U.S. retailers and consumers would face substantially higher costs for fresh produce and other items if the effort to renegotiate the North American Free Trade Agreement fails, according to a new report.
The report, “How NAFTA Affects U.S. Retail” was published in May by the international consulting firm A.T. Kearney and advises retailers begin to prepare now for the potential end of NAFTA.
The report, developed in partnership with the Food Marketing Institute and other retail trade groups, said that without NAFTA, tariffs on imported goods would increase by $5.3 billion annually — including $2.75 billion in higher tariffs for food and beverage imports. Food and beverage costs would be the most affected of any retail category, the report said.
Other possible effects, according to the report, are:
- Retailers’ bottom lines would drop by up to $15.8 billion;
- Job loss in the retail sector could approach 130,000 jobs; and
- Higher prices will reduce U.S. economic growth and a $39 billion drop in retail sales, cutting margins by $10.5 billion.
The U.S. imported $43 billion in food and beverage imports from Mexico and Canada in 2017, according to the report. In that category, Mexico accounted for $25 billion and Canada $18 billion of U.S. imports.
For all goods (electronics, household goods, food and beverage, automotive, apparel and textiles and pharmaceutical), U.S. imports from Mexico totaled $128 billion and imports from Canada topped $54 billion in 2017.
Asparagus and other items
Without NAFTA, the report said U.S. imports of Mexican asparagus would face tariffs ranging from 5% to 21.3%, depending on the time of year. That would result in about $50 million in higher annual costs just for that vegetable. Currently, Mexico accounts for 55% of asparagus sold in U.S. stores, or about $426 million in 2017. Consumption of asparagus has doubled since 1980, and imported asparagus now accounts for 91% of all supply, compared with 11% in 1980.
“While farms in California, Michigan and Washington, among other states, produce asparagus, they grow just 10% of the current supply and acreage for the crop has dropped 61% in the past 10 years,” the report said. “All told, switching to U.S. supply would not be possible in the short term, and would likely require significant cost increases due to the cost of labor.”
Based on the report’s estimates, the retail cost of produce would increase for several items:
- Asparagus would increase from $2.48 per pound to $3.01 per pound based on imports of $426 million annually;
- Watermelon would increase from $4.88 each to $5.71 each, based on annual imports of $248 million;
- Avocados would jump from $3.26 per pound to $3.42 per pound based on $2.3 billion in imports each year;
- Tomatoes would rise from $2.24 per pound to $2.29 per pound based on imports of $1.2 billion annually;
- Broccoli would increase from $3.31 per pound to $3.97 per pound based on imports of $248 million annually; and
- Cucumbers would rise from 63 cents each to 66 cents each based on imports of $563 million annually;
“During just one shopping trip, a basket filled with these fruits and vegetables would go from $16.80 to as much as $19.06 during winter months — an increase of 13%,” the report said.
Domestic growers would likely adjust their acreage over time to benefit from the rising prices of some of these produce commodities, according to the report.
The report said retailers can begin to prepare to reduce their risk if NAFTA ends.
In particular, retailers must understand the effect of higher tariffs to costs of goods sold by themselves and their competitors.
Retailers may have to adjust their assortment strategy, choosing products that can withstand or partially offset lower growth, the report said.
In addition, retailers should work with suppliers and seek alternative supplies that could reduce the impact of the tariffs.
“Any way to make pricing more attractive, and adjusting it for an inflationary environment, could also help retailers,” the report said.