Canadian construction and design service providers have a lucrative new market to crack at a time when trade specialists advise vendors to try to expand their horizons. The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) isn’t expected to suddenly propel a wave of Canadian firms onto short lists for EU projects, but it does open up opportunities to start building relationships with potential customers.
“We call ourselves a trading country, but we (mostly) trade with one country,” Milos Barutciski, a partner and co-head of international trade with Bennett Jones LLP, told seminar attendees at the recent Buildings Show in Toronto. “With CETA, the EU government procurement market is theoretically open. Before, you were simply disqualified if you were in Canada. Now, you are qualified.”
The prospect of new trade partners, whether through CETA or a future Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), is appealing as the renegotiation of the North American Free Trade Agreement (NAFTA) appears to flounder. Barutciski can be counted with two of the three seminar panellists who predicted NAFTA’s demise.
Many observers of the negotiations thus far speculate that the United States has deliberately tabled contentious demands — including an elevated requirement for U.S. content in automotive exports from Canada and Mexico and a dispute mechanism that would allow the U.S. to challenge almost any cross-border transaction — to goad the other parties and paint them as uncooperative.
“The poison pills set up Canada as a convenient bogeyman,” suggested Omar Khan, vice president, public affairs, with Hill + Knowlton Strategies.
“I think Canada will be the fall guy,” Barutciski concurred.
In contrast, Export Development Canada (EDC) is holding to a more optimistic stance. “We are seeing a growing chorus of voices in the U.S., pro-NAFTA,” reported Todd Evans, EDC’s director, corporate research. “We think NAFTA will be renegotiated, but it’s still not a time for complacency in that regard.”
Breaking an integrated supply chain
The philosophy of NAFTA is more important to its supporters than many of the details of the current agreement. Canadian officials have always said they are open to an update that would be more reflective of 21st century economies.
While the 1994 version is primarily focused on tariffs and the trading of goods, Canadian companies are increasingly focused on a global marketplace for skills and project management acumen. In the construction/infrastructure sector, for example, Evans tallied $3.5 to $4 billion in equipment rentals, construction and engineering services on top of the approximately $18 billion worth of materials and equipment that Canada exports to the U.S. every year.
Overall, services now account for about 20 per cent of Canada’s export portfolio. “That’s why some of these newer trade deals are much more relevant,” he said.
As NAFTA was devised to do, tariffs within North America have dropped to an average of 2.5 per cent, thus giving smaller-scale importers a viable economic option to simply pay them rather than navigate formal NAFTA channels. “A lot of small companies are telling us the paperwork is too onerous and it’s (the tariff) something they can manage,” Evans noted.
Beyond the potential for rising tariffs, NAFTA’s demise would present significant costs and complications for the larger players forced to disentangle what Barutciski characterizes as “an integrated supply chain”. Most trade is in intermediate goods that go into the manufacture of a final product in the importing country, and a large share of Canadian and Mexican goods also go directly to the exporters’ U.S. subsidiaries. “About half of what we sell to the U.S. is inside a company,” Evans explained.
“There is virtually no industry that isn’t going be affected if NAFTA goes down,” Barutciski warned — and he foresees the greatest risk ultimately from ensuing economic damage in the U.S. “The old saying is: when the U.S. gets a sniffle, we get pneumonia.”
Influential U.S. advocates for NAFTA include its automotive and agricultural sectors, a large number of state governments and a perceived majority of Congressional representatives. However, none possess the power to make the deal, while U.S. President Donald Trump can break it.
“Trade agreements are where policy and politics collide like a freight train,” Khan mused. “The President, I don’t think wants a deal.”
If negotiations fail, the broad coalition of Canadian interests currently promoting NAFTA could also fracture fairly quickly. “The Trudeau government will come under intense pressure from the left and the right. I think you will hear a lot of rhetoric,” Khan said.
Cultivating new trade partners
Despite sending nearly 72 per cent of exports just across its border, Canada has actually broadened its trading base somewhat since earlier in the 2000s when 80 per cent of exports were destined for the United States. Nevertheless, Evans reiterated that Canada has largely tied itself to a “slow growth market”.
“Canada is at the bottom of the pack (in the OECD) in terms of export growth,” he said.
Courting new trade partners won’t necessarily be easy or an immediate fix, but the panellists unanimously endorsed the strategy. Khan recalled Canada’s historical efforts to cultivate what was known as the third option or third way. “It’s very hard to do when the largest economy in the world is next door,” he acknowledged.
Now, however, Canada has potential leverage as one of the largest economies among the 11 parties still pursuing the CPTPP, particularly when other potential partners are nervous about getting outmanoeuvred in bilateral agreements with the U.S. and/or China. The forerunner TPP, an initiative of former U.S. President Barack Obama, proposed a 90 per cent reduction in tariffs — a move Barutciski calls “huge” in a region with high trade barriers.
“The Asia allies — Japan, Australia, New Zealand — they want this deal so bad,” Khan submitted. “These are the markets we need to target to enable the third way.”
“If it can be done, Canada will be in there and will have an advantage ahead of the U.S.,” Barutciski agreed.
Given that it took seven years to negotiate CETA, that could still be a long way off. Meanwhile, ratification of CETA really just launches a new leg of the journey for Canadian deal-makers. Barutciski sketched some of the challenges inherent in a trading partner composed of 28 (albeit slated to drop to 27) separate nation states, each with its own governance and business culture.
“They just love to regulate over there,” he cautioned. “You need to think it through on a country-by-country basis, but it’s opening up the opportunity of entering certain markets ahead of your U.S. counterparts.”
Barbara Carss is editor-in-chief of Canadian Property Management.