Trade Uncertainty Brings Opportunity | KPMG | CA

Trade Uncertainty Brings Opportunity

Trade Uncertainty Brings Opportunity

Cross-border business is under increased scrutiny.

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At a time when most Canadian companies have come to recognize that international sourcing and expansion is crucial to future growth, cross-border business is under increased scrutiny. Trade agreements including the Comprehensive Economic and Trade Agreement (CETA), North American Free Trade Agreement (NAFTA) and Trans-Pacific Partnership (TPP) are taking center stage in 2017 and we're closely watching developments that may affect Canadian businesses or provide additional opportunities.

 

CETA is finally here
The European Parliament has just voted in favor of the CETA between Canada and the European Union. The CETA, which is Canada's most significant free trade deal since NAFTA in 1994, was signed in October 2016, after seven years of tough negotiations, delays and heated debate.

The vote opens the door for the provisional application of most of the agreement's provisions, with just a few exceptions related to investment, financial services and administrative proceedings. But most of what affects Canadian businesses and jobs - market access provisions, tariff cuts and government procurement rules - will come into force provisionally. That could happen as early as April 2017 following Canada's ratification process.

This is an important deal for Canada, particularly due to increased concerns over the country's reliance on the U.S. economy. The CETA will provide Canadian companies with easier access to 28 countries and 500 million consumers in the EU, making Canada the only G8 country to have preferential access to the world's two largest and most affluent markets, the EU and the United States. As it becomes increasingly unlikely that future transatlantic trade deals will be completed in the near term, Canada will enjoy "early-mover" status in the EU marketplace for years to come.

Besides offering companies increased market access and significant opportunities to reduce costs along their supply chain, the CETA will place Canada at the center of a duty-free area that extends from Mexico to the eastern border of the European Union. This will make Canada an attractive destination for investors and manufacturers looking to benefit from duty-free access to a market of almost 1 billion consumers.

In addition to increased market access, the CETA will also result in more competition for companies operating in the Canadian market. Therefore, companies should act quickly to develop a viable strategy to guard against overseas competition.

 

What will happen to NAFTA?
While much has been written on whether U.S. President Trump has the power to unilaterally withdraw from the NAFTA, the United States has much to lose from unilateral withdrawal, given the deep economic ties that the agreement has produced among the United States, Canada and Mexico. Canada is the United States' largest export market for goods, as well as the top export destination for 35 different U.S. states.

While it is clear that President Trump is seeking to renegotiate the NAFTA, this does not mean that renegotiations will be agreed upon quickly. After all, the original NAFTA negotiations took two years to conclude and the TPP talks lasted eight years.

It's not yet clear what will be on the negotiating table for a revised NAFTA. However, Canada will likely want to renegotiate aspects related to:

  • Greater access to U.S. procurement 
  • Deeper regulatory co-operation 
  • Additional labour mobility 
  • Improvements to both the state-to-state and the investor-state dispute settlement mechanism.

While U.S. officials have already suggested that Canada is not the main target of President Trump's trade efforts, there are indications that Canada's dairy policies and the softwood lumber dispute may be issues to watch.

Country-of-origin content rules for the automotive industry may also be on the negotiating table. The Trump administration could push for increased American content thresholds for vehicles (currently 62.5% North American content for cars and 60% for trucks).

As part of its "Buy American" policy, the Trump administration may consider reintroducing Country of Origin Labeling (COOL) rules for beef and pork, which were rejected by the World Trade Organization in 2015, following a dispute initiated by Canada and Mexico. Finally, the United States recently launched a World Trade Organization challenge over new British Columbia regulations on wine, so this may be another area to watch carefully.

Before any renegotiations begin, Canadian businesses that engage in cross-border trade should immediately begin to reach out to their elected representatives to ensure their voices are heard.

 

TPP - Reborn?
Canadian businesses may also want to follow the latest developments of the TPP agreement. Although the 12-nation TPP agreement was officially proclaimed dead in late January following the withdrawal of the United States, several signatories have already signaled their intentions to rework the agreement.

Canadian officials will participate in a mid-March meeting with the other TPP signatories (Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) to determine how to proceed without the United States. Representatives from South Korea and China, which were not part of the original TPP, will also attended the summit.

It's not yet clear whether this be the start of a new deal that includes China and other key Asian countries. We'll be watching any new developments closely to keep you updated.

 

How we can help
For businesses that rely on cross-border trade, the ability to effectively manage the customs process is critical to survival in a global market place. A company that manages this process efficiently and effectively can then focus its time and resources on the development of its core business.

KPMG has developed a proprietary Tax and Trade Intelligence Solution (TIS) to help companies quantify the saving opportunities associated with new trade agreements and put in place effective strategies to maximize those opportunities while minimizing risks. For more information, see our Trade & Customs site and contact a KPMG's Trade & Customs professional in Canada.

Information is current to February 16, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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