Introduction
It would be a mistake for Canadian businesses to take too much comfort from Trump's declaration that he only wanted to "tweak" U.S. trade relations with Canada. NAFTA is a tripartite deal that has resulted in deep economic integration among the three parties. What happens to one party will have a profound effect on the other two parties. The notion that the U.S. can tweak its relationship with Canada while bulldozing its relationship with Mexico ignores the economic reality of North American integration. Any change – whether it be the Canada/U.S. or Mexico/U.S. relationship will affect all three NAFTA partners. Canadian companies buy goods from Mexico to incorporate into finished products that are sold to the U.S. American and Canadian industry is dependent on access to Mexican inputs in order to remain competitive with imports from China, Korea and Japan. If the Mexican economy crashes because of the Trump administration's policies, both Canada and the U.S. will lose an important market for its goods and services.
American trade policy is unclear, and the future promises only more uncertainty. So what are Canadian business leaders to do? Below are some steps business leaders can take to prepare your business for the future:
1. Put Someone in Charge
This is advice that belongs on the first page of a Management 101 textbook, but it's good advice. If you want your organisation to focus on how changes in trade policy will impact the business, you need to make someone responsible for doing that. So appoint an individual or individuals within the organisation with responsibility for leading the effort to prepare for whatever is to come. The job description would have at least three components: (i) collecting information on what's happening and what is being proposed in trade policy; (ii) understanding how potential U.S. measures might impact your business; and (iii) making concrete proposals to ensure your organisation is prepared.
2. Understand your Supply Chain
As a business grows, senior management spend less time on supply chain issues, delegating them to purchasing and logistics departments. U.S. policy proposals will likely disrupt established supply chains, and senior management needs to focus on what that means.
You need to identify the vulnerabilities in your supply chain and identify alternative sources for your critical inputs. If Mexico is forced out of NAFTA, or if NAFTA rules of origin become more onerous, can you still produce Canadian goods that qualify for preferential treatment in the U.S.? If you are currently using Mexican parts to make finished products you sell in the US, are there alternative parts suppliers and how much will it cost to change suppliers?
3. Explore New Markets to Reduce Dependence on the U.S. Market
Many Canadian companies rely on access to the U.S. market for their very existence, and it's not unusual to see Canadian companies selling over 75% of their production south of the border. In a stable, predictable world that could be a good thing, but in the current trade environment it's called vulnerability, and the only way to reduce that vulnerability is to explore new opportunities and new markets. It's not about reducing sales to the U.S., but putting efforts and resources into finding new markets to reduce your dependence on the U.S. market.
Canadian companies should be looking at the opportunities presented by CETA, Canada's new trade agreement with Europe, or by China's Belt and Road initiative, the largest infrastructure project on the planet. In addition, while the Trump administration may have killed the Trans Pacific Partnership, Canada already has free trade agreements in place with seven of the twelve TPP partners. Not counting NAFTA, Canada has 10 free-trade agreements in force, together, they allow Canadian goods duty-free access to 13 countries. When CETA is provisionally applied, Canadian business will gain duty free access to an additional twenty-eight countries.
4. Identify your Exposure to U.S. Trade Action
The ongoing softwood lumber dispute shows how punishing US trade disputes can be, and trade disputes seem likely to increase under a Trump administration. Canadian businesses can expect more investigations and the imposition of punishing anti-dumping and countervailing duties.
Is your business at risk? If it is, you can take action today to lessen your exposure to any investigation and, if there is an investigation, to lower any eventual duty rates.
5. Identify your interests in any NAFTA renegotiation and make those interests known to Canadian negotiators
The Canadian government is preparing for NAFTA renegotiation by identifying Canada's offensive and defensive interests. Provincial governments, while they won't be at the table as they were with CETA, are doing the same thing on a provincial basis.
Your company should identify its interests in the outcome of any renegotiations - be they offensive or defensive interests - and make them known to Canada's negotiators. Those negotiators are aware of the big issues in any NAFTA renegotiation, be it softwood lumber, dairy, or country of origin labeling, but perhaps your company or industry has a particular NAFTA irritant that it would like to see fixed, or a particular interest that it would like to see protected. Now is the time. If you do not speak up, you obviously want to be heard.
6. Build Coalitions – both in Canada and Across Borders
There's power in numbers, and governments pay more attention to industry groups than to individual companies. In the context of trade negotiations, cross-border industry coalitions are among the most powerful voices. So consider organizing or becoming a part of a coalition to press for your particular interests.
Often, the vehicle for such an effort already exists in the form of an industry association, so that's a good place to start. If it's a provincial association consider joining forces with similar associations in other provinces. If it's a national coalition, is there a way to join forces with associations or industry groups in the U.S. and Mexico?
When industry speaks with a single voice, governments listen.
Conclusion
The next four years will bring challenges for many businesses, but there are many initiatives companies can undertake now to better position themselves in this new reality. Careful and imaginative planning and preparation are key in order to prepare for an unpredictable future.
