With Canadian elections looming in October 2019, followed by the US in November 2020, against a backdrop of heated negotiations around trade with China and the ongoing for USMCA / CUSMA ratification, there is plenty of scope for macro-economic challenge and change for North American SMEs in the coming year and beyond.
Any new Canadian premier seeking to support SMEs exporting and continue to build upon the positive balance of payments would do well to address the twin challenges of declining availability of finance and forex fluctuations. With over a quarter (28%) of Canadian businesses we surveyed exporting and 23% importing, a watchful eye must be kept on key markets such as the US, which according to our research continues to represent the greatest opportunity to Canadian SMEs for both import and export. To nurture new exporters the government has a clear role to play helping Canadian SMEs aspiring to export both to find those first customers abroad, and to assist with funding for export.
As the US is the most important market for Canadian exporters, so is Canada for US-based exporting SMEs. The challenge facing the US administration remains an excess of government regulation and legislation as in 2017, and tariffs remain too high, impacting both exporters and the inbound supply chain from China. Whilst Canada enjoys a trade surplus, the US has long nursed a deficit, increasing the pressure on President Trump to balance the books, which is reflected in the contrasting negotiating positions of the two neighbors.
Canadians typically like to give their premiers two terms to prove themselves, however the liberal government of Justin Trudeau seems likely to face a closer race than those of late. A win for Scheer’s conservatives would certainly alter the negotiation dynamic for the final year of the Trump presidency and well into any second term. Meanwhile, in the US, whilst Trump declared his intention to run for re-election early January 2019, to almost no-one’s surprise, alternative candidates continue to emerge from within his own party. So the ebullient 45th can be expected to position strongly on international trade as the champion of American producers, to capitalize on the current optimism expressed by SMEs. Whilst there has been no shortage of opposition candidates, at time of writing, no clear front runner has emerged from the record breaking field of Democrats seeking to challenge for the highest office in the land. This leads us to both the impact on SMEs of the ongoing US/China trade war and Trudeau and Trump’s track record in negotiations over USCMA / CUSMA.
Over the past year, the US and China have imposed tariffs on billions of dollars’ worth of each other’s goods as part of a long simmering trade battle which is costing businesses dearly worldwide. In China the perception is that the US is trying to limit its growth whilst the US accuses China of unfair trading practices and intellectual property theft. Whilst President Trump attempts to tackle his balance of payments problem by increasing tariffs on imported goods, this policy is raising materials costs for American manufacturing companies. What’s more, as negotiations continue, the resulting uncertainty is hurting businesses and weighing heavily on the global economy. The ramp up by the Chinese to include a levy on US crude oil marks the first time fuel has been hit in the trade battle and demonstrates an entrenchment by the US top trading partner. With tensions between the US and China likely to continue beyond 2020, with new tariffs and hikes to existing duties in the pipeline, costs for US consumers and manufacturers look set to rise further, impacting already challenged cash flows for SMEs. It is therefore wise for SMEs to hedge against rising material costs and to innovate in their supply chains to offset some of the risk stemming from future uncertainties.
The future of the USCMA / CUSMA is not guaranteed but it does offer optimism. The USCMA / CUSMA replaces NAFTA which originally came into effect in 1994 and hasn’t evolved to meet the requirements of a globalized economy. The USCMA / CUSMA isn’t perfect, and fails to address issues around environmental policy, labor, and intellectual property protections, but once passed, the agreement will be a boon for SMEs across North America. It does an excellent job of considering and even removing some of the existing burdens to international trade. For example, the agreement will eliminate the need to open a foreign office as a condition for doing business in another country.
At a time when international free trade is being threatened, even the message that North America is committed to free trade would likely encourage SMEs across the continent to look for new opportunities. In the US, 98% of exporters are SMEs and they support nearly four million jobs. There just isn’t any ‘small’ about the importance of SMEs, they are vital to the health of the economy.
North America is a region bound by trade with both representing the others largest trading partner. The US buys 70% of Canada’s exports and, while Canada’s purchase of the US’s exports stands at 14% the fact the US economy is ten times larger than Canada’s is important.
This economic interlinking has implications for interest rates which for both countries remain comparatively low at 2% and 1.75% respectively, especially when compared to Mexico's 8% at time of writing. Over time, Canada’s economic momentum tends to gravitate towards the US’s, and this is something that the Bank of Canada (BoC) understands. While the BoC doesn’t match every Fed rate cut or rise, every successive shift in the Fed’s policy increases the pressure on the BoC to follow their trajectory. If the gap becomes too wide, it has a significant impact on exchange rates which in turn affects US demand for Canadian exports – which make up 30% of Canada’s total economic output.
While the BoC is currently signaling that it will hold rates, despite the Feds cuts, it will be interesting to see if that changes if the gap widens further. For SMEs, navigating changing interest rates and their impacts on imports and exports is not an easy task and having the right facility in place to manage fluctuations can make all the difference.
There is, however, reason to be optimistic. North America is performing far better than others around the world, with Europe feeling both the impact of global trade tensions and the internal uncertainty caused by Brexit. Europe is an important trade partner for both Canada and the US, and for Canada in particular Europe represents the second largest export market. However, despite the EU’s economic sluggishness, trade with both the US and Canada continues to grow. While losing access to the UK market specifically will cause an impact, it will be limited given its relative size and the relatively small amount of trade done with the UK directly.
For SMEs in North America this is an exciting time. There are challenges, and there is reason to be cautious as the global economy continues to show signs of a slowdown. However, with the region performing well, there are real opportunities to thrive and expand. Success may depend on leveraging every advantage. Rather than just relying on reinvesting profits, SMEs can focus their growth by increasing their cashflow, by borrowing to invest, whether this is in new technology, staff training, or simply to exploit bulk pricing opportunities. Fortune favors the inventive and the bold.