NAFTA and the Future of Trade – Impacting Your Business

We had an interesting discussion at our 2nd Annual Vaughan Economic Summit held on September 27, 2018. The panel of experts was brought to focus on one concern: the ongoing trade war with our “ally” south of the border. The group of experts on the panel addressed a slew of issues from U.S. tax reform and Canada’s reduced competitiveness to the ongoing negotiations around NAFTA.

Key takeaways: According to BDC’s Chief Economist Pierre Cléroux, Canada’s economy is actually in a relatively good position. The GDP has expanded at a 2.9 per cent pace in the spring. The rumors of an upcoming recession aren’t based in hard facts. In reality, exports have surged between April and June, and accounted for the biggest increase in four years.

However, this growth has two sides to it. Our heavily export-oriented economy is tied to the U.S. -primarily because 70 per cent of Canada’s exports are sent to the States. And because of Canada’s comparatively lower tax rate, this has actually worked to our advantage in attracting FDI (foreign direct investment), and has been a huge factor in scaling some of Canada’s companies. In 2017, Canada’s federal-provincial combined statutory corporate rate was approximately 27 per cent compared to 39 per cent in the U.S. It’s important to consider the effective tax rate as well (which is a broader measure of business tax competitiveness, because it includes input taxes, credits, and deductions)—Canada’s tax advantage was actually even more pronounced in 2017 with a rate of approximately 21 per cent versus 35 per cent in the U.S.

But last year, the U.S. underwent a significant tax reform that has actually removed Canada’s competitiveness. Reforms south of the border lowered the federal statutory corporate income tax rate from 35 per cent to 21 per cent, allowed immediate expensing of capital investment, and created incentives to move overseas profits to the U.S.

Our reduced tax competitiveness is further complicated by the NAFTA negotiations. We have no idea what’s happening there. Well, we do but there are sticking points that are hindering our ability to wrap up negotiations: Chapter 19 (the dispute settling mechanism built into NAFTA), and our dairy supply management system. The U.S. wants Chapter 19 removed and Canada will not back down on that front. Why? Because we need Chapter 19 since it allows signatories of NAFTA to challenge each other’s anti-dumping and countervailing duty decisions in front of an expert panel. The panel is comprised of experts from each of the three countries. The U.S wants this panel gone and instead is demanding that cases should be heard in U.S. courts. There are obvious reasons why this is a bad idea.

The other piece that’s hindering our ability to get a deal is Canada’s dairy supply management system. They want the entire system scrapped. Now, contrary to popular assumption, the supply chain benefits only 6% of Canada’s farmers. The problem is that Canada’s very strong dairy lobby will ensure that any party that agrees to the removal of the supply chain is crucified for it at the next election, loses that election and is then subsequently buried under a cloud of political decay, never to emerge from the ashes. Why? Because the farmers benefiting from the supply chain are 40 per cent in Ontario and 60 per cent in Quebec; and those are the two provinces you need to form a majority government in Parliament.

But let’s say for the sake of argument that we do open the supply chain like we did in CETA and give the Americans a similar benefit-access to 3.25 per cent of our dairy market. The U.S. doesn’t want that. They won’t event accept 5 per cent. They want the whole thing gone. Sounds kind of like bullying doesn’t it?

But panelist Joy Nott, Partner, Trade & Customs Practice at KPMG brought up an important point that if there is no deal, we enter a world she calls a “zombie NAFTA”. That’s what will happen when the executive branch of the U.S government (the White House) tries to pull out of NAFTA and Congress disagrees. And in case you missed it in all the Twitter negotiations (because that’s what this really is), Congress needs to agree to the end of the trade deal. So for clarification purposes, NAFTA in name may be dead but that interconnected supply chain and fixed trade agreements (hundreds of them) will still be active. The risk for us is the threat of auto tariffs if we can’t reach a NAFTA deal. That will have serious ramifications for Ontario’s economy. And if those tariffs do kick in, we will certainly be in a recession.

But hey, every day is a new day in the world of trade negotiations! We can’t really predict what’s going to happen with the future of trade when negotiations are being conducted on a tweet-by-tweet basis.


Thank you to our event sponsors, moderator and panelists.

Presenting Sponsor: KPMG Enterprise
Breakfast Sponsor: BDC
Networking Sponsor: Miller Thomson LLP

Moderator:
Mario Paron, Canadian Managing Partner, KPMG Enterprise

Expert Panelists:
Keno Chan, Partner, US Corporate Tax, KPMG
Joy Nott, Partner, Trade & Customs Practice, KPMG
Pierre Cléroux, Chief Economist, BDC
Andy Chan, Managing Partner- Vaughan, Markham, Miller Thomson LLP

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