NAFTA Unchained

CES happened this week, so, understandably, startup and tech related media focused their attention on Las Vegas. At the same time, a tell all book on President Trump just released, just on the eve of an onslaught of developments from Washington, from a meeting on DACA, to the passing of the GOP tax plan. The main stream, US media, as per their function, turned their attention to Washington. Then, talks happened between North and South Korea, pertaining to the 2018 Winter Olympics. Global media focused their attention to the talks. Which is why, it’s no surprise, that I was unable to find the type of media attention this sort of story would have had in any typical news cycle.

Donald Trump might actually pull the plug on NAFTA.

This might not be big news to many people, as it doesn’t affect them, personally. But it will impact people with even remote ties to the US, Canada, and Mexico, and disproportionately those who are involved in the startup space in these markets. It’s not the tariffs that will hurt, it’s the immigration privileges that will disappear that will to the most damage. Let me explain why.

NAFTA and the TN Visa

There’s been a long standing view that Canadians had a leg up on the rest of the world when it comes to seeking employment in the US, as a foreign national. This was primarily because of the TN Visa program, which was part of NAFTA, signed back in the 90’s under the Clinton administration (or the Mulroney government for us, here in Canada). This gave professionals in certain industries an easy path to a US work permit, contingent mainly on a job offer. They only needed to prove they were qualified for the job they were being offered, and they were good to go. Moreover, there was no restrictive quota on the number of such visas issued. This is all in stark contrast to the H1-B visa program, which is heavily restricted, and runs on a lottery system.

Canadians, and Mexicans, have long been using this program to find jobs in the US. This also means that many US based companies were taking advantage of the TN visa to hire Canadian, and Mexican talent. This was especially true for the myriad of technical startups in Silicon Valley looking to bolster their ranks with as much raw talent possible. The TN visa was an easy way to bring in this talent. Many companies, such as Google, Facebook, Twitter, all use this to varying degrees. But now, it may as well be coming to an end.

US-exit?

When the UK invoked article 50, they had a catchy name: Brexit. Unfortunately, no such portmanteau exists for this NAFTA exit. Nor does the confusion. Because NAFTA was a simple FTA between countries, and not a supranational organization, the whole process is a lot simpler. Article 2205, in this case, is invoked, and gives parties 6 months to prepare for the termination of the treaty. What’s more, Canada and Mexico can maintain the FTA as a bilateral agreement instead. Companies and immigrants have a 6 month grace period to adjust their plans accordingly.

It’s really that simple.

And, after the 6 month grace period, any tariffs, and visa regulations the US has in place will kick in to replace NAFTA articles.

So What Happens Now?

To be fair, nothing is set in stone. Yet. The next round of renegotiations are to take place in Montreal, later this month. It’s fair to say the final decision will be made there. Or soon thereafter. Regardless, here’s what to expect if the US does invoke article 2205, at least from a VC perspective.

First, expect to see a lot of US tech companies, many of whom will be early to late stage startups, shrinking operations short term to offset the departure of Canadian and Mexican talent. They’ll fulfill any contracts that are within the 6 month time frame, but anything longer will probably be delayed by a month or two due to the loss of status for many of their employees.

Second, there’s a reasonable chance for many of these firms, particularly the well funded ones, to either set up offices across Canada and Mexico, or bolster their regional offices to accommodate their employees returning home. This would be an added cost for these firms, so non-profitable companies relying on VC funds will find their runways shortened by quite a bit (should they go this route).

Otherwise, another equally likely situation is that they’ll hire US based talent to offset their Canadian and Mexican departures. This will definitely help to bolster the US unemployment numbers, which will work in Trump’s favor in terms of approval ratings. I say both are equally likely because companies that can afford to keep their employees by creating foreign offices will do so, for continuity concerns. But, many companies, particularly in the early stages, don’t have such capital luxuries. They might find it  best for them to replace their workforce instead.

The last point is more speculation than anything. There’s reason to believe that the L-visa or the intracompany transfer visa, will be abused to compensate for the loss of the TN status. It’s already a point of concern for this administration, along with their well known complaint against the H1-B visa program. Further strain on this program can be expected due to the loss of the TN status program, which will further justify (at least in Trump’s mind) the repeal of such visa programs as well. The repeal is still a question mark at this point, but the abuse of the L-visa is a foreseeable problem.

VC Market Concerns

There is a concern, at least personally, that this might cause uncertainty, not in the public markets, but in the private ones, particularly in VC. The absence of few, key employees, especially in the technical teams, can hurt startups like none other, especially because many early stage companies are in the process of developing procedures to tackle day to day operations. This uncertainty of key hires, talent retention, and talent acquisition, will have an impact, it’s just a matter of how big.

There’s reason to believe the impact won’t be too big, but that’s assuming that the talent pool in the US is large enough to offset the loss in foreign STEM talent.

Conversely, we can expect to see Canadian and Mexican companies and startups eat up those talents in an effort to bolster their scaling efforts. Moreover, the loss of NAFTA won’t mean an end to Canadian and Mexican companies entering the US. It’ll be a bit more difficult, but it definitely won’t hem the onslaught of interest in entering the US.

What I can say, definitively is this. NAFTA doesn’t seem like it’ll be for too long. It’s too bad that this isn’t making headlines like it used to.

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