

But, of course, political risks will still exist. While there will be mechanisms for resolving disputes, there will be nothing to prevent disputes from arising. These disputes could result in government action that prevents a company from meeting its commitments under contract on a timely basis.

While the dispute resolution mechanism may eventually prevail, it may be only after the contract has become invalid, leaving the contractor with incomplete work and attendant losses.

Stable governments and a smooth transition of power as governments change have been major features of North America as a place to do business. But what effect would it have on NAFTA if Quebec separated from Canada? A separation could possibly result in great bitterness and bring an end to open borders. Previous contracts/relationships, seemingly secured by NAFTA, could suddenly be severed with losses incurred.

Obviously, one could go on at great length about the various eventualities that could result in losses due to bad debts that arise out of political events. But overall, I would expect that while initially there will be some problems, in the medium-to-long term, NAFTA will substantially reduce the political risks faced by grantors of credit within North America. …

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