NEIGHBORS OF THE NORTH: HOW THE CANADA & UNITED STATES TRADE TIFF AFFECTS SUPPLY CHAIN AND PROCUREMENT

NEIGHBORS OF THE NORTH: HOW THE CANADA & UNITED STATES TRADE TIFF AFFECTS SUPPLY CHAIN AND PROCUREMENT

Homes, cars and wooden pallets that fill our favorite stores all contain Canadian products or parts.

Over the last few months, President Donald Trump has addressed upping trade tariffs with China, the EU and now Canada: the U.S.’s biggest customer. Even though nothing has been finalized, we must ask how these suggested tariffs can and/or will affect business and procurement.  No one could have predicted that the US would impose tariffs on our “friends”, Canada and the EU.  As a result, industries such as  auto have had to rethink their entire supply chain.

Trade aside, the daily U.S.-Canada relations consist of many things including border security, shared climate and energy. For example, close to 400,000 people cross our shared border each day. The commutes alone helps both US and Canadian economic relations.

What cars do we import from Canada?  It seems the auto industry in the US and Canada have become integrated in to one supply chain.  Parts and components crossed back and forth across the two borders as many as eight times before the final car is assembled.  Look at where Detroit is located, a tunnel away from Windsor, Canada.  Trump’s strategy seems to be aimed at returning the full auto supply chain to the US.

There are two issues here.  1.  Auto makers are not equipped to turn on a dime and re-engineer their equipment lines and manufacturing facilities.  2.  Changes are going to drive up cost which are going to have to be absorbed by either the automakers, resulting in reduced profit or by the consumer, resulting in reduced sales or both.  It is estimated that there could be a more than $6,000 increase in a $30,000 imported car.

Trade aside, the daily U.S.-Canada relations consist of many things including border security, shared climate and energy. For example, close to 400,000 people cross our shared border each day. The commutes alone helps both US and Canadian economic relations.

 

A Brief History: What Are the Current trade Agreements Between the U.S. And Canada?

NAFTA or the North American Free Trade Agreement was established officially under the Clinton administration, even though it was conceived by the Reagan administration and negotiated by the H.W. Bush administration. The goal was to reduce trading costs, increase business investment and help North America be more competitive in the global marketplace. It has been the standard for trade between the two countries and Mexico for the last 25 years.

Currently, the main products that Canada trades with the U.S. are ones that feed our infrastructure and manufacturing industries: steel, aluminum and wood.  The proposed tariffs are: 25% on steel, 10 % on aluminum and 20% on soft lumber (Pine, spruce, fur etc.).

 

Can the US Get Around NAFTA?

Yes, Based on Section 232 of NAFTA. Section 232 and the national security power of the Trade Expansion Act of 1962 (19 U.S.C. 1862), the President is allowed to impose tariffs without the approval of Congress.  The secretary of commerce must conduct an investigation on the effects of the importation of the tariffed goods on the security of the US.  The commerce secretary has 270 days to conclude the investigation and make a report with recommendations to The President.  This investigation started on May 23, 2018 and must end by February 2019.  Here is the caveat; The President can agree or disagree with any recommendations made and act accordingly.  Essentially President Trump is free to do what he wants.  Security doesn’t just mean physical threats but could also mean weakening of the US economy.  In this case, the premise is that imports are eroding the US auto industry, which in turn are weakening the economy and therefore impairing national security.

(via Supply Chain Management Review)

 

The Milk Tariff War

The other side of this tariff war is a new milk tariff that Canada has place on US products.  In a protectionist move, Canada has extended its tariffs to a new class of milk products (Class 7) that did not exist when NAFTA was negotiated and previously were not covered.  This has upset the supply chain of high protein, ultrafiltered class 7 milk products that existed between the US dairy farmers along the border (Wisconsin & New York) and Canada.  It has effectively pushed the US along with Australia and New Zealand out to the Canadian dairy market.  In this case inventions and technology moved faster that the laws.  The US believes changes in the tariff should have been negotiated instead of mandated.

(President Trump “doubles down” on possible Canada tariffs. Read Prime Minister Trudeau’s response.)

The recent proposed tariffs would not only shrink the US-Canadian economic relations from daily movement (decreasing incoming/outgoing travel, tourism, business, etc.), it could and/or will be detrimental for years to come. In a retaliatory move, Canada’s Department of Finance proposed tariffs on U.S. products. If everything follows through as described, here is what we can expect in the preliminary:

  • Companies may move out of the U.S. (a retroactive move for the domestic economy)
  • Profit forecasts for major companies (e. General Motors) are lowering
  • Prices will go up for average U.S. bought items (who likes pancakes without syrup?)
  • Airline prices may go up due the repairing and building of aircrafts – this also can and will affect both nations military units (meaning taxes will indeed go up to cover armed forces costs)
  • New building and housing prices will go up, possibly creating a new market crash

Many of these tariffs will affect small businesses, especially MBE’s and WBE’s from bidding for the contracts they need to sustain their company. Even one of the president’s main supporters, billionaire industrialist Charles Koch, warned that tariffs could lead to something even worse: a recession. The president has already fired back in usual fashion.

 

As tensions keep growing, this may be the new normal… Things that we use every day, things that many U.S. businesses rely on will be affected if the president’s words come to fruition with all countries involved. It should also be note that President Trump is now threatening boycotts to American companies who are moving operations due to proposed tariffs.

 

What Can Be Done to Reduce Cost and Risk in Your Business?

  1. Create “what if” models while trying to anticipate any new tariffs or barriers to trade.
  2. Determine the risk of retaliatory tariffs on your products and develop alternatives. Sometimes a slight tweak to a product can move it out of tariff consideration.
  3. Reassess sourcing strategies to minimize cost. Look at both parts and component made outside of the US. What is the likelihood of a new tariff on them that could drive up cost.
  4. Review current contracts and vendor engagement beyond a 12-month period to see alternatives
  5. Reassess manufacturing strategies and plant locations to mitigate risk and cost.

 

References/Citations

Burnson, Patrick. “Supply Chain Managers Reliant on Steel and Aluminum Should Act Now to Mitigate Risk.” Recently Filed RSS, Supply Chain Review, 30 July 2018, www.scmr.com/article/supply_chain_managers_reliant_on_steel_and_aluminum_should_act_now_to_mitig.

Connolly, Amanda. “Here’s Why Donald Trump Is Taking Aim at Canada’s Dairy Industry.” Global News, Global News, 8 June 2018, globalnews.ca/news/4262157/donald-trump-supply-management-dairy-tweets-g7/.

Johnson, Kelsey. “Dairy 101: The Canada-U.S. Milk Spat Explained.” IPolitics, 23 Apr. 2017, ipolitics.ca/2017/04/22/dairy-101-the-canada-u-s-milk-spat-explained/.

Kim, Tae. “Trump’s Tariffs on Auto Imports Will Hurt Entire Industry – Including General Motors, Ford: Moody’s.” CNBC, CNBC, 25 June 2018, www.cnbc.com/2018/06/25/trumps-tariffs-on-auto-imports-will-hurt-entire-car-industry-moodys.html.

Marowits, Ross. “Trump’s Auto Tariffs Would Devastate Supply Chains, Cause Mass Layoffs: Experts.” NEWS 1130, AP, 11 June 2018, www.news1130.com/2018/06/11/trumps-auto-tariffs-would-devastate-supply-chains-cause-mass-layoffs-experts/.

Sosnow, Clifford, and Peter Kirby. “US Auto/Auto Parts Imports Tariff Would Tip Canada into a Recession.” US and Global Trade: New Threats, Innovation Shaking Container Industry out of Doldrums, Journal of Commerce, 10 July 2018, www.joc.com/regulation-policy/trade-policy/us-trade-agreements/us-autoauto-parts-imports-tariff-would-tip-canada-recession_20180710.html.

Tencer, Daniel. “Trump’s Auto Tariffs Would Devastate The Industry, Experts Warn.” HuffPost Canada, HuffPost Canada, 11 June 2018, www.huffingtonpost.ca/2018/06/11/trump-auto-tariffs-impact_a_23456366/.

Tyrrell, P. (2018, February 15). Tariffs on Canadian Lumber Are Hurting American Homebuyers. Retrieved from https://www.heritage.org/taxes/commentary/tariffs-canadian-lumber-are-hurting-american-homebuyers

Vomiero, J. (2018, June 24). Trump’s tariffs on Canadian lumber are pricing Americans out of the U.S. housing market. Retrieved from https://globalnews.ca/news/4293847/tariffs-lumber-pricing-americans-out-of-housing-market-trump/