In the wake of U.S. President Donald Trump’s latest trade-related executive order it seems the ability for Canadian companies to continue trading as usual is in question and some may be contemplating setting up shop south of the border.
At his press conference in Wisconsin last week, Trump zeroed in on Canadian dairy producers using anti-NAFTA rhetoric. Now the U.S. Commerce Department has hit softwood lumber imports with duties ranging from three to 25 per cent.
“Canada should brace for a lengthy trade dispute with the U.S. on softwood lumber because of the entrenched positions on both sides of the borders,” says Brenda Swick, lawyer with Dickinson Wright LLP in Toronto.
Swick has represented clients in numerous government contracting disputes. She says “this is a perennial dispute and will eventually be resolved through an agreement though at greater costs for Canada perhaps this time.”
All the uncertainty is extremely “unhelpful” for planning purposes for businesses, and there are a number of areas of great concern to Canadian businesses, says Riyaz Dattu, partner, international trade and investment law at Osler Hoskin & Harcourt LLP.
After the presidential inauguration in January, Dattu said he received calls from clients asking if they needed to move their business into the U.S. to stay competitive. Dattu says the “Buy American” plan adds another layer of complexity for businesses trying to sell into the U.S. market to governments. For example, a component of the Order singles out the steel industry, directing a review of procurement rules favouring U.S. companies to see if they are actually benefiting from the existing “Buy American” provisions.
“Initially we said ‘hold off’ but the evidence is mounting that over the next few years things are going to be in flux. The whole area of government procurement is most contentious and this makes it even more so,” he says.
His phone began ringing more this week with questions on procurement rules and concern on higher levels of trade enforcement. Customs enforcement is also becoming stricter.
“For business looking at what side of the border should they invest with in all the uncertainty things are puling in the direction of the U.S. at this point in time,” he says.
The faster Trump moves, the more uncertain Canadian suppliers are becoming.
“It’s pretty clear we’re not quite at ‘tear up the agreement’ but we’re certainly more than ‘tweak’ right now in his eyes,” says international trade and customs lawyer Dan Ujczo of Dickinson Wright based in Columbus, Ohio.
“Be careful what you ask for is the message here — we wanted them to take a very rational approach but now it’s very data driven and that’s going to be creating evidence for these negotiations and for the U.S to take unilateral action.”
Ujczo says issues such as dairy and lumber are “the last bastion of protectionism” — 20th century trade fights, or in the case of softwood lumber a 19th century trade fight. Last week’s “Buy American, Hire American” edict from Trump has set a chilling tone when it comes to how foreign bidders and suppliers will factor into Trump’s America.
The “Hire American” focuses on guest worker programs, particularly, the H-1B visas for highly skilled workers. Last week’s executive order calls for a multi-agency review for changes to the program.
“Any of those issues around supply management and procurement are areas the administration is going to point to. Anytime Canada says we want access to the U.S. market, we want free trade, the U.S. is going to point to that,” he says.
There are several problematic areas Canadian businesses must consider if they are looking to continue doing business with the U.S. For example, the rules of origin to qualify for tariff free treatment. Dattu says there are “clear signals” those rules are going to change.
“The rules of origin is an area of concern because supply chains have been built up over the last 23 years under NAFTA based on certain content requirements and transformation requirements from components to finished products,” he says. “That was going to be a very problematic issue for many companies built on North American and international supply chains.”
The rules of origin apply for exporting product into the U.S. to get free tariff treatment. That would be the case for non-government as well as government purchases.
“They need to know whether their goods will qualify under the rules of origin and whether they will meet any waivers under free trade agreements with the Buy American provisions,” Dattu says.
As well, there will be tighter procurement rules and greater emphasis on enforcement of trade laws and immigration rules will also become tighter.
Ujczo says the biggest risk to Canadian companies is for those in a supply chain where it’s going to be a U.S. company bidding on the project and they are supplying that customer.
“What you will start seeing is U.S. companies saying ‘We can’t have those Canadian suppliers in our supply chain.’ Canadian companies may have to look at whether it makes sense to set up operations in the U.S. We saw that after the Obama stimulus package — a number of Canadian companies picked up stakes and moved a component of production to the U.S.”
But setting up shop in the U.S. is not necessarily an easy decision for Canadian companies to make with the low loonie. And, by tightening the immigration programs Canadian companies use to go into the U.S. it’s going to make it very difficult.
There are now strong disincentives for a U.S company to use Canadian supplier.
Ujczo says it is “imperative” that the Trudeau government look at the NAFTA renegotiation in a new way.
“Instead of talking about it terms of how much stuff Canadians buy from the United States, or ‘We’re you’re largest export market’ — the message should be that ‘We’re the world’s most integrated trading relationship and so we’re different than any other relationship the U.S. has’,” he says.
Dattu adds that not only does one need to be concerned about the federal government rules but each state has their own rules. Recently Ontario was able to convince New York state not to pull back on the exemption for Ontario on the New York State rules of procurement.
“That was seen as a big win for Ontario, but what [Buy American] does for the federal government may increase incentive for some state level governments to be more protectionist. Many of the infrastructure projects the federal government funds for states such as highways require a certain amount of U.S. content,” he says.