SmAll Business pivots AwAy from U.S. Amid tAriff tAlk
Small firms pivot from U.S. amid rising trade wars, NAFTA impasse
Most of the fresh fish exported by Louisbourg Seafoods Ltd. makes its way to the United States, which has long been the company’s largest buyer of halibut, haddock, sole and other groundfish. But like many smaller Canadian companies, Louisbourg ’s dependence on the U.S. is beginning to shift.
The company, named after the Cape Breton Island town it is based in, currently generates roughly $65 million in revenue, but it has begun to find new potential buyers for its groundfish in markets such as the U.K. and South Korea, where it once only sold shellfish products. It has also discovered demand in Asia for products it hadn’t previously sold such as sea cucumber and whelk.
“There is a whole variety of markets that we’ve never had before here in North America,” said Dannie Hansen, a vice-president at the company, which produces far more than 15 million tonnes of lobster, shrimp, crab and groundfish products every year.
The reason for the company’s increasingly global expansion efforts: the uncertainty surrounding the North American Free Trade Agreement, which U.S. President Donald Trump has threatened to rip up, and his increasingly hostile attitude toward trade with Canada and other allies.
Hansen said the company has always looked for new markets, but has increased those efforts ever since Trump began proposing tariffs on various imported products. On June 1, the U.S. escalated matters by levelling import tariffs on steel and aluminum from Canada, Europe and Mexico, citing security concerns, in a move Prime Minister Justin Trudeau called “frankly insulting.”
Louisbourg has boosted its marketing budget in recent years to around $2.6 million, Hansen said, much of which would have been previously spent on domestic lobbying activities. The company has begun gradually expanding its reach into Vietnam, Singapore, South Korea, the Netherlands, the U.K., Belgium and other markets.
“When you have all that uncertainty, it’s never good for anybody,” Hansen said. “We had to accelerate a little faster our research into new places.”
Louisbourg’s efforts to branch out are emblematic of a wider attempt to shift away from the U.S., said Peter Hall, chief economist at Economic Development Canada. Companies have been “shaken to their cores” by trade disruptions during Trump’s tenure, he said, causing them to rethink their heavy dependence on the U.S.
“I’ve heard the word ‘diversification’ more in the last year than in a long while,” Hall said. “They have been thinking about their China strategy, their East Asia strategy, their Europe strategy.”
The growing trade spat between Canada and the U.S. is also causing companies to look elsewhere when securing supplies.
Waterloo, Ont.-based Clearpath Robotics Inc., which builds autonomous robot systems for multinational enterprises, is looking more closely at dealing with domestic companies, both when buying and selling products.
About 10 months ago, Clearpath began buying its wheel hubs from Demtool Inc., an Ontario-based manufacturer, instead of its previous supplier based in Mississippi, after costs for the parts doubled. It has also begun buying steel brackets from a Canadian company rather than the Illinois one that used to supply them, largely as a result of increased anti-dumping tariffs between Canada and the U.S. Tariffs on the brackets have been as high as 150 per cent in recent years.
“We buy a lot more local than we used to,” said Ryan Wicklum, former head of supply chain management for Clearpath. “It just doesn’t make financial sense to buy from the States anymore, for metals specifically.”
Clearpath’s decision is partly in response to Trump’s “America First” strategy, which has compelled more U.S. companies to buy from local suppliers. In early April, Trump proposed tariffs on roughly 1,300 tech products, mainly to stem cheap imports from China. The move sent ripples across the wider tech-based supply chain in North America, prompting companies to increasingly rethink their supply chains and look outside the U.S.
Clearpath depends on the U.S. for roughly 90 per cent of its sales, mostly to behemoths such as General Electric Co., Caterpillar Inc. and Deere & Co., which manufactures John Deere equipment. It is now looking to expand its reach into Japan and Germany, where it already sells some products, as well as other markets overseas.
“We need a plan B, plan C and plan D,” Wicklum said.
According to Statistics Canada, Canadian companies exported $483 billion worth of goods in 2017, an increase of $30 billion from 2016. Small and mediumsized companies accounted for 54 per cent of the increase, led by energy companies. The number of exporting firms in 2017 grew by 191 to 43,480.
EDC’s Hall said Canada’s exports remain healthy overall, despite trade worries, but they are still largely driven by a U.S. economy that has finally emerged fully from the economic recession 10 years ago. Companies, particularly large U.S. ones, are finally beginning to put real capital towards growth after a decade of chronic underinvestment. The U.S. Institute for Supply Management now expects capital spending by U.S. factory firms to rise 10 per cent in 2018, up from its earlier forecast of two per cent, largely due to U.S. tax reforms.
But some companies in Canada remain hesitant to invest given that ongoing trade disputes have tempered growth.
“Regular businesses are just sitting on that money,” Hall said. “That’s economic activity that we’ve kissed goodbye, for now.”
There are some signs of improvement. In an interview with Bloomberg News on June 4, Bank of Canada governor Stephen Poloz said trade worries had already restricted business investment, but it is still “making a significant contribution to growth.”
Meanwhile, companies are recalibrating their relationship with Canada’s largest trading partner as NAFTA talks pass the one-year marker.
“It concerns me greatly,” said Stan Gorzalczynski, president of Wabi Iron & Steel Corp., a small manufacturer in New Liskeard, Ont., that designs and manufactures conveyor and elevator systems, mainly for the mining sector.
He said the U.S. market is “almost like a lifeline” for his company, accounting for about 40 per cent of sales and 50 per cent of its supply chain. The firm buys chromium, nickel and other minerals from U.S. suppliers. Replacing them could prove a challenge.
“U.S. suppliers are very competitive, even with the currency exchange,” he said.
Gorzalczynski said Wabi’s bottom line has not been influenced by the trade disputes, and said it will manage to reorient itself if NAFTA talks implode.
To that end, the company has already begun looking for new markets, particularly on the sales side, and recently found a new buyer in a Canadian steel producer. Gorzalczynski said the company has made inroads into new markets such as Australia, Chile, Peru and the European Union.
Louisbourg’s Hansen also sees little reason to fret, saying the company would find a way forward even if NAFTA was shredded outright. He said the Canadian seafood industry is unlikely to be targeted in a Canada-U.S. trade dispute.
“We’re not panicking over these little spats,” he said.
When you have all that uncertainty, it’s never good for anybody. We had to accelerate a little faster our research into new places.