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Doing Business in Canada

Business Planning in the Face of a Trade War

Canada, and more acutely, the Province of Ontario, is poised to enter a trade-war with the United States over the extent of Buy American policies and the threat of their imposition. At a time when the foundational trade agreement outlining cross border business in North America is being renegotiated, Ontario’s Premier Kathleen Wynne and US Commerce Secretary Wilbur Ross have been exchanging threats while assuring all who’ll listen that nobody wants a trade war between Canada and the United States.

The stakes are high for Ontario, as they are for many American states. Believe it or not, Ontario runs a trade deficit with the US. We import more from America than we send down. Last year alone, Ontario exported over $166,178,161,000 worth of goods to the United States while we imported goods worth total of $189,068,119,000. That left Ontario with an approximately $22 billion trade deficit. If measured simply dollar for dollar, even the current American administration can understand a winning position when it sees it.

Unfortunately, the economics of international trade can’t be measured so easily. With so many dollars worth of goods going in or out of the Province ($517,994,847 per day in, $455,282,633 per day out) each day, it’s often hard to remember that those goods are, more often than not, merely parts of products that are manufactured between factories on both sides of the border.

Ontario’s largest export to the United States is automobiles. In 2016, this province sent $60,085,838,000 worth of finished cars to the United States. Predictably, motor vehicle parts were Ontario’s biggest import, accounting for $17,896,056,000 worth of trade but, oddly enough, our second largest imported good also comes from the United States, finished automobiles, which we imported $17,387,510,000 worth in 2016. Would anyone care to venture a guess about Ontario’s second largest export? It happens to be motor vehicle parts, $11,094,142,000 worth of parts to be exact. Looking at it this way it would appear Ontario and the United States shuffle stuff back and forth across the border without actually selling anything the other doesn’t already produce.

In reality, those finished automobiles and the motor vehicle parts used to finish them are part of a continent-wide supply chain that sees manufacturing split between Canada, the United States, and Mexico under the North American Free Trade Agreement. Some car components cross the borders a dozen times or more during the manufacturing process. Each time the item crosses the border its value is assessed and added to the import and export columns of the respective country’s balance sheet.

Nobody wants a trade war. Nobody wants to catch the flu. That leaves the open question of “what if?”.

A trade war means both jurisdictions place restrictive duties and tariffs on the other’s goods and services to be applied each time an item moves across the border. That serves to stifle cross border trade in sectors unfortunate enough to be targets of a trade war. It would effectively kill the Canadian automobile industry as it is completely integrated with its American counterpart. A trade war would also severely damage Ontario’s economy as 80.86% of all trade flows to the US. Ontario’s second largest trading partner is the United Kingdom which accounts for 6.68%.

Clearly Ontario would be on the losing end if a trade war were held today. The Premier must be crazy to even contemplate such actions, right? Not necessarily. While we have a serious trade deficit with the United States and are completely reliant on the US to buy our manufactured goods, we have one major tactical advantage. While the Province of Ontario would suffer quite badly on the losing end of a trade war, we would most certainly take down the current administration because the economies of states the current American president needs to remain in power such as Michigan, Wisconsin, and Ohio would also suffer with a loss of jobs numbering in the tens, perhaps hundreds of thousands.  Nobody wants a trade war yet here we sit on separate sides of the border threatening each other over trade.

Businesses doing cross border trade should immediately consider obtaining a business address in the other country. Businesses in Canada doing cross border trade need to establish a physical presence in the United States. Similarly, American businesses will want to do the same in Canada. Having an address in the other country doesn’t guarantee your business will be entirely free from repercussions of new trade arrangements but there’s a better than even chance it prove be helpful, if only for a better perception for sales or at billing times.

Doing business in uncertain times is unpredictable and unpredictable is scary. Mitigate your uncertainty by establishing relationships that might serve your business well later. Business centres like Telsec are a good option, especially if your business needs to establish a presence in several states, provinces or regions. A Telsec representative can help you find office space in Toronto or any of the other 600 business locations we’re affiliated with around the world.

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