With political volatility the current reality on the continent, these are complicated times for Canadian exporters.
We asked two experts on the issue for their thoughts on North American trade, and any advice they can offer Canadian companies.
The climate for global trade seems to be getting more volatile every week. How might this affect Canadian companies that do most of their business in North America?
Dr. Detomasi: The main effect of volatility is to damage confidence in expansion abroad. This hurts companies that may decline to invest when once they might have gone ahead. It also constrains providers of finance who may balk at additional investment or charge higher interest rates to cover the perceived risk. Over time, that slows business development.
Mr. Kingston: The biggest driver of this uncertainty is the U.S.-China trade dispute. Should the situation worsen, it will affect company supply chain and sourcing decisions. For Canadian firms integrated into the North American market, this could delay capital investment and sourcing decisions.
With the recently negotiated United States-Mexico-Canada Agreement (USMCA), which will replace the North American free-trade agreement (NAFTA) if ratified, are there any significant changes that Canadian exporters should be aware of?
Dr. Detomasi: Exporters are most worried about the so-called “sunset clause,” which, in effect, mandates the renegotiation of the agreement [after six years, otherwise it expires after 16 years]. Foreign investors come to Canada because they like the idea of selling from Canada to the United States tariff-free. But if there is a sunset clause, they will bypass us and just go to the U.S. That’s a problem.
Mr. Kingston: The agreement requires that Canada, the U.S. and Mexico apply their customs procedures in transparent, predictable and consistent manners to facilitate trade. This means less red tape, lower costs and ultimately more trade. While this may sound insignificant, red tape at the border can be a major deterrent, particularly for smaller firms.
Are there any advantages for Canadian companies that export goods and services to the United States and Mexico to remain headquartered in Canada?
Mr. Kingston: Canada has two significant advantages over other countries. First, our vast network of free-trade agreements gives Canadian-based companies preferential access to 1.5-billion consumers around the world. Second, the availability of talent is world-class.
Dr. Detomasi: As you internationalize, it is important to take on a more global or international mindset in terms of management, strategy and outlook, but you can do that while remaining Canadian. If you are just exporting goods and services, then it is unlikely you will set up a foreign headquarters; that usually only happens after you have set up a subsidiary.
How attentive should Canadian companies that trade primarily in North America be to new opportunities that may arise from other deals such as CETA or CPTPP?
Dr. Detomasi: I think it would be good for Canada to focus on these other opportunities generally. We have always been very heavily reliant on the U.S. and do not have as deep a presence in the European markets – let alone [Asian] markets – as we probably should.
Mr. Kingston: Now is the time to diversify. We have 14 free-trade agreements in place covering 51 countries. This first mover advantage won’t last forever.
Is now a good time for Canadian companies to consider expanding to other markets?
Mr. Kingston: There has never been a better time to consider exploring new markets. We are the only G7 nation with trade agreements covering the United States, the Americas, Europe and the Asia-Pacific region. For smaller firms that face greater challenges when entering new markets, the Trade Commissioner Service is an excellent resource.
Dr. Detomasi: That depends on the company and how good the product is that they are selling. It is important not to overestimate the importance of trade in determining what countries will or will not do. A company that has a good product or service and has done the requisite homework in ascertaining the attractiveness of a foreign market should consider doing it. Volatility is always there.
Any particular tips for Canadian companies looking to move into, or expand further into, Mexico and the United States in 2019?
Mr. Kingston: The main thing to keep in mind is that there is a risk that President [Donald] Trump withdraws from NAFTA and USMCA is not ratified.
The opportunities in Mexico are huge but tend to get overlooked. Mexico’s middle class is growing. As incomes grow, the middle class is looking for better, high-quality brands and Canada has a strong reputation there. Opportunities exist in the retail, extractive, automotive, financial, aerospace, infrastructure, energy, and telecom sectors, to name a few.
But Canadian companies should pay close attention to the new [Andres Manuel] Lopez Obrador administration over the next few months. There is cause for investor anxiety after Mr. Obrador cancelled the construction of a US$13-billion airport in Mexico City, after contracts had been signed and construction was under way.
Dr. Detomasi: A good product and business plan is the factor for success in the U.S., or indeed any other market, so focus on what you can control, which is your own company, and don’t become too bogged down with what you cannot.
Responses have been edited and condensed.