Is the current political climate an opportunity for Canadian businesses to look beyond the U.S. and search for other markets?
During a news conference on Oct. 1 to discuss the trade agreement no longer to be known as NAFTA, Prime Minister Justin Trudeau repeatedly stressed its potential benefits to Canadians and especially the middle class.
“We now have a path forward,” said Trudeau about the United States Mexico Canada Agreement. The prime minister was flanked by Foreign Affairs Minister Chrystia Freeland, who played a significant role in the sometimes-fractious negotiations leading up to the agreement, and described it as a win for all Canadians.
The announcement that an agreement had been reached followed weeks of nearly daily coverage by the Canadian media about the negotiations and threats by U.S. President Donald Trump to impose tariffs beyond those already on steel and aluminium. Often, reporters were camped outside the Washington office of the U.S. Trade Representative, waiting for updates from Freeland.
The last time a trade agreement received this level of media coverage in Canada was after the initial free trade agreement with the U.S. was negotiated by the Conservative government of Brian Mulroney.
In a heated exchange during the 1988 federal election debate, Liberal leader John Turner suggested the pact would turn Canada into a “colony” of the U.S. Mulroney scoffed at the claim and that he would agree to any trade treaty that would impact Canadian sovereignty. “You do not have a monopoly on Canadian patriotism,” said Mulroney.
Three decades later, the optics of entering into agreements with other countries to reduce trade barriers does not appear to be controversial anymore in Canada. The agreement with the U.S was followed by NAFTA in 1994 and, since then, many more trade agreements have been signed with other countries or regions. The most recent was the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which Canada signed earlier this year with 10 other countries after the U.S pulled out of the original deal. As well, in answering questions about the USMCA at that news conference, one of the people thanked by Trudeau was Mulroney.
What has fundamentally changed the trade landscape, however, is the Trump presidency. While he also praised the USMCA, Trump claimed the agreement was reached ultimately because of tariffs he imposed and the threat of more trade sanctions. “Without tariffs, we wouldn’t have a deal,” Trump said. Freeland described the goal of trade agreements as something that is supposed to be a “win win” for all countries. For Trump and economic nationalist groups in other democratic countries, it is a zero sum game, at least in the public statements made about trade.
The USMCA is expected to come into force early next year, if it is approved by the legislatures of all three countries. While it has a new name, in reality, much of what is already in NAFTA will be the same, said most analysts both in the U.S. and Canada, after the details were made public. Canada will provide slightly more access to the domestic dairy market than what was agreed to in the CPTPP. But there are protections for the auto industry, cultural exemptions and other provisions that Canada demanded, including a 16-year sunset clause for the agreement, instead of the five years that the U.S. suggested. After six years, the three countries will hold talks to determine whether to extend the USMCA beyond the 16-year period.
The agreement, assuming it is ratified, brings some long-term stability to cross-border trade. The wild card, however, remains the impulsiveness of Trump and his administration.
“There is still a great deal of uncertainty” in the current climate, says Riyaz Dattu, an international trade lawyer and partner in the Toronto office of Osler Hoskin & Harcourt LLP. “There is also a need to be able to react much more quickly.”
That view is shared by Jesse Goldman, a partner at Borden Ladner Gervais LLP in Toronto, who specializes in international trade law and investment. “There are greater impulses to be protectionist. As well, the World Trade Organization has ceased to be an effective arbiter. Uncertainty is the name of the game. Things can turn very quickly,” says Goldman.
“We are in uncharted waters. Not only for industry but for government officials as well,” says Greg Tereposky, an international trade lawyer and founding partner of Tereposky & DeRose LLP in Ottawa.
The unusual environment has even extended to disagreements over factual data. In the negotiations leading up to the agreement, U.S. Trade Representative Robert Lighthizer stated earlier this year that Canada had an US$87-billion trade surplus with his country. That claim was contradicted in data posted online by his own officials. It stated that the goods trade deficit was actually US$17.1 billion and, when services were included as well, the U.S. had an overall surplus of nearly US$8 billion last year.
Despite the conflicts over data and the anti-Canada rhetoric by Trump, the strength of the U.S. economy and its currency has clearly been good for cross-border trade in the past year.
Exports to the U.S. rose by just more than three per cent in July and 15.8 per cent on a year-to-year basis, according to Statistics Canada. The merchandise trade surplus with the U.S. in July was $5.3 billion — the largest monthly total in a decade.
The challenge, says Goldman, is how to be “nimble” in this climate. “Now, more than ever, you need to pay attention regularly to which way the winds are blowing. You have to watch what politicians are saying and manage your government relations.”
According to Tereposky, that means being much more proactive in this area than in the past. “For many years, if not decades, things have been stable on the trade front. Rules were respected. It was not a top-of-shelf issue for in-house counsel. All of that has gone out the door. You can no longer wait to see if you are going to be adversely affected.”
For internal legal departments, that should mean an increase in resources devoted to trade and understanding the rules that govern these issues, says Dattu. “The federal government is well served by its in-house lawyers. But the development of legal talent in this area has been lacking within Canadian businesses. The backgrounds [of in-house counsel] have traditionally been in corporate law, M&A or securities. That is short-sighted. You will always be in a reactive mode.”
“While companies spend considerable time on tax planning, I do not understand why they do not put a fraction of the same effort on international trade planning. The potential impact on companies can run into the millions for failing to ensure compliance with tariff classification rules and rules of origin,” says Dattu.
“Once you understand the [trade] rules, you can put in a mitigation strategy and deal with potential risk issues,” he adds. As well, the frameworks already in place for trade agreements are still going to be the basis for how rules are likely to be interpreted, he says. “It is not as if the whole landscape will be different.” One key aspect that remains unchanged, at the insistence of the Canadian government, is the dispute resolution process known as chapter 19 under NAFTA.
Cyndee Todgham Cherniak, a Toronto-based international trade lawyer, agrees that more legal resources should be devoted internally in this area. “If you are in-house, you are managing the business people. You are expected to have the answers, so you need to be ready to know the questions. Issues can be coming out of the blue.
“You need to have a team that knows how you might be impacted,” says Todgham Cherniak, who founded LexSage, a boutique trade and tax law firm.
The range of issues that must be addressed in this area can be very broad and sometimes unexpected, says Dan Ujczo, who is of counsel and cross-border (Canada-U.S.) practice group chairman at Dickinson Wright LLP based in Columbus, Ohio. “We are all struggling to get some certainty and control over events of which we may have no control. Mobility restrictions remain challenging for a cross-border workforce because trade treaties have not been updated to reflect a very different type of workforce,” he says.
The “temporary entry” system under NAFTA is not going to be substantively amended under the USMCA to reflect a changing workforce, especially in the area of information technology, so that may continue to be an obstacle for some companies.
Cross-border transportation of goods is another challenge. “Trucking is the wild wild west and one of the untold stories,” says Ujczo. “We have a shortage of truckers. Millennials do not want to do it. There are a series of new regulations in the U.S. and a lot of truckers do not want to cross an international border.”
As well, a lot of agreements with transport companies are “done on the fly and don’t get reviewed by legal,” he says. “Transportation providers will go to the highest bidder regardless of a contract. We have had situations where they respond by saying ‘so sue us.’
“Make sure you know what contracts you have in place, not only in transportation but also with suppliers. Look at your own business documents and relationships and see if there is certainty,” says Ujczo. Given the current volatility, trying to lock in prices whenever possible is also a priority, he adds.
The sudden imposition of tariffs by the U.S. earlier this year under national security grounds and the response from Canada has also raised the prospect of force majeure clauses being invoked to escape from contractual obligations. “This issue is starting to be litigated,” says Ujzco.
Another issue related to tariffs that needs to be addressed is in the area of large infrastructure projects, since steel in these projects may move back and forth across the border a few times for finishing, says Tereposky. “How many times are you going to have to pay duties? Ideally, it would only be once,” he says. He agrees that existing contracts with U.S. suppliers should be reviewed. “It is in both parties’ interest, because it is so unpredictable under the Trump administration.”
Added costs incurred by retaliatory trade measures are a possibility that need to be covered in future contractual agreements, says Todgham Cherniak. “Make sure you have a provision related to tariffs, just as you used to have related to fuel surcharges.” If possible, she says, existing contracts should also be amended. “You can’t hope this all goes away. You have to take steps to ensure you are protected and adjust your risk strategy.”
Mitigating your risk also requires increased contact with the Canadian government in case there are future trade sanctions imposed by the U.S., says Tereposky. “You need to be engaged with Canadian officials as soon as possible. There is a new level required that has not existed before.”
Good relationships with all levels of government are vital, agrees Ryan Mills, general counsel and corporate secretary at the Dairy Farmers of Ontario. “These are interesting times. The key thing is you have to remain calm and get your message out,” says Mills.
The dairy sector has been one of the most frequent targets of the Trump rhetoric, with the U.S. president regularly claiming that Canada has been “very unfair” to farmers in Wisconsin. “It is a challenge. You have to respond selectively and take the high road,” Mills notes.
The USMCA agreement grants access to about 3.6 per cent of the Canadian dairy market. After the trade deal was announced however, the head of the Wisconsin Farmers Union said the concession will do little to help its members. The dairy industry there is facing issues of over-supply and the Canadian market is not large enough to address these problems.
For dairy farmers in Canada, the USMCA agreement and other recent trade treaties have cumulatively opened up access to about 18 per cent of the domestic market. “This is death by a thousand cuts,” says Mills.
“It is important to get the right information out there. There is a lot that is anecdotal,” he says. One example is the price of fluid milk, where the data shows that Canada ranks roughly in the middle and the price is lower than in the U.S., Australia and France, for example.
A healthy dairy industry, stresses Millis, is also vital to related industries. “Our message on a go-forward basis is you can’t keep whittling away,” he says.
While the combative nature of the U.S. government under Trump has injected a new level of unpredictability, especially for certain sectors, it still remains far and away the largest trading partner of Canada. The North American trading zone, including Mexico, accounts for more than a quarter of the world’s economy, Trudeau noted after the agreement was reached.
At the same time, is the current political climate an opportunity for Canadian businesses to look beyond the U.S. and search for other markets?
This is something to consider in the area of investment as well as trade, says Goldman. “Canada has many bilateral investment treaties with investor protection.” Ultimately, he says, the goal is to seek “more certainty” in any trading or investment situation, whether in the U.S. or another country.
Edmond Luke, a partner in the Vancouver office of Fasken Martineau DuMoulin LLP, says it is time to consider other trading opportunities. “Should Canada diversify beyond the U.S.? Of course, the answer is yes. I think we are heading into an era where across the Canadian business community we are going to be more purposeful and serious about expanding beyond the U.S., which has been the ‘low-hanging fruit’ in terms of trade,” says Luke, co-leader of the firm’s China group.
“It is not necessary for Canada to see the U.S. and Asia as mutually exclusive such that it is only possible to pursue one at the expense of the other,” he says. “We’ve always had good trade relations with Japan and Korea [a free trade agreement with South Korea came into force in 2015] and there have been recent dialogues with China about a free trade agreement. Obviously, China is the elephant in the room in that the opportunities and benefits for Canada in enhancing trade and investment with Asia will likely be the greatest with China. However, for the most part, we are still quite clumsy and lack business and political savvy in the way we deal with China.
“The pendulum is swinging in opposite ways,” adds Luke. “Traditionally, the Asian market was closed. But they are becoming more open and embracing globalization. Canadian businesses can see that and should be building a strategy.”
Part of any strategy, he says, should include legal departments putting more resources aimed at these markets, most of which are civil law based.
“We would get a lot of value if we increase our capacity and ability to understand these foreign markets. It is hard to engage what we don’t understand,” says Luke. The increasing diversity of the legal profession in Canada is an asset in any strategy aimed at new markets, he says.
“Build your in-house team. Bring in lawyers from different cultures or with a burning interest in countries such as Japan or Korea,” says Luke. “In the long term, you will see the value.” As well, while business with China has until recently been mostly trade based, there are now increased investment opportunities as well, he says.
Another part of the world where Canadian businesses might consider an increased focus is Europe, says Dattu. The Canada-European Union Comprehensive Economic and Trade Agreement came into force in September 2017 and aims to reduce barriers with our second largest trading partner.
“Canadian companies should consider alternate sourcing as a result of CETA,” Dattu says. Here, too, there is a lack of understanding about the new agreement and opportunities to take advantage of reduced duties, he says.
“There has not been any big impact yet, but I hope in the future there will be a move to diversify to the European market. Legal departments should have strategies to adapt to the changing trade rules.”
The current trade environment may continue to cause stress for Canadian businesses and their internal legal departments. However, according to Dattu, there are also some positive aspects. “More businesses in Europe are looking to Canada. It is seen as more of a safe haven, until things are more settled in the U.S.,” he says.
As well, the increased spotlight on trade regulations is a much-needed wake-up call in the longer term. “This may be a silver lining. We have seen a lot of general counsel now saying ‘I better understand these rules.’ Boards of directors are starting to ask questions,” says Dattu.
TRADE: BY THE NUMBERS
75 Percentage of all merchandise trade exported to the U.S. in July 2018
8 Percentage of all merchandise trade exported to the E.U. in July 2018
4 Percentage of all merchandise trade exported to China in July 2018
2 Rank of the United Kingdom in terms of most exports from Canada to other G7 countries
2 Rank of Germany in terms of most imports into Canada from other G7 countries