The new trade agreement between the United States and Canada could touch off a small-business export boom
Good news seldom makes splashy headlines, so it's not surprising that one of the most hopeful business developments in years is unfolding quietly. The U.S.-Canada Free Trade Agreement has been almost ignored amid the political firestorm over the trade bill. Yet the trade agreement with Canada would create a $5-trillion North American free-trade zone, which would benefit small companies in a very big way.
That's certainly how it looks to Bill Stuht, vice-president of international sales and marketing at Stimson Lane Wine & Spirits Ltd., a $34-million owner of vineyards in Washington State and California. The company owns 3,000 acres of vineyards in Washington's Columbia Valley and is the state's largest producer of premium table wines. Chateau Ste. Michelle, one of the company's labels, ships 500,000 cases of wine each year, some of which goes to Europe and the Far East. But it has precious little trade with Canada, although it's right next door. The reason: stiff Canadian protection of its own wine industry.
With markups as high as 66% in Ontario, to take just one province, a bottle of blush wine from Columbia Crest -- another of Stimson Lane's labels -- that retails for $6.49 in the United States can cost more than $12 in Canada. "You really have to be a wine lover to pay those premiums," says Stuht, an enthusiastic backer of the free-trade agreement. "If these high tariffs are eliminated, it will give all good American wines a great opportunity in Canada."
Across the country, other companies like Stimson Lane are already counting the profits as they gaze at our affluent northern neighbor, which offers a market the size of California. No doubt we'll all be hearing more about this historic pact as Congress and the Canadian Parliament take it up this summer. Ratification would dramatically increase the U.S.-Canada trading relationship, already the largest in the world.
Last year, transactions in goods and services were an estimated $156 billion -- with Canada piling up a $12-billion surplus in goods. U.S. trade with the Great Lakes province of Ontario alone is more than our trade with Japan, our second largest trading partner. Put another way, every year Canadians buy more U.S. goods than the entire European Community. All told, two-way traffic across our shared border provides employment for 2 million Americans and one-fifth of the Canadian work force.
Signed last January by President Reagan and Prime Minister Brian Mulroney, the agreement would phase in the North American trade area over 10 years, beginning January 1. As this relationship evolves, economists predict, it could increase the U.S. gross national product by as much as 1% -- or $45 billion -- and create as many as 750,000 jobs. It could drive up Canada's GNP by 5%. Choices would expand and prices would fall for consumers in both countries as Canada became the commercial equivalent of a 51st state. Proponents regard the agreement as a capstone in trade relations between the two countries, which date back to a reciprocity treaty in 1854 and include a landmark auto pact in 1965 that began duty-free trade in automotive products.
For starters, the pact would eliminate all tariffs -- some immediately, others in stages. Canadian tariffs average about 10%, twice as high as U.S. tariffs and among the highest in the industrialized world. On many categories of products, they run far more: 25% on clothing, 20% on certain carpets, and up to 22% on plastics. Ice cream faces a 15% tariff.
It would also, for the first time in an international agreement, guarantee unimpeded service transactions in some 150 categories. In industries ranging from tourism and telecommunications to insurance and management consulting, Americans and Canadians working in one another's countries would receive "national treatment." That means Canada, for instance, would apply the same rules to a U.S. engineering and architecture firm operating there as it would to its own companies. Further, each country would pledge to refrain from erecting nontariff barriers in the future.
Moreover, the agreement might provide the kind of leverage required to open markets in other countries. "It's just another way of accomplishing what we are trying to do in exhorting the Japanese to lower their trade barriers," explains Gail Harrison, executive director of the American Coalition for Trade Expansion with Canada (ACTE/CAN). "It says, 'Look, if you don't want free trade, fine. We'll have free trade with Canada, and its products instead of yours can come in here duty-free."
Smaller companies will find two other provisions particularly valuable. One calls for coordination of testing standards, the sort of evaluations done here by Underwriters Laboratories. Each government often requires that products of the other country be retested under its own system, which can be expensive. That's not a major burden for big business, but it can weigh heavily on small companies.
The other provision involves sales to the Canadian government. As it stands, the only contracts open to American bidders are those worth more than $171,000. The agreement would lower the threshold to $25,000, opening up $500 million of new procurement to U.S. companies. This lower end of the procurement field is serviced intensely by small companies, which would receive the greatest benefit.
As much as anything else, however, the creation of a North American free-trade area would propel small companies into the export business as never before. The removal of tariffs, combined with the proximity of the Canadian market and the use of English as the primary language, makes Canada an irresistible market market for small U.S. companies. "A big company can afford a professional to try to finesse its products into a lower tariff category," says one U.S. businessman. "Small companies just pay the higher duty or forget it. It makes their products that much less competitive."
And Canada imposes tariffs even on U.S. products with no domestic competition. Among them are the high-performance camshafts manufactured by Competition Cams Inc., a fast-growing company based in Memphis.
A camshaft is the heart of a combustion engine, the component that allows the mixing of air and fuel flowing through the cylinders. A 13-year-old company with $20 million in sales, Competition Cams made its name selling to professional race-car drivers before expanding into a broader market. As the company's reputation grew, Canadian car buffs clamored for its customized products. But a 20% duty and currency differentials boost the typical cost from around $90 to $130.
"We have sold small quantities to Canada for some time," says Ronald Coleman, the company's chief executive officer. "Obviously, we could sell a lot more if those tariffs were lifted."
It is not only high tariffs that hamper small-business trade with Canada. Sometimes it is simple harassment. Consider the case of Charles Beck Machine Corp., a $2.5-million outfit in King of Prussia, Pa. Beck manufactures industrial machinery priced at $200,000 apiece, for use in the converting industry. Its machines cut rolls of materials -- textiles, films and so forth -- into sheets. In business for more than a century, Beck has installed its equipment all over the world.
Beck has no Canadian competition, but what it does have are service contracts. And what annoys company president Carl A. Beck is that every time he sends a technician into Canada to make repairs, the Canadian government slaps a duty on his tools, new and used alike. It makes no difference that the technician carries them back out. It's not a fortune, $30 or $40 each time, but it's the sort of petty hassle Carl Beck could live without. "The more we can do in terms of commonsense thinking, the better it will be for business," says Beck, who not only favors the free-trade pact but also spoke on its behalf before Congress.
Given the potential for increased trade, few industries oppose the agreement. But a handful do, and they wield enormous political clout. Energy producers, already battered, dread competing with Canadian natural-gas suppliers. The U.S. coal industry fears cheaper hydroelectricity from Canada. Wheat farmers resent Canadian crop-transportation subsidies.
Then there is Hollywood. The Canadians, worried about "cultural sovereignty" and disturbed at the thought of an unchecked onslaught of American movies and TV sitcoms, insisted on excluding so-called cultural industries from the agreement. "This was a very controversial and emotional issue in Canada," says Janice McEntee of the California World Trade Commission, in Washington, D.C. "The entertainment industry is worried about two things -- its market access in Canada, and the precedent this might set for other agreements."
By and large, however, these complaints represent disappointments rather than fundamental objections to the agreement, and it would be a shame to see it shot down in Washington or Ottawa. Defeat would leave both countries stuck where they are, and decades could pass before trade negotiators tried again. But more important, if the United States can't strike a deal with its neighbor, where else can it do so successfully?
At the very least, the agreement is guaranteed to come up for a congressional vote under a special "fast-track" protocol that bars changes and gives Congress 90 days to act once it is formally introduced. Should it pass, and come to demonstrate the benefits of dismantling trade and investment barriers, it could well serve as a prototype for unilateral trade pacts with other nations. Already, Korea, Taiwan, and Japan have expressed interest in the idea. It would also serve as a counterpoint to protectionist trends in the world economy.
With any luck, Congress will evince a bit of statesmanship in its waning days. After all, free trade is good business. And good business is good politics.
Suddenly, the Common Market is number two
The U.S.-Canada Free Trade Agreement would create the largest free-trade area in the world, ranked by gross domestic products. Number two is the European Community (EC) and the European Free Trade Association (EFTA). The EC consists of Belgium, West Germany, Denmark, Spain, France, the United Kingdom, Greece, Italy, Ireland, Luxembourg, the Netherlands, and Portugal. The EFTA embraces Austria, Finland, Iceland, Norway, Sweden, and Switzerland.
United States/Canada 265 million $ 5.0 trillion
EC/EFTA 355 million $ 3.9 trillion
How to get started in the Canada trade
Here's where you can find out more about trading north of the border:
Check first with your trade association, which may offer export advice and statistics specific to your industry. Then take advantage of the comprehensive resources available from government agencies.
Economic-development authorities in all 50 states run seminars and conferences on exporting. Many also sponsor trade missions, provide sales leads, and conduct market research.
At the federal level, the Small Business Administration provides export assistance. Contact your SBA district office, or call the Washington office at (202) 653-7794.
The U.S. Department of Commerce operates the U.S. and Foreign Commercial Service, whose agents throughout the world provide all manner of export assistance. Call (800) 343-4300 and ask for operator 199.
The U.S. and Foreign Commercial Service runs six offices in Canada, and agents there can help with sales leads and contacts with sales representatives and distributors. You can reach them in Ottawa by calling (613) 238-5335; Calgary (403) 265-2116; Halifax (902) 429-2482; Montreal (514) 281-1886; Toronto (416) 365-0049; and Vancouver (604) 685-4311.
Finally, buy a copy of Exportise, a 257-page guidebook jammed with facts on everything from how to evaluate your product's export potential to where to buy the best foreign road maps. It is available by calling the Small Business Foundation of America at (617) 350-5096.