Trade Winds — A Four-Part Series On Shifting Attitudes Toward Trade Agreements
Part 1: Canadian, U.S. Businesses Passive Toward Trade Deals
This article was originally published on November 28, 2016 in Global Trade Magazine
As the Canadian and U.S. governments move toward ratification of agreements like the Trans-Pacific Partnership (TPP) and the Comprehensive Economic and Trade Agreement (CETA) — deals that have taken years and significant amount of diplomatic capital to negotiate—new research shows many businesses believe such agreements offer them little value.
The research, conducted by Livingston International, reveals businesses across the continent have a strong indifference toward free trade agreements, with approximately four in 10 businesses believing FTAs will have no net benefit or detriment to them and an additional 11 per cent believing the costs outweigh the benefits.
That sentiment is more pronounced in the U.S. than in Canada, and particularly marked among small businesses on both sides of the border.
Perhaps even more startling are data showing businesses currently engaged in trade are not necessarily choosing their target markets based on ease of trade regulation, but rather on what’s most advantageous to their business. In other words, they’re not using free trade agreements in a strategic manner, but rather a passive one.
In fact, businesses are so passive about the potential benefits of trade agreements that as many as one in five North American importers don’t bother to verify that they have received a reduced or eliminated duty on applicable goods.
This demonstrates that many enterprises aren’t seeing the potential for cost savings, nor the opportunity to maximize the advantages FTAs afford them. At least part of the explanation may lie in the ways FTAs are used by businesses across the continent and the value they derive from them.
Rather than integrating FTAs into a comprehensive supply chain that involves importing goods at lower cost via reduced tariffs and then exporting them to global markets, most businesses are focusing primarily on the former.
Asked how they get benefit out of FTAs, businesses universally listed importing inventory at a lower cost as the top benefit. Accessing new foreign markets came a distant second, although a much more distant second in Canada than in the U.S.
Despite being called out as an economic bogeyman by protectionists, high import levels should not be cause for concern. In fact, healthy import activity tends to lower the price of goods for the country doing the importing and in many cases contributes to economic growth and employment for those industries that strategically combine imports with export opportunities.
Unfortunately, those export opportunities are not being leveraged and aren’t even being sought after to the same extent as the import opportunities, which means many businesses aren’t using trade and trade agreements in a manner that will allow them to maximize their business-development potential. There are many causes behind this but for most businesses it boils down to the complexities related to export, including a lack of understanding of the rules and regulations associated with bringing goods into foreign markets and having partners on the ground to facilitate the transport and sale of those goods.
There is cause to feel overwhelmed. In many cases, the regulations associated with bringing foreign goods into a country can be incredibly difficult to navigate, and that becomes even truer when free trade agreements are involved as they are contingent upon meeting very complex rules of origin and FTA compliance.
But the benefits of overcoming these challenges can change the entire nature and growth trajectory of businesses and even industries. Strategic import and export practices aren’t just about profitability for Canadian and U.S. businesses and the diversification of their market bases to better manage shifts in consumer confidence, exchange rates, economic conditions and protectionist sentiment. It’s also about establishing strategic partnerships that can allow these businesses to make themselves an integral part of the international supply chains of larger multinationals, solidifying more consistent and stable business and allowing them to take advantage of the benefits of global trade while mitigating some of the administrative headaches.
It boils down to seeing FTAs and trade in a broader global context, rather than just the context of individual buy-and-sell transactions. Many enterprises in emerging markets have been doing this for some time and it has contributed to a growing middle class and improved industrial competitiveness in these markets.
If Canadian and U.S. businesses are to remain competitive in the long term, they will need to begin by seeing the benefits FTAs offer them and use them strategically to build their practices internationally. Failing to do so may signal to governments that the agreements offer little value and eliminate the incentives to negotiate new and/or better deals, putting all businesses in a more challenging and less competitive position.