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Should Canadian businesses move south to skirt new NAFTA rules?

Any Canadian companies looking to build a new plant south of the border and move some production there should weigh a variety of factors, experts say.

Jeremiah Thompson/iStockphoto

With the resumption of North American free-trade agreement negotiations in Mexico City later this week, Canadian companies are keenly watching contentious U.S. demands, such as establishing minimum U.S. auto-content limits and discarding a key dispute mechanism.

The United States is this country's largest trading partner, with 73 per cent of this year's export goods and services destined for south of the border. By comparison, the European Union, Canada's second-largest trading partner, accounts for less than 10 per cent of this country's exports.

While industries such as automotive and energy account for a big chunk of our total exports, the technology sector is growing in importance and it has specific concerns about NAFTA negotiations.

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"In terms of NAFTA, there's a lot at stake for the tech industry," says Sage Chandler, vice-president of international trade for the Consumer Technology Association in Arlington, Va., which represents roughly 2,400 member companies in both the United States and Canada.

Ms. Chandler says that the CTA is focused on seeing a strong digital chapter added to the agreement, which would include cross-border data flows and balanced copyright limitations.

Jim Balsillie, the former co-CEO of Research In Motion (now BlackBerry) and current chair of the Council of Canadian Innovators, warned earlier this month about the importance of data to this country. His organization wants the government to back data localization, which, according to the council, would help protect personal information about Canadians by storing it on servers in this country.

However, Ms. Chandler is one of a chorus of voices that takes the opposite view on this.

"We're advocating for no restrictions on where data is stored," she says. "It's a competitive issue rather than governments telling you where you have to have your data. So if companies want to have their data in Montreal or wherever, they can feel free to put it there."

She adds that, like other industries, the tech sector is watching closely to see how the rules of origin requirement plays out, because the CTA represents a number of companies that would be affected by changes to current requirements of how much of a product needs to come from North America, or even how much needs to be American-made.

The sunset clause proposed by the United States, whereby NAFTA would be automatically terminated in five years if Canada, the United States and Mexico do not approve it again, is another cause for concern, Ms. Chandler says. As she explains, businesses need a certain amount of predictability.

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"Businesses can't be on a five-year cycle, just constantly wondering if their business model would get pulled apart because one of the partners wants to pull out."


For any Canadian business playing the waiting game, there are a few things that can be done to ensure they are ahead of the game, come what may.

Todd Evans, director of corporate research at Export Development Canada in Ottawa, lists his top four.

Consider what-if scenarios

Mr. Evans says there are two likely outcomes of the NAFTA talks. One is going back to the original Canada-U.S. free-trade agreement that preceded NAFTA.

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If that happens, he says, most sectors and industries in Canada that sell products and services into the States would be fine.

"A lot of those tariffs are 0 per cent anyway," he says. "There are some exclusions, maybe 1 or 2 per cent, 3 per cent on some things."

The other scenario is that Canada would end up trading with the United States under the World Trade Organization's Most-Favoured Nations (MFN) rule, whereby all members of the WTO get the same trade exceptions. Again, Mr. Evans says the trade tariffs would be in the range of 2-3 per cent, and in some cases lower.

Make yourself heard

Mr. Evans says it's important to stay in touch with U.S. customers throughout the whole NAFTA negotiation process. Many U.S. companies buying from Canada have built up supply chains over a number of years and suddenly abandoning those supply chains would be just as cost-prohibitive for them as it would be for Canadian companies.

"So it's making sure that the U.S. customer understands that there are costs involved on both sides here and to encourage those U.S. buyers to speak to their local politicians and make sure that kind of message gets out there. We're starting to see that happening," he says.

Consider expansion carefully

Choosing to invest in the United States is always a loaded decision, but for any companies looking to build a new plant south of the border and move some production there, Mr. Evans preaches caution.

"You don't want to rush into that and make this big investment in U.S. production capacity," he says.

However, some companies may want to mitigate the effect of potential trade tariffs by accommodating U.S. calls for a greater proportion of American-made components in products. It is important to do a cost-benefit analysis first, he cautions.

"Certainly in the U.S. now it's not a low-cost market," Mr. Evans says. "Labour markets are getting very tight, unemployment is 4.1 per cent and when you start getting into skilled labour and professional trades, you're looking at unemployment rates of 2.5, 3 per cent."

Another thing to consider is that the currency exchange rate could cancel any tariff-avoidance cost advantages to moving south.

Stay calm and carry on

For smaller companies without a presence there currently, Mr. Evans says that it can be very costly to move operations south, and even if NAFTA is abandoned, the worst-case scenarios would not likely be all that bad.

"If it's a matter of staying in Canada and the downside scenario could be paying that 2- or 3 per-cent tariff, that could actually be the best strategy for a number of companies," he says.

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