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Canadian Small Businesses Impacted by Talk of New NAFTA

Changes in policy coiuld impact US-Canada shipments of export cargo and import cargo in international trade.

Canadian Small Businesses Impacted by Talk of New NAFTA

For many of Canada’s small businesses, the recent meeting between US President Donald Trump and Canadian Prime Minister Justin Trudeau was a nail biter. For months, speculation about the fate of the North American Trade Agreement had been circulating out of Washington, albeit with a much stronger emphasis on neutralizing the trade imbalance between the US and Mexico. The meeting was supposed to offer greater insight on what Canada might expect from a new NAFTA. And according to President Trump we can expect “tweaks.”

That leaves room for plenty more speculation. What’s certain, however, is that any change to NAFTA will have an impact on Canada’s small businesses—an impact that will be as broad and varied as the businesses themselves.

Positive or negative impact will generally be determined by geography and industry. New trade arrangements between Canada, the US, and Mexico could potentially harm manufacturing SMEs in Canada and Mexico while benefitting those in the US, but could affect America’s independent clothing retailers with as much adversity as Mexico’s textile manufacturers.

For many US employees of small and medium-sized businesses that rely on high-volume trade with Mexico, the death of NAFTA could potentially vanquish their jobs as some six million American jobs are dependent on trade with their southern neighbor.

As is often the case with any trade deal, the devil is in the details, and thus far details of what a new trade regime would look like have been scarce and shrouded in politically charged rhetoric directly mostly at Mexico.

However, once those details become available, SMEs will need to move quickly to adapt to whatever the new normal might be. According to the fine print of the agreement, a US withdrawal would require a six-month notice. On the surface, that might seem to be a generous amount of time to adapt (and for some it might be), but for most SMEs it will involve a flurry of activity. For those US and Canadian businesses that flurry of activity might even be a two-stage process – each one equally as disruptive as the other.

According to the agreement, if the US pulls out of NAFTA, trade arrangements with its northern neighbor would revert to the original Canada-US trade agreement signed in 1988. But if the US chooses to pull out of that, as well, it will require another six-month notification, forcing those affected to cope with an interim trade regime before a more permanent trade arrangement can be put in place.

Make no mistake, regardless of geography or industry, this will profoundly upset the business models of SMEs far more than their large-enterprise counterparts who have not only reserves in place to mitigate against disruptions in cash flow, but also redundancies to protect against supply chain interruptions.

For SMEs, the quashing of NAFTA will mean identifying in short order new suppliers, new modes of transporting goods, and possibly entirely new business models and consumer markets. The introduction of new tariffs could price some businesses out of some markets while opening new markets to others. Businesses that deal with chemicals or dangerous goods could find their supply chains stalled with new red tape, as could businesses in industries facing protectionist tariffs (e.g. softwood lumber, auto parts manufacturers, etc.)

What’s perhaps most destabilizing isn’t so much whatever the final outcome might be but the ongoing period of speculation and doubt around trade policy. Such instability tends to stymie businesses’ investment plans and bring down overall economic activity.

On the bright side, most businesses, small or otherwise, have a list of suppliers who support them in their trade activity – from freight operators and customs brokers to lawyers and trade-compliance consultants. While these suppliers perform day-to-day operational functions, entrepreneurs and business managers shouldn’t be afraid to lean on them for counsel on longer-term strategy and/or short-term alternatives to get through tumultuous times.

For small businesses to emerge from this period unscathed, they will need to maintain a strong resolve, as well as an ability to nimbly respond to change. Both are tall orders for enterprises with traditionally razor thin margins and limited cash flow, but it is these characteristics that will ultimately define success in a new world order of trade protectionism.

Stéphan Galarneau is the vice-president of inside sales for North America at Livingston International and has been leading the overall management and performance of Livingston International’s small business sales group in Canada since 2011. His team works exclusively with small and medium enterprises and focuses on international trade advisory services. He has more than 25 years of industry experience.

US and Canadian businesses take different approaches toward free trade agreements for shipments of export cargo and import cargo in international trade.

Trade Winds: A Four-Part Series on Shifting Attitudes Toward Trade Agreements

With so much public debate in the United States about the disparate advantages of trade deals, one might think American companies are struggling to find ways to make use of free trade agreements (FTAs).

Not so. In fact, according to a recent research by Livingston International, Canadian businesses find it much more difficult to enter export markets than their U.S. counterparts.

The research shows 23 percent of Canadian businesses find it hard or very hard to enter the export market, versus only 16 percent of U.S. businesses. Moreover, while Canadian and U.S. businesses tend to make use of FTAs at a relatively equal level, U.S. businesses tend to be more diversified in their use of FTAs.

In fact, three times more U.S. businesses than Canadian businesses use three or more FTAs. Furthermore, use of the North American Free Trade agreement (NAFTA) among Canadian businesses is double that of the U.S. (61 percent versus 31 percent respectively).

Canadian businesses are struggling to get into the export market (particularly the one that lives outside the U.S.) for a variety of reasons despite the fact that Canada’s currency puts them at a competitive advantage in many global markets. Why?

The top three reasons cited by Canadian businesses are: the complexity of international trade regulations (16 percent); an uncertainty as to how to get started in global trade (14 percent); and taxes and tariffs being too high (10 percent). The top two reasons are particularly interesting as Canadian businesses enjoy some of the greatest public and private support mechanisms to engage in international trade.

Canada’s public sector has long provided support to businesses interested in export, most notably Export Development Canada (EDC), which provides counsel on everything from key export markets to currency exchange risk to patents and copyrights. EDC also assists businesses looking to go global with support in financing.

Aside from EDC, the Business Development Bank of Canada (BDC) provides venture capital, financing and advisory services for those business looking to explore the U.S. and global markets.

Beyond these institutions, there are a wealth of private-sector support organizations for enterprises looking to go abroad that can provide insight and counsel on everything from international market analysis to the use and compliance of trade agreements, and the effective development of continental or international supply chains.

These resources – both public and private – will become more critical than ever to Canadian businesses looking to take advantage of the recently signed Comprehensive Economic Trade Agreement or CETA—a historic free trade deal recently signed between Canada and the European Union that removes tariffs on 98 percent of industrial goods and opens up the EU’s 28 nations to business with Canada.

When negotiations for the deal began in earnest seven years ago, the goal for Ottawa was simply to find new market opportunities for Canadian business. However, with protectionist sentiment growing in Canada’s traditional go-to trade base of the United States, the opportunity to penetrate European markets may be more than just gravy for ambitious businesses.

The aforementioned support services will be particularly critical for Canada’s small businesses who, unsurprisingly, tend to have greater challenges entering export markets than their medium or large-enterprise counterparts. In fact, more than a quarter of small businesses (26 percent) say they find entering export markets hard or very hard, compared with only 19 percent of the mid-market and big business.

Those numbers are far less pronounced in the U.S. where only 18 percent and 11 percent of small businesses and medium-to-large businesses respectively are struggling to go global, demonstrating a higher appetite south of the 49th parallel to overcome barriers to trade.

Many business organizations within Canada have already reaped the benefits of global trade and have found value in using the support services available to them. However, many of these are rooted in the country’s traditional export sectors of natural resources and manufacturing, leaving a world of untapped potential for the country’s growing services sector.

As that sector evolves along with new forms of manufacturing and technology-related industries, it will be critical for these budding enterprises to take their skills and ideas to the global marketplace. After all, as U.S. President Barack Obama recently declared during a visit to Ottawa, “The world needs more Canada.”

Stéphan Galarneau is the vice-president of inside sales for North America at Livingston International and has been leading the overall management and performance of Livingston International’s small business sales group in Canada since 2011. His team works exclusively with small and medium enterprises and focuses on international trade advisory services. He has more than 25 years of industry experience.