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NAFTA talks negative affect

Nearly one-quarter of Canadian exporters believe they are negatively affected by looming NAFTA renegotiation uncertainty and are turning to creative solutions to succeed even if the free trade agreement fails, according to a poll by Export Development Canada.

The federal agency supporting export-oriented companies reported Friday that among the 23 per cent of firms surveyed that said they were negatively affected, several are contemplating strategies including moving operations south of the border, diversifying away from the U.S. or delaying investment or hiring.

Canada and the United States both expressed their hope in late summer that a new North American Free Trade Agreement agreement could be reached by year-end, but tense and combative discussions have necessitated extending negotiations to a March 2018 deadline.

However, Scotiabank economists believe even the March deadline is unlikely given that NAFTA negotiations have stumbled on several major U.S. demands, including a new requirement to increase U.S. parts in automobiles, the end of Canada's dairy, poultry and egg supply-management systems, and the introduction of a possible "sunset clause" that could see the trade policy agreement reviewed every five years.

Still, Scotia said NAFTA uncertainty has not yet dented investment growth in Canada or Mexico and forecasts that the trade policy agreement will survive any prolonged "zombie phase."

"We do not believe this is the end of NAFTA. It remains very unlikely that any material changes in the trading relationships between Canada, Mexico, and the United States are in the offing," the bank said in a report released Thursday.

The firms that are most affected by cross-border tensions, Canadian exporters — a sector that has been decimated since the 2008 global recessions — appear much more pessimistic. About 75 per cent of Canadian exports go to the U.S.

The Ottawa-based EDC said its semi-annual survey revealed a significant drop —from 10 per cent to five per cent — in the number of Canadian exporters looking to expand to new markets in the next two years who are considering the U.S.

Some firms surveyed by the EDC suggested they could move their operations to the United States to avoid potential border disruptions.

But businesses — especially small- and medium-sized firms — thinking of shifting their operations south of the border to avoid border disruptions need to be cautious, warned Peter Hall, chief economist at EDC.

"It's not a slam dunk that one can actually just uproot and seamlessly accommodate the policy changes that are being contemplated in the United States," Hall said in an interview.

"This is a very serious situation and firms ... are being asked to make a very substantial financial commitment to do all of this. And if it's based on spurious policy announcements that may never see the light of day, it's a massive gamble."

Positive developments in NAFTA this week saw negotiators gather at an informal session in Washington to discuss ways to work around a main impasse thwarting the trade policy agreement — a U.S. demand on auto parts deemed unfeasible by Canada, Mexico and the industry.

The Canadian side thinks that goal can be achieved by moving away from the traditional method of calculating the content of a car. For instance, the current NAFTA says that a car's pieces must be 62.5 per cent North American to avoid a tariff and the U.S. called for a ramp-up to 85 per cent, plus a U.S.-specific 50 per cent requirement, with virtually no adjustment phase-in period, to the dismay of other parties.

U.S. President Donald Trump has repeatedly said he might start withdrawing from NAFTA to press the other countries into making concessions.

Some firms in EDC's survey said they would be taking a more cautious "wait and see approach" to NAFTA by delaying investment or hiring, while others are instead seeking to diversify their operations away from the U.S. market.

Autoparts maker Linamar Corp. (TSX:LNR) announced Thursday it had reached an agreement to buy Winnipeg-based agriculture equipment maker MacDon Industries Ltd. for $1.2 billion, as part of a strategy to diversify away from automobiles and into more global markets.

With a new trade agreement now in force between Canada and the European Union, EDC said Canadian companies are paying more attention to the European market, where economies continue to improve.

Surveyed firms said they are planning to expand their existing exports to Europe, and/or are developing new products and services for the European market, as well as taking advantage of cheaper European imports due to tariff reductions being introduced by the Canada-EU Comprehensive Economic and Trade Agreement.

"You've got an economy that is the same size as the United States in the Western European economies," Hall said.

"And with the CETA agreement coming into effect, well, this drops tariffs in a number of very significant industries that enables our reach into that market place to expand."

EDC's study included 746 small-, medium- and large-sized Canadian companies surveyed between Oct. 2 and 25, selected randomly from its databases.



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