Here’s why revisiting NAFTA and Trump’s “Buy American” agenda is likely to benefit Amazon.com

Amazon.com’s strategy fits snugly into Donald Trump’s vision of “Buy American”

In a significant development, Amazon.com Inc, the world’s biggest online retailer, is preparing to unveil a 1 million square-foot warehouse near Mexico City in order to capture Mexico’s nascent e-commerce market, said sources familiar with the project.

According to four real estate professionals familiar with the plans, the new warehouse is likely to be built in the Tepotzotlan municipality, 25 miles (40 km) north of the Mexican capital.

With an expected completion date of 2018, the facility will triple Amazon’s distribution space in Mexico, and possibly target 120 million potential customers.

The development comes midst talks of the Trump Administration revisiting the North American Free Trade Agreement (NAFTA). This could potentially be beneficial to Amazon if the U.S. manages to persuade Mexico to raise the $50 limit on the value of online purchases that can be imported duty-free.

Although Amazon.com is a relative newcomer in Mexico , its rate of expansion in the country is much faster than its rivals, including Wal-Mart Stores Inc, which is currently Mexico’s third-largest online retailer.

In 2016, Amazon recorded $253 million in sales, more than double than its previous year figure, as per Euromonitor International, a market research firm.

With Mexico sharing a nearly 2,000-mile border with the United States, could be beneficial for Amazon, duplicating its U.S. success could be tough.

Currently, only 3% of Mexico’s populations shop online compared with over 10% in the U.S. This could be because shoppers in Mexico are wary of online frauds and thus do not have credit cards.

According to a few analysts, Amazon is willing to take the risk of expanding its presence in Mexico, in order to bulk up against foreign players such as China’s Alibaba Group Holding Ltd.

“Amazon is not afraid to plow into a new market in a very big way, take a big hit, but say, 10 years down the line, this is going to be big and profitable,” said Neil Saunders, managing director at the GlobalData Retail research firm.

As per Julio Gil, Amazon’s spokesman, the company’s Mexican unit is aiming to expand its product offerings, offer faster deliveries and make the purchasing process as smooth and secure as possible to inspire consumer confidence.

“We’re trying to eliminate any friction,” said Gil.

Significantly, Amazon’s two distribution centers in Mexico totals to more than 500,000 square feet (46,452 sq m), with both located in Cuautitlan Izcalli in the state of Mexico, adjacent to the autonomous district of Mexico City, whose metro area is home to more than 20 million people.

Its new warehouse will be constructed around 7 miles (11 km) away from its existing facilities.

Incidentally, all of its warehouses are located along the “NAFTA” highway, an industrial belt that runs through Mexico’s factory regions to the U.S. border.

The new facility will be built by Prologis, a U.S.-based industrial developer, which owns 45.9% of Fibra Prologis, a Mexico-based real estate investment trust that owns 34.2 million square feet (3.2 million sq m) of manufacturing and logistics space across Mexico.

Typically, Fibra Prologis acquires properties from Prologis upon their completion.

As per Marc Wulfraat, the president of the logistics consultancy firm MWPVL International, the new facility will be able to distribute big products, such as furniture, as well as smaller items such as microwaves and books, said Marc Wulfraat, president of the logistics consultancy firm MWPVL International.

If about 85% of the space is used for small products, a typically U.S. warehouse setting, Amazon would be in a position to store 15 million products and make up to 1 million deliveries a day nationwide.

Once the new warehouse becomes operational, Amazon would most probably employ 2,000 to 3,000 people to handle shipments, said Wulfraat.

Significantly, the location could also serve as a distribution point for products going to the U.S. said Saunders.

“Amazon is very fluid with its logistics. As long as that border is reasonably open, Amazon is very agnostic,” added Saunders.

Revisiting NAFTA has potential

While revisiting NAFTA, if Mexico , the United States and Canada were to raise the value of online purchases that can be imported, duty-free, it would significantly benefit Amazon expansion in Mexico.

No wonder this proposal was backed by U.S. trade representatives, who pushed the duty-free limit on imports to about $800 from their previous thresholds of $50 in Mexico and C$20 ($16.5) in Canada.

This upward revision is likely to act as an incentive, for consumers in these countries, to buy big-ticket items online from the United States. This very idea was championed by U.S. President Donald Trump in his “Buy American” agenda.

Mexican negotiators, understandably, are treading with caution midst a push-back from Mexican industries, including footwear and textiles.

“We have to find a middle point that does not damage our economies with extreme liberalization,” said Mexico’s Economy Minister Ildefonso Guajardo at the conclusion of NAFTA talks in Mexico City early this month.

The next round is scheduled for Ottawa in late September.

As per Claude Barfield from the American Enterprise Institute who is an international trade analyst, even a compromise is unlikely to dash Amazon’s plans for Mexico.

“I can’t imagine this would be a deal-breaker,” said Barfield.

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