Looking ahead to the possible impact of NAFTA, Canadian companies are certain of at least one thing—the sun will rise in the east and set in the west. That’s why many are adopting the Boy Scout motto of “be prepared” for just about anything.
In the wake of ongoing NAFTA renegotiations to review the 23-year-old agreement, coupled with slower than expected policy decisions out of Washington, D.C., some are starting to view our largest trading partner as an increasingly risky market for Canadian companies.
That was reinforced by EDC’s Top 10 Risks For Canadian Companies Abroad released earlier this year. The top two global risks identified were U.S. based and deal with an increasing sense of protectionism and the inability for the U.S. to pass domestic legislation.
Mitigating these risks and planning for the impact of a new NAFTA are becoming part of the daily operations for many companies successfully conducting business south of the border.
“The risks and threats (of doing business in the U.S.) have been elevated and aren’t going away,” says Cogent Power President Ron Harper. “But my advice for Canadian companies is plan ahead.”
Harper has first-hand knowledge about planning. The U.S. accounts for 60 per cent of overall sales for the Burlington, Ontario-based manufacturer of electrical steel components. Aside from the ongoing uncertainty surrounding the impact of NAFTA 2.0 as well as Buy American requirements, the company is facing a new challenge, often referred to as the U.S. Department of Commerce 232 investigation.” Launched in April to determine if the import of steel products presents a threat to national security, it could possibly lead to new quotas or tariffs on steel imports.
The steel industry is highly integrated between Canada and the U.S., and the issue is highly politicized. A final decision had been expected in late June. In late August, 25 senior U.S. steel company executives penned a letter to President Trump saying that the industry was suffering and requested the President to employ his “American First” vision.
“The need for action is urgent. Since the 232 investigation was announced in April, imports have continued to surge,” states the letter.
While the increased risks may not be impacting Cogent’s bottom line yet, it’s definitely consuming more of Harper’s time. He’s taken on the role of chief advocate for his American customers and is working with Canadian officials on both sides of the border to find a positive resolution.
“I have a new second job which is staying on top of NAFTA negotiations, the 232 investigation and educating our U.S. customers on the latest developments,” he says. “That’s part of our new value proposition to our customers.”
A positive sign for Cogent is a growing sentiment by many U.S. companies to exclude specialty metals such as grain-oriented electrical steels (GOES) from its Section 232 investigation. In fact, the company was the only one mentioned during public testimony. Jack Roberts, CEO of the U.S.-based Power Partners, said that not all specialty grades of steel that go into GOES products can be sourced in the U.S. and asked that North American Free Trade Agreement members—specifically Canada—be exempt from 232 in order to protect its long-term supplier, Cogent.
“Companies are unsure about the future,” Harper says. “For us, it’s not like we would possibly lose 60 per cent of our business, but there’s a strong possibility that it could create a completely different supply chain and one that may not provide the best value for our American customers.”
“Companies need to work with and educate their customers,” he says. “You have to think about possible future scenarios and develop contingency plans for it.”
Ryan Wicklum, Supply Chain Manager at Kitchener, Ontario’s Clearpath wholeheartedly agrees.
“You need to set yourself up so you are not relying on Plan A,” he says. “You must have risk mitigation strategies and Plans B and C.”
The U.S. market accounts for 90 per cent of the robotics manufacturer’s overall sales. Like Cogent, the increasing risk has not impacted the company’s bottom line yet, but it is causing challenges, not to mention extra work.
Wicklum points out that politicians of all political stripes on both sides of the border have stated they’ve wanted to review NAFTA at one time or another and the business community viewed this as posturing. Now, they are taking NAFTA negotiations more seriously.
“In terms of trade, Canadian companies want two things—certainty and consistency. But the only certain thing right now is the uncertainty.”
Riding this NAFTA roller coaster makes it difficult to plan ahead.
“It’s difficult, because it seems like things are constantly changing,” Wicklum adds. “My challenge is to figure out what percentage of my time and my resources should be dedicated to developing contingency plans.”
Wicklum remains hopeful that a new agreement will improve trade flows, not hinder them.
“Renegotiation of NAFTA will bring about a new set of challenges for us and for other Canadian manufacturers,” he says. “Solutions for us as high-tech manufacturers would be rooted in less red tape, easier cross-border access for business travelers and service workers. Because we are an extremely integrated industry, we require the ability to ship parts back and forth across the border without burden, so maybe there’s a symbiotic balance to be found in the negotiations.”
While no one can predict the impact of NAFTA renegotiations on supply chains and trade patterns in the future as a result of the increasing risks in the U.S., it’s clear that failure to plan is a plan that will fail.
“Because a lot of the issues are so political, you can’t predict what the final outcome will be,” says Harper. “But my advice is to do your best to develop contingency plans and work with and educate your customers.”
Despite the numerous challenges, the changes may present new opportunities as well.
“For our company, something is going to happen. But we don’t know what that something is or when. Time will tell,” Harper adds. “The outcome could completely turn existing supply chains upside down or it could create tremendous opportunity. The most successful businesses are the ones that are able to find opportunities when others see nothing but adversity. That’s the approach we are now taking.”
Danny Hanson, Vice President of Sustainability at Louisbourg Seafood in Cape Breton, says if you take an historical view, Canadian companies shouldn’t worry too much.
“NAFTA has been in effect for 23 years and we had a Canada-U.S. agreement before that. Uncertainty in the market is not desirable, it does not mean the end of the world,” he says. “Canada is the largest trading partner in 35 states and that employs millions of people in the US. That alone will hold us all together.
