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Business Centre / Business Networking / small business advice / temporary office space

What to Expect if NAFTA Talks Fail

Most businesses in Canada share a deep seeded defect that is so common as to be part of our DNA yet so malignant it corrupts the very foundation of Canada’s national sovereignty. The flaw is not a fault of planning or ideology. It is not caused by neurosis or insecurity. It is a simple yet subtle mixture of geography and the physics of supply and demand. Most Canadian businesses are entirely dependent on access to the American market, or are reliant on serving businesses that are successful only because they enjoy easy access to the American market.

Stretched primarily along a 6400km border with our southern continental neighbour, approximately 35million Canadians live a relatively excellent life by finding ways to collaborate with or feed the enormous appetites of a post-industrial consumer society eleven times bigger than our own. Some are haulers of water and hewers of wood and miners of all sorts of minerals and precious elements. Some are the workers who assemble parts of great machines built in a cross-border supply chain so complicated and precise it staggers comprehension. Some are the entrepreneurs who fashion complex communication tools out of source-code and common sense. Some work in importing goods and some in distributing them and some others work in selling them in shops that rely entirely on other people’s access to the American market.

Donald Trump wants to limit or heavily regulate the terms of that access, in order to ensure America is not getting taken advantage of. In fact, Donald Trump appears to want to apply highly restrictive tariffs on that access, or cause the negotiation of several new bilateral trade agreements guaranteeing some form of access or something. It’s honestly hard to tell. One thing that has become starkly apparent is the American negotiators aren’t as interested in reaching a deal as their Mexican and Canadian counterparts are. The NAFTA negotiations are, by all accounts, turning in to a frighteningly irresponsible farce and American intransigence is the reason. The bottom line is becoming clear. This American administration wants to destroy the deal in a bid to shock its partners into submission over a number of unreasonable items it insists should be on the agenda. The foundation of North American prosperity for a quarter century, NAFTA, will likely die on the negotiation table early in 2018.

It is incredible to consider it might come to this but this might come to pass. If it does, expect a period of economic dislocation and extreme uncertainty. Fortunately, that period won’t happen immediately. It will build gradually over a six month disengagement period built into the agreement. If the President were to decertify NAFTA on January 1, that decertification would not come into effect until the following July 1. In the interlude between declaration and damnation, businesses would start the process of realignment as best they could based on predicting how the new trade regime will be structured. As Canada and the United States share a free trade agreement that precedes NAFTA, bilateral trade rules would revert to the original FTA. That would still require a series of fundamental shifts in sourcing, production, labour, shipping, and financing but that work would be easy compared to starving. Mexico does not have a pre-existing free trade deal with the US. For Canada loss of NAFTA will be very difficult but for Mexico it will be devastating.

The problem for Canadian business is; how does one restructure a business when one is not sure their trade partner understands the complexity of the arrangement, or even the existence of the arrangement? President Trump said on Wednesday he was open to negotiating new deals with both Canada and Mexico, but on bilateral basis rather than as a tripartite agreement.

Canada and Mexico have openly discussed negotiating their own deal but current trade between the two is much lighter than the trade either maintains with the USA. Mexico is Canada’s fifth largest export market accounting for just over $20billion US in bilateral trade in 2016. By contrast, two way trade between Canada and the United States comprised $544billion in 2016.  Two way trade between the US and Mexico was worth $525billion in 2016. Even if Canada and Mexico signed a separate agreement, the fact is the majority of trade between the two countries must first flow through the United States.

Canada became an export nation because of the original Free Trade Agreement. According to the World Bank, exports made up about 25% of Canada’s GDP between 1900 and 1990. After 1990, exports accounted for about 40% of GDP. After NAFTA was implemented, exports rose to over 50% of Canada’s GDP.

Canada has a number of other free trade deals with several other countries and regions, the largest of which is currently the Canada/EU trade agreement CETA. Canada along with Japan, South Korea, and Australia continue to pursue the Trans-Pacific Partnership Agreement, a grouping made much smaller by the absence of the United States. We are also trying to fashion together a series of trade agreements with China.

Canadian businesses should immediately seek other markets beyond America. That is obvious advice and well worth following however impractical it might seem. The United States is, for the time being at least, an extremely unstable bet or proposition for business. Canadian business is likely to lose the unprecedented level of access that has allowed us to virtually integrate our economy with America’s. That means we’ll have to mix US charged tariffs into our pricing or see less in profit to pay them. Even though tariffs on goods before the original FTA were fairly low, they added up significantly for consumers and businesses.

Businesses supplying American industry should enter into dialogue with their American partners immediately. It will be important to manage the new risks brought about by uncertainty over trade conditions. Consulting with a trade lawyer is advisable though it’s hard to imagine what they might tell you given the chaotic nature of trade negotiations.

As noted in a previous column, businesses with significant cross border travel and sourcing should open branch operations in the other country, even if it’s just a virtual office, or temporary office space. Spending a small amount to get a Canadian or US business address might save a much larger amount in the future.

Most importantly, don’t panic. Time has a way of fixing things, or, in this case, time has a way of finding solutions to complex problems faced by large numbers of people who have lived under extremely free conditions for the better part of a quarter century. In time, common sense will prevail and liberalized trade will again flow freely between the two countries. A major restructuring of a business at this time is hopefully not necessary. Diversifying your customer base is however. The Americans can obviously not be relied on to be reasonable trade partners at this time. Perhaps they’ll change their mind in three years.

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