Cana­dian busi­ness needs a NAFTA ‘Plan B’

The Globe and Mail (Atlantic Edition) - - OPINION - RUSS CRAW­FORD ANGELOS XILINAS

The fourth round of NAFTA ne­go­ti­a­tions opened this week with more ques­tions than an­swers. While the teams an­nounced a new North Amer­i­can free-trade agree­ment com­pe­ti­tion chap­ter, the U.S. Pres­i­dent again used a num­ber of events and ve­hi­cles to talk about the need to ter­mi­nate the deal. The Prime Min­is­ter, for his part, ac­knowl­edged that the out­come was un­pre­dictable. That said, other sig­nals from the Trump ad­min­is­tra­tion and Con­gress would point to sup­port for a mod­ern­ized NAFTA.

With so many con­flict­ing mes­sages about the state of the ne­go­ti­a­tions, Cana­dian busi­ness lead­ers are get­ting in­creas­ingly ner­vous about the out­come. De­spite an­nounce­ments in re­cent weeks on new chap­ters around com­pe­ti­tion, sup­port­ing trade op­por­tu­ni­ties for small and medium-sized busi­nesses (SME), and de­vel­op­ments re­gard­ing core pro­ce­dural is­sues such as au­to­matic dec­la­ra­tions of ori­gin, the ab­sence of any for­mal pro­pos­als to amend the deal’s most con­tentious is­sues is rais­ing grow­ing con­cerns.

Of par­tic­u­lar con­cern is the emer­gence of new pro­pos­als from the United States that Canada and Mex­ico are un­likely to ac­cept, and that could cause sig­nif­i­cant is­sues for busi­nesses on all sides of the bor­ders. The United States has taken a harsher tone on rules of ori­gin; pro­posed a sun­set clause that would ter­mi­nate the agree­ment af­ter five years, un­less all coun­tries agreed to ex­tend; and sug­gested new sea­sonal re­stric­tions on im­ports of agri­cul­tural goods.

As well, some in the trade com­mu­nity be­lieve that the Trump ad­min­is­tra­tion has not sub­mit­ted text on key con­tentious ar­eas be­cause it plans to sub­mit a let­ter with­draw­ing the United States from NAFTA. While dif­fi­cult to be­lieve that a deal won’t be struck that works for all three coun­tries, it is in­cum­bent on Cana­dian busi­ness lead­ers to start con­sid­er­ing their op­tions and plan for var­i­ous con­tin­gen­cies.

One of the big­gest risks to busi­ness in th­ese ne­go­ti­a­tions is not a re­newed NAFTA with less favourable terms, but a dis­so­lu­tion of the agree­ment with­out a re­place­ment – or a new agree­ment that ex­pires ev­ery five years. Busi­nesses need to know the rules of the game are go­ing to re­main con­sis­tent and pre­dictable. The lack of a trade agree­ment or one that can be rewrit­ten ev­ery five years could make it im­pos­si­ble to se­cure needed fi­nanc­ing to make the in­vest­ments nec­es­sary to keep their com­pa­nies sus­tain­able and com­pet­i­tive.

Un­cer­tainty re­gard­ing the ap­pli­ca­tion of NAFTA pro­vi­sions will af­fect smaller en­ter­prises the most. SMEs likely won’t have the re­sources or in­fra­struc­ture nec­es­sary to adapt to a world of un­pre­dictable rule changes.

On the pos­i­tive side, the trade rep­re­sen­ta­tives from all three coun­tries know that con­tin­u­ing pre­dictabil­ity and clar­ity in the agree­ment is of ut­most im­por­tance. What is not clear is whether they will be able to be in a po­si­tion to fi­nal­ize a deal.

Given this en­vi­ron­ment, Cana­dian busi­ness lead­ers need a “Plan B” to be ready for a wide range of out­comes to the cur­rent trade and cus­toms rules. 6 A U.S. with­drawal from NAFTA: As there is a six-month phase-out pe­riod from the time writ­ten no­tice is pro­vided, the im­pact of a with­drawal will not be im­me­di­ate. Af­ter the six­month pe­riod, busi­nesses may be able to ap­ply the pro­vi­sions of the Canada-U.S. free-trade agree­ment, which was su­per­seded when NAFTA came into force. Fur­ther, if the United States were to with­draw from NAFTA, the agree­ment would still ap­ply between Mex­ico and Canada. In all cases, busi­nesses need to ex­am­ine their sup­ply chains and what new du­ties could be im­posed, un­der­stand the flowthrough im­pact on prices and their com­pet­i­tive po­si­tion in the mar­ket­place. They also need to un­der­stand if there will be im­pacts on their abil­ity to send peo­ple to the United States to work with sup­pli­ers and pro­vide af­ter-sales ser­vice to Amer­i­can cus­tomers. 6 Changes to the NAFTA rules of ori­gin: If changes to the rules of ori­gin make them too oner­ous and costly to ad­min­is­ter, or if pref­er­en­tial rates between the United States and Canada are no longer avail­able, busi­nesses should as­sess the costs as­so­ci­ated with pay­ing duty at the higher most-favoured na­tion rate. If th­ese costs are pro­hib­i­tive, busi­nesses need to as­sess sup­ply­chain changes to take ad­van­tage of other pref­er­en­tial tar­iff regimes, as­sess whether chang­ing the struc­ture of their im­port trans­ac­tions can lower the cus­toms value and ex­am­ine their cus­toms trans­ac­tions to iden­tify any other po­ten­tial duty-sav­ings op­por­tu­ni­ties. 6 Other pref­er­en­tial tar­iff regimes: Canada cur­rently has ac­cess to pref­er­en­tial tar­iffs for cer­tain goods un­der the Gen­eral Pref­er­en­tial Tar­iff, the Least De­vel­oped Coun­try Tar­iff, the Com­mon­wealth Caribbean Coun­try Tar­iff, the Aus­tralia Tar­iff and the New Zealand Tar­iff. There are also 11 free-trade agree­ments cur­rently in force (not in­clud­ing NAFTA), as well as other agree­ments ei­ther con­cluded, in ne­go­ti­a­tions or in ex­ploratory dis­cus­sions. Th­ese agree­ments could pro­vide com­pa­ra­ble or bet­ter trade op­tions.

For ex­am­ple, Cana­dian com­pa­nies can look to trade more with the Euro­pean Com­mu­nity and ben­e­fit from pref­er­en­tial rates un­der CETA, which came into force pro­vi­sion­ally on Sept. 21, 2017. Most goods mov­ing between Canada and the 28 Euro­pean Union coun­tries are now el­i­gi­ble for duty-free treat­ment. Upon com­ing into force, CETA elim­i­nated ap­prox­i­mately 98 per cent of all tar­iffs between Canada and the EU, with an­other 1 per cent to be phased out over a pe­riod of up to seven years.

Un­cer­tainty about NAFTA may be the trig­ger to get Cana­dian busi­nesses to se­ri­ously think about lever­ag­ing the coun­try’s ties to in­ter­na­tional mar­kets to build new sup­ply-chain op­por­tu­ni­ties and di­ver­sify trade. Russ Craw­ford is a Tax Part­ner and NAFTA leader with KPMG in Canada. Angelos Xilinas is a part­ner, trade and cus­toms, with KPMG in Canada.

CHIP SOMODEVILLA/GETTY IM­AGES

U.S. Pres­i­dent Don­ald Trump waits as Prime Min­is­ter Justin Trudeau ar­rives at the White House on Wed­nes­day. Con­flict­ing mes­sages on the state of NAFTA talks are mak­ing busi­ness lead­ers ner­vous.

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