The Trump effect: what’s next for the Canadian economy? (Part 4)

How the new administration could affect your business

Is NAFTA Next?

By: David Hogan and Andre Oliveira

Last week, Donald Trump was sworn into office as President of the United States of America. Throughout his campaign, Trump promised to protect American jobs and the U.S. market from foreign outsourcing and exporters. His proposed measures have included U.S. withdrawal from, or renegotiation of, the North American free-trade agreement (NAFTA); tariff increases for goods manufactured outside of the U.S.; and strengthening the Buy American Act.

In the days following the inauguration, what do we know about his promises and what are the potential implications for Canadian businesses?

Here’s what’s being said: 

  • “A renegotiation of NAFTA, as demanded by Mr. Trump, could disrupt continental supply chains and directly affect the nearly 80 per cent of Canadian exports that head to the United States or Mexico” – The Globe and Mail, November, 2016
  • Trump has promoted the idea of imposing a 35% tariff on goods entering the U.S. from American-owned manufacturers. The purpose of that tariff would be “to prevent American companies from moving operations to Mexico and elsewhere to take advantage of lower wages. But would it also apply to goods entering the U.S. from American-owned companies with operations in Canada?” The Globe and Mail, January, 2017
  • Donald Trump has made clear he wants buy-American rules in the massive infrastructure program he’s planning, launching an ardent defence of domestic-purchase requirements that can cause tensions with other countries.” The Star, December, 2016

The Richter take:

A renegotiation of NAFTA would have significant implications affecting many industries, most notably the livestock and lumber industries, as well as professional services.

The potential withdrawal from NAFTA has created considerable uncertainty for Canadians living and working in the U.S. in the professional services sector. Under NAFTA, Canadians are eligible to receive a special visa to work for an American company in the U.S.[1] Additionally, the free-movement of financial-sector personnel allowable under NAFTA – which has led to substantial foreign expansion for Canadian professional service businesses – is equally at risk upon a U.S. withdrawal from, or redrafting of NAFTA.[2] Canadian individuals and businesses should carefully evaluate these risks in making employment and expansion decisions, while monitoring the developments.

A recent trade dispute between Canada and the U.S. involved the country-of-origin law with respect to U.S. meat products. The law required foreign beef and pork to be labelled detailing its origin, including where the livestock was born, raised and slaughtered. Sharing Canada’s view that the rules are unfairly onerous and costly, last year the World Trade Organization (WTO) called for the removal of these rules. With Trump’s election and renegotiation of NAFTA, the rules of origin may very well be reinstated, and Canadian livestock exporters should be prepared for another time-consuming and costly appeal to the WTO.[3]

U.S. forestry companies have long called for the U.S. to limit Canadian timber imports, alleging that the Canadian provinces unfairly subsidize the timber industry. Including softwood lumber in a renegotiated NAFTA would likely set a quota for Canadian timber imports, and such a limitation on imports would have a significant impact on the Canadian forestry market. What’s crucial is for these Canadian businesses to diversify their trading relationships – not only for the industry, but for the 230,000 Canadians it employs.[4]

The fully-integrated nature of the North American automobile manufacturing sector may also be on shaky ground in the coming months following Trump’s tweet of the intended imposition of a 35% tariff on goods entering the U.S. from American-owned manufacturers. At this time it is only speculation whether the tariff would apply to U.S. companies operating in Canada, and just what the impact on the Canadian economy might be.[5]

Lastly, Trump proposes to strengthen the Buy American Act, which requires U.S. businesses to favor U.S.-made products, and U.S. companies when awarding government procurement contracts. The law contains many exemptions and exceptions, i.e. when certain goods are not manufactured in the U.S., do not meet quality standards, cannot be supplied in a timely fashion, or are priced unreasonably. It’s been speculated that Trump plans to address these exemptions and eliminate loopholes. However, other exemptions in the act exist due to free-trade deals with Canada, the European Union, Japan, and other countries. Strengthening the rules to exclude these countries from the U.S. government contract bidding process would create international tension and could possibly result in retaliation, whereby major U.S. bidders such as General Electric, Caterpillar and Microsoft would be excluded from foreign governments’ bidding processes.[6]

Given the inherent uncertainty surrounding Trump’s policy proposals, Canadian businesses and individuals must closely monitor all developments. Check back here for context on news updates and the possible implications on your business as details emerge following the inauguration.

[1] http://www.immigration.ca/trumps-nafta-threat-canadians-u-s-worried/

[2] http://www.theglobeandmail.com/report-on-business/rob-commentary/what-would-canada-us-trade-relations-look-like-without-nafta/article32947565/

[3] http://www.cbc.ca/news/canada/calgary/nafta-country-of-origin-labelling-cattle-producers-1.3854624

[4] https://beta.theglobeandmail.com/news/politics/canadian-businesses-seek-clarity-on-trumps-trade-policies/article32869000/?ref=http://www.theglobeandmail.com&service=mobile

[5] https://beta.theglobeandmail.com/news/world/us-politics/canada-could-end-up-caught-in-the-crossfire-of-a-trump-trade-war/article33479820/

[6] http://www.marketwatch.com/story/trump-vows-us-will-buy-american-but-the-promise-wont-be-easy-to-keep-2016-12-29


Stay tuned for new posts in our The Trump Effect series. Missed a post? Read on here:

Post 1: Insights: The US Corporate Tax Code
Post 2: Should we really expect an influx of U.S. citizens in Canada?
Post 3: What does the future of TPP mean for your business?
Post 4: Is NAFTA next?
Post 5: How the new administration could affect the tech sector
Post 6: Cybersecurity: changes on the horizon

Register to our publications

About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.

Expert Showcase