Background on the Trade Wars
Canada and the United States have been at odds over trade law and tariffs since before Canada was a country. The early ‘Reciprocity Treaty’ eliminated all cross-border tariffs between the US and Canada. Revoked in 1866 by US lawmakers, high tariffs persisted for decades afterward leading to suboptimal economic growth in both countries.
In 1965 a free trade agreement called the Auto-Pact removed tariffs for automobile manufacturing and helped both the Canadian and US automobile industries grow ~1000% over the next 12 years. The North American Free Trade Agreement (NAFTA) replaced the Canadian-US Free Trade Agreement (CUFTA) in 1994, maintaining and formalizing the broad duty-free trade that had been in effect since 1988 and added Mexico into the agreement. The terms of CUFTA & NAFTA both improved conditions for investment and lowered the costs of trade. NAFTA has persisted for the last 24 years.
The New Tariffs
Trade wars often have unintended consequences but some consequences are almost always assured, for the countries affected, the costs of trade increase and prices increase. On June 1, 2018 the US imposed a 25% tariff on steel and a 10% tariff on aluminum directed at the European Union, Canada and Mexico. Though in an increasingly globalized world no country is completely reliant on only a single trading partner, 68.2% of Canada’s global export volume goes to the United States while the US only sends 18% of its exports to Canada. 64% of Canada’s GDP is derived from international trade making Canada more vulnerable to a trade war than the US, which only has 27% of its GDP created through trade.
Though the US only has limited exports to Canada, in some specific industries products like ketchup, coffee, toilet paper and maple syrup approximately 50-90% of the US exports come to Canada. These products and other specific goods have been the target of the retaliatory Canadian tariffs against the US which came into effect July 6, 2018. Companies that are exposed to these specific goods subject to US or Canadian tariffs need to prepare to take steps to protect their business.
Plan to Protect Your Business
Businesses looking to plan for a trade war have to understand the business environment and possible pitfalls, setting aside capital and creating contingency plans for issues that may arise. These contingencies tie up valuable capital but they help ensure that the business can weather the trade war with minimal difficulty and sustain itself when tariffs are imposed.
- Make Smart Purchasing Decision: Knowing that in a trade war, prices will typically increase and that reduced trade can create shortages, many companies should stock up on raw and/or basic materials where there are purchasing opportunities.
- Make New Production Decisions: Some companies may want to produce less or on a different schedule to avoid carrying excess inventory. If your products have a short lifespan, make your business more 'lean' by producing only what you can sell to help avoid unnecessary costs.
- Analyze Inventory Turnover: Understand and plan for the costs of increased storage of finished goods and obsolete inventory. It may be prudent to diversify brand offerings with complimentary goods instead of expanding production. Every industry will have different risks and ways to mitigate them.
- Plan for Cash Flow Bottlenecks: As the trade war's effects propagate it is likely payment times will increase causing cash flow bottlenecks for many companies. Having a financial partnership established before you need cash ensures you have a plan in place if cash flow temporarily dries up. An alternative finance partner can help mitigate cash flow difficulties through factoring services or asset-based lending that ensure a business has the cash it needs to meet its obligations.
Bibby Financial Services (BFS) offers dedicated cash flow solutions to different sectors. BFS’ approach is to work with clients individually to deliver financing their needs and in turn, delivers the liquidity and flexibility needed for businesses to succeed. BFS is committed to the success of your business and working to help your team achieve its goals, so contact us today to learn more.