First it was the lumber spat. Then came the milk battle. Trade issues with the United States are a hot spot these days.
And now, after U.S. President Trump backed a G7 pledge to fight protectionism, we head into negotiations starting in August for the retooling of the North American Free Trade Agreement (NAFTA). Meanwhile, a new IMF statement warns of major shocks to the Canadian economy that could come from a revised NAFTA.
In the midst of all this talk about trade, those in leadership positions at public and private businesses were asked in a recent survey: What is the top challenge to growth of the Canadian economy? U.S. trade protectionism was the top answer. Some 23% of Canadian chief executives, chief financial officers and chief operating officers cited “protectionist trade sentiments in the United States” as their top economic concern, according to the CPA Canada Business Monitor (Q1 2017).
The Harris Poll conducted the survey from March 30 to April 18, a time when Trump appeared to have softened his position on the North American Free Trade Agreement.
Trump was elected in 2016 with a campaign promise to renegotiate NAFTA, which comprises Canada, the United States and Mexico. Yet in February, when meeting with Prime Minister Trudeau, the U.S. president publicly said he would only “tweak” Canada’s side of the agreement and focus on the “unfair” U.S. commercial relationship with Mexico.
Since the Business Monitor survey ended, however, Trump has boosted tariffs on Canadian lumber shipments and came close to signing an executive order to pull the U.S. out of NAFTA. At the last minute, he reportedly told reporters: “I decided rather than terminating NAFTA, which would be a pretty big, you know, shock to the system, we will renegotiate.” Trump added that if he is “unable to make a fair deal,” he will terminate the trade pact.
Oil and Economies
Second on the list of threats to the Canadian economy, the survey showed, is oil prices, with 17% of respondents saying they’re concerned about this. Tied in third place at 14% were “uncertainty surrounding the Canadian economy” and “the state of the U.S. economy.”
Still, the national economy seems less threatening to executives than it did a year ago: 38% of respondents described themselves as optimistic about the economy, up from 32% in the previous quarter and significantly higher than 22% a year earlier. Another 47% said they are neutral and only15% said they are pessimistic. Despite potential volatility, a cautiously optimistic mood still prevails.
“This quarter’s results reinforce Canada’s underlying economic momentum,” says Joy Thomas, president and CEO of CPA Canada. “Uncertainty remains a constant shadow over the country’s growth prospects because of trade and oil prices but the business leaders are not allowing themselves to be paralyzed by it as demonstrated by the climb in optimism.”
Respondents to the Business Monitor survey appear quite bullish about when it comes to expectations about their own companies:
- 58% are optimistic about the next twelve months, up from 54% in the previous quarter.
- 69% said they’re anticipating revenue growth over the next year.
- 63% reported they expect an increase in profits, up from 57% in the previous quarter.
Canada’s Tax System
The survey also asked if the leaders would welcome a comprehensive review of Canada’s tax system. There was overwhelming support for the idea. More than 7 in 10 (72%) agreed that such a review is required. Of the responses, when asked what a review could accomplish:
- 89% said it would keep Canada’s “personal and corporate tax rates competitive with other advanced economies.”
- 88% said it would “reduce complexity, while maintaining a fair and efficient tax system.”
- 86% said it would “modernize the tax system in line with current business and economic realities” and attract investment.
- 84% expected it would “reduce administrative costs for business and government.”
- 72% said it would “keep the tax base broad, with fewer tax preferences.”
- 71% said it would “reduce the possibility of unacceptable tax planning.”
- 68% said it would “increase compliance by taxpayers.”
IMF Issues Statement about Canada
Meanwhile, the International Monetary Fund (IMF), in its latest report on the state of the Canadian economy, noted that the imposition by the U.S. of higher tariffs or new non-tariff barriers under a revised NAFTA “would undercut growth prospects in Canada, leading to a permanent reduction in investment and consumption.” It added that if the U.S. administration pushes ahead with its plans to cut the U.S. corporate tax rate, Canada may become “less attractive as an investment destination.”
The IMF explained: “While the global economy has improved with stronger manufacturing activity, the renegotiation of NAFTA, U.S. policies on tax reform and climate change, and the timing and form of the U.K.’s withdrawal from the EU could tilt policies toward protectionism and economic fragmentation. This would have significant consequences for Canada, an economy that is highly reliant on trade and cross border flows.”
Regarding the Canadian tax system, the IMF said: “A more simple and efficient tax system is important to encourage greater participation in the labor market, and promote investment and innovation, so that Canada’s tax competitiveness will be preserved with the rest of the world.”
The IMF also warned that the property transfer taxes on purchases by foreign residents introduced by the British Columbia and Ontario governments target capital flows and discriminate against non-resident buyers. It said the provinces should replace these measures, with possible alternatives including “a combination of prudential and tax-based measures that discourage speculative activity without discriminating between residents and non-residents.”
Four Tips for Global-Thinking Businesses
If you’re among those who see the winds of potential U.S. trade protectionism as a threat, but you’re still considering expanding beyond Canada, here are four tips that may help you:
1. Decide if your business is ready. Some products sell well in foreign markets, but others aren’t so welcome. There are cultural differences, so conduct market research very carefully. Understanding supply and demand for your product or service can help you forecast potential sales and decide whether you can reach a reasonable profit margin.
2. Plan a global strategy. For some companies, expanding globally is as simple as setting up an e-commerce website and marketing to customers in a target area. Others may require an overseas branch. Either way, you need a detailed plan that includes a thorough risk assessment. Working with established logistics partners that have experience in your markets can help you establish a clear strategy.
It’s also important to ensure your business is equipped to handle the demands of international trading. Consider starting in just one or two markets that offer low risks and high potential. Overexpansion could derail your international ambitions.
3. Know the laws. You must follow local regulations governing the import and export of goods. It’s simple enough to ship goods, but the laws can be complex and violating them can be costly. Rules governing foreign ownership of assets and taxation can be particularly high hurdles.
4. Play the long game. Your company’s senior management should be committed to any overseas move, including functions in human resources, operations and finance — then be prepared to wait. It’s not uncommon for companies in a foreign market to work with negative cash flow for up to five years, if not more. Be ready to sustain operations if they’re losing money and possibly put up even more money for unpredicted challenges and potentially more complex bureaucracies. And don’t underestimate the effect of currency fluctuations on profit.
Consult with your tax and other advisors. They can help you sort out a global plan as well as understand the laws and taxes in the countries where you may want to expand.