Global horizons for Canadian exporters are expanding. The new trade agreement between Canada and the EU is now in force, and Canadian companies are planning to expand existing exports to Europe and take advantage of cheaper European imports due to tariff reductions, according to the semi-annual forecast from Export Development Canada (EDC). There are also future opportunities in the China market, with exploratory discussions under way between the two countries on a possible bilateral trade negotiation.
Looming over these new options, though, is the uncertainty created by the North American Free Trade Agreement (Nafta) negotiations, which are still ongoing and still have no clear path to resolution. Regardless of how the trade pact itself shakes out, this uncertainty is causing significant pain among Canadian companies, with many telling the EDC that they plan to move some of their operations to the US because of it.
Companies are not necessarily panicking, said Peter Hall, chief economist of the EDC. But “the ongoing Nafta renegotiation [is] having a negative impact on their Canadian operations and they already are or plan to implement strategies to mitigate this”.
Specifically one-quarter of Canadian companies told EDC they are contemplating moving their operations inside the US to avoid potential border disruptions; seeking to diversify their operations away from the US market; and/or taking a more conservative 'wait-and-see approach' by doing nothing, or delaying investment or hiring.
The deadline for Nafta talks, initially set for the end of 2017, has been extended to March 31, 2018. It is doubtful it will be extended again because of the Mexican presidential elections. These are scheduled for July 1 and Mexican law does not allow the president to strike major agreements in the run up to the poll.
Canadian prime minister Justin Trudeau has made clear the country is not going to accept “any old deal”. At a town hall event in February, Mr Trudeau said: “Canada is willing to walk away from Nafta if the US proposes a bad deal. We won’t be pushed around.”
As for US president Donald Trump, he has said (or tweeted) on numerous occasions that he is willing to terminate Nafta if he does not like the terms. Indeed, it is speculated that he might terminate the trade agreement no matter what has been negotiated, in the hopes of bringing Mexico and Canada back to the negotiating table for a better deal.
However these events unfold, clearly Canadian companies will continue to invest in the US and such flows may well become stronger if Nafta is rescinded. And even if there is not a marked increase in Canadian FDI into the US, Canada’s investment in its southern neighbour is already approaching $370bn.
This is for a variety of reasons, not just because of Nafta. For example, Ag Growth International, a Winnipeg-based company with more than $500m in annual sales, scooped up two US companies, CMC Industrial Electronics and Junge Control, in January to round out its product portfolio and expand its market reach.
Likewise, US companies continue to welcome this investment. “Over the past few years, it became apparent we needed to expand our team quickly since we are now covering the entire country and will eventually expand internationally,” said Dave Junge, co-owner of Junge Control, when the acquisition was announced.