By Cora Di Pietro, Global Trade Consulting
There’s been an unusual amount of chatter about trade and trade agreements lately. That’s not surprising considering the prominence of trade debate in the recent U.S. presidential election campaigns. But if changes proposed to the North America Free Trade Agreement (NAFTA) by the incoming U.S. administration come to fruition, they’ll have a tremendous impact on the trade relationship between Canada and the U.S. and dramatically affect bilateral supply chains. They’re also likely to accelerate Canadian firms’ already growing level of participation in global value chains and internationally integrated trade.
A globally active Canada
While Canada has often been called out for putting too many eggs in the U.S. export basket, the truth is that Canadian businesses have been more global in their outlook and activity than many might realize. According to research conducted by Export Development Canada, Canadian businesses have been making fruitful gains in integrated global trade for quite some time.
As the study noted, much of this integration involves the establishment of overseas affiliates that have helped Canadian-based firms capitalize on steadily rising demand in emerging markets, bolstering revenue through activity in primarily services-based functions.
While it is true that production output among these affiliates has seen prolonged declines since the financial crisis, non-production activity in functions such as sales and marketing, logistics and accounting (among others) has allowed for greater investments in numerous onshore functions, including research and development.
These trends are an evolution from the more traditional roles Canadian firms have played as links in the global value chains of foreign-based multinationals, and demonstrate a higher level of global enterprise emerging from within Canada’s borders. While geographic proximity, language and business-culture similarities will continue to keep our economy closely tied with the U.S., Canadian firms will persist in their pursuit of global opportunities with ever-increasing vigor.
Connecting global business with domestic R&D
Investment in R&D currently plays a critical role in this evolution, particularly for manufacturers, allowing them not only to innovate their products, but also to realize greater production efficiency and overall output productivity, all of which will be critical to their overseas competitiveness. In many cases, that R&D will involve a combination of primary or commissioned research and capital investment.
The good news for those firms that choose to invest in R&D as they pursue global opportunities, is that in many cases they can realize significant tax breaks through federal and provincial tax-incentive programs that serve to offset the often arduous cost of such investments.
The bad news is that those tax-incentive programs come with a cornucopia of rules and requirements that can be difficult to navigate for the uninitiated – particularly small and medium-sized enterprises.
Importing innovation
For those firms that make capital investments a part of their R&D, there will be critical considerations for them to make, including the country of origin from which the equipment is being shipped, the exchange rate favorability with that country of origin, and any relevant duties associated with that country.
Even for those who choose to leverage the benefits of NAFTA, there will need to be strong emphasis on compliance to ensure the equipment qualifies under NAFTA or risk paying significant penalties.
Right now it seems the only certainty with respect to North American trade is uncertainty. While Canadian entrepreneurs shouldn’t sour on the opportunities for bilateral trade, they should also consider the opportunities abroad and how they can best capitalize on those while ensuring they minimize the costs and risks associated with doing so.