Not the Canada of Yore
Site selectors traditionally have viewed Canada as a “slow and steady” expansion destination given the country’s strong domestic market and proximity to the insatiable consumer appetites in the U.S. The fiscal and monetary belt-tightening that Canada directed throughout the 1990s and early 2000s rendered it the most stable Group of Seven (G-7) country in which to conduct business and allowed the nation to emerge from the Great Recession in a strong position. Additionally, boom periods spurred growth in the oil sands regions of Alberta; technology centers such as Kitchener-Waterloo, Ottawa, and Vancouver; startup cultures in Winnipeg; and green-energy clusters in Ontario. Along the way, Canada maintained its longstanding corporate tax advantage over its southern neighbor with Canada-U.S. tax arbitrage strategies being the “bread and butter” of corporate expansions into Canada.
Nevertheless, recent headwinds have left corporate executives less than enthusiastic over Canada. The various boom periods resulted in busts, with challenging energy circumstances in Alberta, difficulties in keeping technology companies from fleeing to the U.S. to scale up and secure capital, and high energy costs for manufacturers resulting, in part, from shortcomings in green energy programs. Tax reform in the U.S. potentially has tipped the balance, removing one of the largest incentives for expanding into Canada.
However, the march to managed trade in the U.S., and the resulting turmoil for the global economy, has revealed one of Canada’s greatest strengths — namely, Canada’s ability to serve as a platform for global trade into and from North America. Canada has creatively negotiated in a way that maintains preferential access to and from the U.S. market through the new NAFTA, known as the Canada-United States-Mexico Agreement (CUSMA), while expanding trade relationships with Asia through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), with Europe through the Comprehensive and Economic Trade Agreement (CETA), and via various trade agreements with nearly 40 other countries. Indeed, Canada is the only G-7 country with trade agreements with all other G-7 members. These networks provide the rope-bridge for companies seeking to navigate the ever-changing landscapes of tariffs, quotas, subsidies, and export restraints that create chasms for sourcing, pricing, and costs.
An inventory of key provisions in Canada’s trade portfolio reveals that Canada has maintained its traditional access to key markets such as the U.S., while developing a series of innovative tools for next-generation growth. This “maintain-and-gain” approach provides significant opportunities for companies desiring to utilize Canada’s trade cloud to network around the globe.
- CUSMA-Automotive/Advanced Manufacturing Rules of Origin
Canada, the U.S., and Mexico entered into CUSMA in late 2018 and, while ratification faces challenges in the U.S. Congress, there is not any “No New NAFTA” movement in the U.S. comparable to “No Deal” Brexit. In short, companies operating in Canada will have NAFTA or CUSMA throughout the foreseeable future.
Once ratified, CUSMA has the potential to spur manufacturing growth in Canada through new rules of origin in the automotive and the advanced manufacturing sector. Contrary to the rhetoric, large assemblers will not be pulling up stakes in Mexico and returning to Canada (nor the U.S.). However, CUSMA’s new automotive rules of origin — which were largely designed by Canada—do provide strong incentives for original equipment manufacturers (OEs) to source from Canadian suppliers. For example, these rules require nearly 40 percent of the vehicle to be produced with labor earning at least $16.00/hour, which will have the practical effect of creating opportunities for Canadian suppliers throughout the supply and value chains. These rules of origin also provide credits for research and development, which again will provide opportunities for autonomous vehicle and mobility ventures in Canada. Similarly, enhanced rules of origin in other manufacturing verticals, such as paints/coatings, polymers, and chemical, eliminate disadvantages that companies faced in the outdated NAFTA, making Canada a state-of-the-art locale for these sectors.
- CUSMA-Digital Trade
CUSMA also includes the best-in-class digital trade standards that prevent jurisdictions from placing customs duties on digital transactions, prevent data localization (such as that witnessed in France), and address notice and take-down issues. These provisions are critical for technology companies and suppliers to have predictable regulatory environments. Such predictability will foster the further growth of Canada’s thriving artificial intelligence (AI) competitive advantage in areas such as the Greater Toronto Area (GTA) and assist in addressing the scaling/venture capital challenge that has confronted Canada.
- CUSMA-Border Issues
CUSMA’s customs and trade facilitation chapter, aka the “border” chapter, incorporates more than a decade and a half worth of efforts since September 11, 2001 to address Canada-U.S. border management, facilitation, and security. CUSMA enshrines a technology-driven, risk-managed approach to North American trade that will ensure the sustainable and consistent movements of goods between Canada and the U.S. The two governments advanced this process in August 2019 by announcing enhancements to pre-clearance protocols that will provide companies with future opportunities to more predictably move commercial goods throughout North America. The border is no longer a barrier to goods trade in North America and may even be a “plus-up” given security uncertainty in other markets around the globe.
- CUSMA, CETA, CPTPP Services Advantages
A major “miss” in CUSMA is the lack of any tangible provisions regarding services/movement of business professionals. In short, the outdated NAFTA immigration system will continue due to unwillingness in the U.S. to address migration issues in trade discussions. Yet, the United States’ loss is Canada’s gain as Canada has implemented innovative services provisions in CETA and CPTPP that make Canada the most-sought after destination for highly skilled workers. In a global talent economy, Canada is well on its way to becoming the skills hub for the Western Hemisphere.
- Canada’s Trade Cloud
One understated gain for Canada is that the country’s focus on international trade over the past two decades has fostered a level of consistency between trade agreements such as CUSMA, CPTPP, CETA, and others. No other country in world has created a similar cloud of compatible trade agreements where companies can use common terms, forms, and methodologies to connect with customers and clients in North America, Asia, Europe, and other significant markets. Companies need only connect to Canada’s trade cloud to have diversified markets and growth.
The key change in attitude regarding Canada is that these northern latitudes are no longer stable yet saturated markets — Canada is now one of the most dynamic global trade and skills hubs on the planet. And there is more to come. Canada has structured its trade deals to include competition and regulatory cooperation provisions that will permit these agreements to evolve as business needs change. Similarly, Canada is emerging from some of those “busts” scenarios with renewed visions to develop energy and transportation infrastructure that will complement its efforts to establish a trade cloud. Further, there is still work for Canada to do on tax and internal trade barriers that, if resolved, will unleash even more dynamic growth.
Yesterday’s Canada is certainly over your shoulder, so don’t look back for too long. There’s just too much to see in front of you; you can’t go wrong with Canada.