By Carlo Dade
Published in the Edmonton Journal, The Province
February 23, 2018
Business needs to prepare for a potential U.S. withdrawal from the North American Trade Agreement (NAFTA) – that much is obvious. But just what individual businesses should do hasn’t always been clear, particularly for smaller or family-owned companies that don’t have the resources to find their best “Plan B” for trade.
Recently, Prime Minister Justin Trudeau announced that though he was optimistic about NAFTA’s future, the government still has its own “Plan C, D, E and F” ready should the U.S. withdraw. Months earlier, Alberta Trade Minister Deron Bilous said Alberta had a strategy “so we’re not caught flat-footed” should the mercurial President Donald Trump suddenly pull the plug on the trilateral trade deal.
If governments have begun to speak publicly on their own contingency plans, then what should business do?
First, businesses need to understand the different potential withdrawal scenarios and think through how each will impact the way they buy and sell with the U.S. and Mexico. As the Canada West Foundation explains in The ‘Just in Case’ Plan: How western Canadian small businesses can prepare for the potential end of NAFTA, there are four likely scenarios.
First, Trump may announce a withdrawal to simply use the six-month notice period to try and ramp up pressure on Canada and Mexico. Second, the U.S. administration may withdraw and the U.S.-Canada Free Trade Agreement, which was suspended but not terminated after NAFTA, could be resurrected. Third, the U.S. may withdraw and World Trade Organization Most-Favoured Nation (WTO MFN) tariffs kick in. These are the tariffs that essentially govern all trade around the globe where two countries do not have a bilateral trade deal.
And finally, the Trump administration could try to impose rates higher than WTO tariffs. According to our analysis, of these the scenarios, the most likely should the U.S. leave NAFTA is that WTO MFN tariffs come into force.
Armed with this information, businesses can start to plan.
For more than 20 years – or almost an entire generation – under NAFTA, tariffs for almost everything we trade with the U.S. have been zero. Under the WTO tariff structure, that would change. For example, under NAFTA, a specialty food producer that sells jam to the U.S. has a zero tariff on its exports. Under the WTO MFN rates, not only would the producer now face a tariff on its wares, but that rate would range from 2.2 per cent for strawberry jam to 4.5 per cent for cherry jam.
Under WTO rules, Canada would also have to start charging tariffs on items businesses import from the U.S. – or in the specialty food producer’s case, jars or similar products imported from the U.S. Meanwhile, there are also other measures to improve trade between Canada and the U.S. that exist apart from NAFTA – there is no reason these would not continue even if the trade deal were no longer in place. All of this must now factor into the owner’s business plan.
It is critical for businesses to take the time now, in a period of relative calm, to run the tariff numbers for goods they import and export with the U.S. This can be done via online tools provided by the government of Canada and the WTO, or by hiring a customs broker.
Running the tariff numbers may also turn up opportunities to save money by looking at inputs or selling product to markets where Canada has new trade agreements, like the Canada-European Union Comprehensive and Economic Trade Agreement. Finally, with tariff information in hand, businesses can have a conversation with their U.S. suppliers and customers, about how they would – or would not be – affected by trade without NAFTA.
If the U.S. walks away from NAFTA, the only certainty is that there will be legal and political uncertainty – the ensuing chaos would be a terrible time for businesses to talk to their U.S. clients about their game plan. Instead, businesses must use the time now, not to panic, but to prepare and arm themselves with information – and potentially new opportunities, regardless of the outcome of NAFTA talks.
Carlo Dade is the director of the Trade & Investment Centre at the Canada West Foundation