How should Canadian businesses prepare for a world without NAFTA?

(Canada is increasingly convinced that Trump will pull the US out of NAFTA: Reuters, citing sources)
(Canada is increasingly convinced that Trump will pull the US out of NAFTA: Reuters, citing sources)

With the sixth round of NAFTA renegotiation talks underway in Montreal, many Canadian businesses don’t actually know how to cope in a world without NAFTA.

According to a survey from accounting services firm BDO Canada, only 35 per cent of Canadian business owners felt they were equipped to secure new suppliers and different modes of transportation. Meanwhile, 66 per cent of business owners have not pursued contingency plans in case of NAFTA’s dissolution.

“I wouldn’t necessarily be so pessimistic right off the bat,” says Ashley Ziai, senior policy analyst for national affairs for the Canadian Federation of Independent Businesses [CFIB]. “I am trying to remain hopeful that the agreement will be renegotiated. That being said, I do agree that this [negotiation] round is basically make-or-break and it’s a pivotal round to determine the way forward.”

NAFTA as it stands today has been in place for almost 25 years. If the treaty falls apart, Canadian business owners and corporations will need to prepare for a post-NAFTA world.

A world without NAFTA

According to Dan Ujczo, an international trade and customs lawyer for Dickinson Wright, we’re already seeing the effects of the uncertainty around NAFTA cause economic tightening and negative consequences for companies.

“Major manufacturers, such as auto companies that project their finances on three to five year cycles are already being conservative with their planning, so they’re not going to be purchasing as much from companies down the supply chain. This, in and of itself, will add to a slight contraction in the economy,” says Ujczo who projects that North America will start feeling that contraction in 2018 and into 2019 just based on the lack of decision making happening right now.

Ujczo is also seeing large manufacturers starting to go down the supply chain, and starting to ask questions about where they might be vulnerable were NAFTA to disappear. These are questions like, “Where are you purchasing your goods and services from?” These questions help ensure the record-keeping around what traditionally qualifies under NAFTA is being kept clean. This is a concern for companies because a lot of these suppliers are mom-and-pop shops when you move down the supply chain, and they don’t have a large customs and trade compliance staff — if they have any at all.

“An unintended consequence of that will be there are going to be companies that are unable to answer those surveys and questionnaires. As a result, they’re going to get out of those supplier contracts and you only get one shot at being the supplier of say a Chrysler or a Ford – once you’re out, you’re out,” says Ujczo, adding that the compliance burden on companies will increase, as there is greater scrutiny on what’s really qualifying for NAFTA and what’s not.

Another consequence of no NAFTA has to do with immigration. There are countless engineers, accountants and skilled tradespeople that travel throughout North America for work on NAFTA visas, also known as TN Visa. In the current climate of uncertainty, Ujczo predicts these visas will stop being issued.

“It creates huge staffing challenges,” says Ujczo. “Companies will have to rely on homegrown talent – where we know there’s already a shortage – or those positions will go unfilled.”

The trickle-down effect

Staffing holes can mean fewer choices, lower-quality products and potential safety risks for consumers, while the higher costs for the companies that will come with no free-trade treaty will almost certainly be passed on as well.

“At the end of the day, consumers will be the ones who will get hit because if you do away with NAFTA, beef for example, that is largely coming in duty-free, all of the sudden gets hit with a 25 per cent tariff,” says Ujczo.

Canada, Mexico and the U.S. will all raise their tariffs if the United States withdraws because no country can be seen to be giving another country preferential treatment under the rules of the World Trade Organization, so prices will go up everywhere.

Tariffs will go up to the Most Favoured Nation [MFN] level, which in the U.S. averaged 3.5 per cent and in Canada averaged 4.1 per cent in 2016. That may not seem like much, but with trade volumes of $1 trillion a year, Ujczo assures they will start to add up.

“More importantly, that’s the average. There are trade specific MFN levels, such as 25 per cent in the U.S. on light-duty pick up and most of the trucks used in the U.S. are based in Mexico, so depending on what you’re looking at, the rates could be significantly more,” he says.

Perhaps the most significant issue is that the NAFTA agreement is so embedded in trade and the way North America does business that no one is quite sure what the long-term negative consequences will be if it dissolves.

“It’s that very uncertainty that will really cause companies the most serious economic damage. They can’t plan at that point,” says Ujczo.

How businesses should prepare

Granted, not every business is affected by NAFTA, but for those that are, what should they be doing now in case NAFTA doesn’t survive the current negotiations?

“We’re encouraging our members to be in constant discussion with their suppliers in the U.S. and Mexico and to be speaking to their customers, while thinking about ways to move forward should the negotiations fail,” says Ziai of the CFIB.

Those ways to move forward may include diversifying their suppliers in other markets and relying on agreements such as the Canada-European Union Trade Agreement [CETA] and the new America-free Trans-Pacific Partnership [TPP] for guidance, she says.

The bottom line is, business owners will have to do a lot of homework to figure out where their exposures are.

“Every company needs to be looking at which parts of the NAFTA are vital to their operation because if we get into a withdraw scenario, every one of us that represents companies where NAFTA is critical will be in Washington lobbying to get legislation passed to save those parts of the NAFTA and it may not look like a free-trade agreement, it just may be another statute,” says Ujczo who estimates that only 15 per cent of American companies impacted are doing that right now.

“The major companies are doing it, but for most companies this is something that has only existed in the Twitter-verse and they’ve been more concerned about other domestic U.S. issues, such as tax reform, healthcare and others,” he says.

For its part the CFIB has made their business counsellors available to their members and works very closely with the Canadian Board of Trade and The Canada Border Services Agency to help provide answers to business owners’ questions.

“We will be looking at providing webinars and other resources in the future, especially if things don’t go so well,” says Ziai.

To mitigate possible staffing shortages, Ujczo is recommending that companies renew their NAFTA visas now even if there’s still one to two years left on them, just to buy themselves some time to figure out a staffing strategy should NAFTA be no more.

“While they likely won’t renew or grant new visas once NAFTA dissolves, NAFTA visas are usually three years and what we’ve seen with other visas is that customs will usually honour that original visa, even if the agreement behind it doesn’t exist anymore. So if your employee has a NAFTA visa and they’re in year two when NAFTA goes away, customs will likely let them stay another year,” says Ujczo.

“Don’t wait until the last minute to renew. Renew now while the NAFTA is still in-force and that will get you additional time until it hopefully sorts itself out,” he advises.

Though things look potentially dire now, both Ziai and Ujczo stress that trade within North America isn’t going away, with or without NAFTA, and they are both still hopeful that the agreement can be renegotiated successfully.

“I know that our government is working really hard this week and into the weekend, so I personally am still hopeful that we will see an agreement that works for everyone,” says Ziai.

“As a business, you have to do that contingency planning to be prepared for that worst-case scenario of a NAFTA withdrawal, but be ready to proceed with a new NAFTA as this moves forward,” says Ujczo. “Uncertainty is the worst-case scenario for business, so everyone needs to get prepared one way or the other.”

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