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‘AFTA’ NAFTA: Expand your reach beyond North America

You can compete and win despite global trade disruptions.


There’s demand for Canadian products beyond North America.
PHOTO: ADOBE STOCK

Many manufacturing exporters drew a sigh of relief when the new NAFTA agreement was signed last December, but the punitive steel and aluminium tariffs remain a concern. In addition, China and the US are engaging in trade war sabre rattling, while Brexit woes in the UK are also causing uncertainty on the trade front. And 65% of companies surveyed for the PLANT Manufacturers’ Outlook 2019 study are very concerned about US protectionism.

Tariffs are the weapon of choice in a trade war. With tariffs come rising prices. “Some prices can be passed along to the customer but that interferes with a company’s competitiveness,” says Shawn Casemore, president of the Excellence in Manufacturing Consortium (EMC), based in Owen Sound, Ont. Of particular concern is the 25% steel and 10% aluminium tariffs slapped on exports to the US and the subsequent retaliatory tariffs introduced by the Canadian government in October.

He said some of EMC’s 13,000 individual members have found ways to mitigate the impact of tariffs by applying for reimbursement from the federal government. “But it has still been a very difficult time for our members to function. Regulatory changes and tariffs can erode profits,” Casemore says.

“Uncertainty regarding tariffs makes it difficult to plan. The price of steel – even sourced in Canada – has gone up because of foreign competition. Some Canadian mills are slapping on a 20% surcharge just because they can,” he says EMC’s members are telling him.

Some companies can pass those costs along but others can’t. It’s also putting a strain on sourcing quality steel.

“The longer it [the tariff situation] goes, the worse it will get,” Casemore says.

“What can you do about it as an organization? If your product line relies on it, you can’t pass along [tariff costs] anymore and your profit line is eroding to the extent that you can’t invest in the future, then how long can you sustain it?”

Getting started

What’s a manufacturer to do in a scenario where costs are escalating and competition is heating up?

Look beyond our borders. That is one suggestion many are considering, Casemore notes. Help from the federal Trade Commission and the Department of Global Affairs is available to help manufacturers get started. There are programs offered by Business Development Canada (BDC) and Export Development Canada (EDC). “All three organizations play a valuable role helping manufacturers identify and get into – despite of themselves – new markets.”

Global Affairs offers expertise identifying markets for products and helps make the connections within those markets to get manufacturers going.

Casemore suggests interested manufacturers from across Canada check out EMC’s free Magnet Export Business Portal as a first step (www.emccanada.org/magnet-export). They’ll find information related to support programs, funding and resources, including opportunities and ways to overcome trade barriers in different countries.

Provincial governments can also help. Ontario Exporter of the Year, Diego Lai told PLANT his company, Laipac Technology Inc., gained significant market intelligence attending trade shows in South America and elsewhere with the Ontario government’s trade commission. An exporter to 100 countries, Lai is now accustomed to the diligence required to keep up with potential trade barriers. He mentioned his recent decision to bring some of his manufacturing back to Canada from China was in part spurred by the threat of new tariffs.

Peter Hall, EDC’s vice-president and chief economist, says the organization is entrusted by the Canadian government to help companies expand and succeed in global markets in the world, “not just in that market to the south of us.”

In his consultations with manufacturers across Canada, Hall says their top concerns include the new NAFTA deal, now called (in Canada) the Canada-US-Mexico trade deal or CUSMA (USMCA in the US). Will Congress hold up its passage?

“Second, they are concerned of all protectionism in general,” Hall says, citing the China-US trade spat, which has seen the introduction of 25% tariffs on goods imported into the US. “Exporters are looking at that as a huge potential disruptor. Brexit was swamped in the news at the time. But probably a bigger concern now.”

The third concern is steel and aluminium tariffs. “There is a tremendous amount of angst that they were not rescinded by the Nov. 30 (CUSMA) signing.”

Recession is another concern, he says. “Some are asking, ‘Are we going off a cliff?’ The stock market stoked fears in December when it fell to historic lows.” Trouble sourcing labour let alone skilled labour, remains a problem, too.

But the sky isn’t falling.

“CUSMA negotiation process actually gives us a lot of confidence that this is not about permanently disrupting supply chains. A lot of incendiary stuff was being said about the existing NAFTA deal. It made it look like this was over and there was going to be a radical change that would rewrite rules,” Hall says.

“But we actually have a modernized, upgraded deal that borrows from TPP [Trans Pacific Partnership]. It addresses trade and services, intellectual property, agricultural barriers. It addresses industries that didn’t even exist when NAFTA was originally put forward.”

There is an irritant that steel and aluminium tariffs still exist. But he says most will benefit from the new negotiated deal. “Globalization hasn’t been weakened. It’s actually been strengthened by CUSMA.”

He said the noise between the US and China is “sabre rattling” between these major super powers. He expects the two to come to the table and negotiate a trade deal within the year because “they each have a very high incentive to resolve the situation and to do that as quickly as they can.”

Such news would be welcomed by Canadian manufacturers in China who are wondering how long they can hang on in the frenzied current economic situation, he adds.

Mathew Wilson, senior vice-president, policy and government relations for Canadian Manufacturers & Exporters (CME), notes the “US is the most important trade partner we have. Name some of the 50 or so trade agreements we have with other countries in the world. None are as important as the one we have with the US.”

Manufactured goods account for 33% directly or indirectly of Canada’s total economic activity, accounting for 66% of all Canada’s exports. Seventy-five per cent of Canada’s exports are to the US. In 2017, Canada had both record exports and record manufactured goods exports. The US “can’t be replaced with another market anywhere else in the world,” Wilson says.

Trade deficits

Yet Canada’s global trade deficit reached a record $136 billion in 2017. According to CME’s report, Stalled Trade: Gearing up Canadian exports, Canada’s market share of exports decreased from 4.3% in 2000 to 2.4% in 2017. When China joined the World Trade Organization in 2001, it’s global exports were US$266 billion, roughly equal to Canada’s, which were $260 billion. By 2017, China’s global exports had grown to $2.6 trillion – yes, that’s trillion – compared to Canada’s $421 billion.

“Frankly, the problem we have regarding exports is that not enough Canadian manufacturers export. That’s the part of the equation often neglected,” Wilson says.

The Manufacturers’ Outlook 2019 study revealed that companies continue to harvest most of their sales in Canada (67%) and the US (23%). The remaining 10% of exports is divided among other countries. What’s holding them back from exporting to other countries? Competition is cited by 33%, followed by transportation and logistics issues (28%) and trade barriers (26%).

Despite the fact manufacturing employs one in four Canadian workers (1.7 million jobs), most manufacturing companies are small, of which 37% have fewer than 24 employees, according to the Outlook study.

Outside of the tech sector, only a small percentage of traditional manufacturing SMEs export – between 2% and 28% for most countries, according to CME reports. “Small is fine, but it also means they have limited resources,” Wilson remarked. While many of these firms are experts in manufacturing, they might lack the business development expertise required to tackle exporting. They just might not have the time to devote to identifying new markets for their products.

“We need to get the government to give them more internal resources to bring in third-party resources,” Wilson says. He cites EDC and notes the “Global Affairs trade commissioner is a great service, but it’s difficult for small companies to navigate.”

Most manufacturers are currently operating at 84% capacity – with 80% being full capacity – Wilson points out. To increase production for export requires investment.

“If they’re making 10% return, they might be considered fairly profitable. They might be exporting to the US. But it doesn’t make sense to look at exporting to China because they might have to double the size of the company. In that case they might decide not to expand or grow into foreign markets. There’s too much risk.”

Even considering developing new products for the same markets is risky, “capacity still plays an issue,” Wilson says. But a government export tax credit could lower the burden for exporters. “It could encourage them.”

There are opportunities out there. Record exports in 2017 indicate there’s a demand for Canadian products and markets for them. Manufacturers would do well to get help identifying those opportunities and the best ways to tap into them.

Managing your export risk

Mitchell Osak, managing director of strategic advisory services at Grant Thornton LLP, an accounting, tax and advisory firm, advises manufacturers they can proactively mitigate risks in a number of ways. Osak offered the following tips in PLANT (July-August 2019):

l. Closely monitor the situation, be mindful of changes and prudently adjust inventory, headcount and decisions accordingly.
2. Diversify export and domestic markets.
3. Increase Canadian content. This could reduce the impact of higher US pricing and possibly reduce supply chain complexity.
4. Leverage the right financial management strategies, such as hedging strategies or strictly buying inputs and selling wares in US funds.

Grow your exports

In its report Stalled Trade: Gearing up Canadian exports, Canadian Manufacturers & Exporters makes several recommendations to grow manufacturing exports:

1. Focus on trade with the US.
2. Leverage the North American supply chain to boost Canadian manufacturers’ competitive position.
3. Implement tax reform that focuses on investment in capacity, productivity and exports. For example, lower the tax rate on profits generated from
4. Create government and industry trade councils to help advise manufacturers seeking to export.
5. Leverage Canada’s natural strengths. Establish a concierge service led by the private sector ad supported by government to help SMEs scale up.

Kim Laudrum is a Toronto-based business writer and regular contributor to PLANT. E-mail klaudrum@rogers.com.

This article was featured in the January-February 2019 issue of PLANT Magazine.

 

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