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North American Free Trade: managing our future.

We generally take trade for granted because it's invisible. Consequently, many people are either not interested, not informed or, worse yet, they are easily misinformed about the impact of trade in their everyday life. While many tend to ignore trade in its broadest sense, there is still a sense of panic and anger when an isolated trade issue crops up in the media.

Is it any surprise therefore that the North American Free Trade Agreement is controversial? Trade has become a "dirty" word in some circles. Almost as bad as the word "profit", a word we all need more of these days.

Both KPMG Peat Marwick Thorne and The Hamilton & District Chamber of Commerce believe that NAFTA is a strategic issue facing the business community. The North American Free Trade Agreement will potentially "re-jig" Canada's competitive position in North America and, indeed, the world.

KPMG Peat Marwick Thorne, together with it's consulting arm, Peat Marwick Stevenson Kellogg, surveyed senior executives from the 1000 largest Canadian companies concerning free trade with Mexico. In partnership with The Hamilton and District Chamber of Commerce, an identical local survey was undertaken to assist the Chamber in developing a road map for members considering their options in the face of a changing global economy.

The local survey was mailed to 1150 business members of the Chamber and The Hamilton Chapter of the Canadian Manufacturers Association.

Locally, businesses were most immediately concerned about a lack of knowledge about Mexico, low Mexican wages and increased competition. Smaller businesses were more inclined to seek direct Government intervention in the form of financial assistance, tariffs and other trade barriers. Most would still prefer a "hands off" approach.

Local businesses were inclined to view the impact of NAFTA negatively as a result. While nationally only 9% of the larger businesses perceived negative impacts with NAFTA, almost one third of local respondents foresaw difficulties.

Canadians are relative novices in the Mexican marketplace with low investment levels and facing a fundamentally different business culture and economy. Language is also an issue. The U.S., by contrast, has doubled its exports to Mexico from 1988 to 1991 while our exports have shrunk to under $400,000. We seem to be back on track in the first half of 1992 with our exports for the period matching our total 1991 export performance. NAFTA has heightened awareness of opportunities in Mexico for Canadian businesses -- more Canadian businesses have visited the Canadian Embassy in Mexico in the first half of 1992 than in all of 1991.

Mexico is our largest trading partner in Latin America and although volumes are presently low, there is a sense of optimism about opportunity there. Steven Van Houton, President of the Canadian Manufacturers Association, stated it very succinctly, "Mexico is the fastest growing North American economy so we may as well start looking at the possibilities. The Mexicans are for real."

Yes, the Mexicans are for real and we need to take them seriously. The siesta, a laudable tradition if ever there was one, will likely always enjoy a revered spot in the Mexican way of life, but sleepy the country is not. Mexico is on the go these days, riding the crest of economic momentum that's been gathering steam for some six years.

Many are calling the current economic overhaul Mexico's fourth revolution, and for good reason. The country reached a paralyzing low point in the early 1980's plagued by a debilitating recession, ill-conceived protectionist policies, falling oil prices and rising foreign debt. Things came to a head in 1982 when the Government could not stay current on its formidable $100 billion in foreign debt.

Today the Mexican economy is growing at an annual rate of 4% and inflation, which soared to a horrendous 160% in 1987, is now less than 20%. The budget deficit has declined from 16% of GDP is 1987 to 3.5% in 1990.

Tariffs reached 100% during the protectionist 1980's; but they are ow down to 11% and expected to eventually disappear under NAFTA. Many Mexican companies have also been privatized, the infrastructure is being revitalized, and foreign investment restrictions have been greatly liberalized.

This program of economic reform, sometimes referred to as Salinas-Stroika after President Carlos Salinas, has wide support amongst the Mexican people.

In spite of this truly dramatic success NAFTA would initially bring together three extraordinarily unequal trading partners.

In 1986 Mexico joined the general agreement on tariffs and trade (GATT). What is significant is that GATT has been around since 1947 progressively expanding and defining the areas and rules governing international trade. Canada has played an active role, while Mexico is a relative novice in the world of managed trade.

GATT has been working at liberalizing world trade since 1947. Canada has participated from day one and has committed to tariff reductions from a high of about 30% in 1947 to almost 3% today. In return we have significantly improved our access to other markets and increased our exports.

Many countries do not participate in GATT, as was the case with Mexico until 1986. Free Trade, in it's truest sense, has not been achieved by GATT in spite of 45 years of diligent work by casts of thousands. GATT is presently bogged down attempting to resolve the politically sensitive area of agricultural trade.

A number of countries, including Canada, have worked our regional trading arrangement, partly out of frustration with the slow pace of the GATT talks. The European economic community and the Canada/U.S. trade zones account for more than 50% of the worlds export in 1991. NAFTA would create a trading block larger than the EEC.

The full impact of the FTA between Canada and the U.S. will not be felt immediately due to the long phase in period for many of the tariff reductions (as long as 15 years in some cases).

Statistics Canada numbers point to rising exports since the FTA and a surge to record levels in the first half of 1992--the much ballyhooed "export led recovery". The Federal Government would like us to credit the FTA for this export performance; however, it's more likely that the slide in the Canadian dollar since November 1991 has been a greater contributing influence.

Cutting through the salesmanship and rhetoric, Canada must continue to manage its trading relationships with the rest of the world. We must continue to be a trading nation for one in four jobs is directly related to trade as is 25% of our GDP. Our standard of living, the second highest in the world, is dependent on trade. So let's get down to business with this latest initial NAFTA agreement and study how we can benefit from it.

The Canadian Trucking Association, for example has started to analyze the implications of changes affecting ground transportation. Gilles Belanger, President of the association supports the gradual opening of Mexico to both Canada and US truckers. He states that "We're not really positioned for it and Americans would have been the only ones taking advantage. In that sense, a gradual opening suits us." Strange as it may seem, truckers currently have to turn over their loads at the border to Mexican truckers.

The North American Free Trade Agreement, unfortunately, explicitly preserves the right of each to retain its anti-dumping and countervailing duty laws. Similar to the FTA, a panel review process is contemplated with the power to bind both parties. This system of settling trade disputes has resulted in faster decisions in comparison to previous appeal procedures available to Canadian companies under U.S. domestic law. Regardless, the present average decision period of 10.5 months is still damaging to our export businesses.

Our steel industry is experiencing disruption as the result of a U.S. dumping action at exactly the time when we can least afford a 10.5 month wait for justice. Steel executives are also upset that a clause in the FTA to negotiate a new set of rules dealing with dumping and subsidies may be omitted from the draft NAFTA text.

The process is still too slow. Getting changes will be a tough nut to crack but like the steel executives others will need to dig into the text of the deal and do their homework now.

As we come to understand the 2000 pages of legal text in the NAFTA deal we can start to plan for the changes it will bring. There will be "winners and losers" in the trade game. We enhance our chances at winning if:

1. We become knowledgeable about the agreement details -- information is a powerful ally!

2. We carefully consider the various impacts of NAFTA on our specific business -- assess our strengths and our vulnerabilities.

3. We embrace a strategic management philosophy -- dynamic trade situations call for dynamic business planning.

Trade has been good for Canada but, to keep it that way, it must be managed.

John Buschhausen is a partner with the Hamilton Office of KPMG Peat Marwick Thorne, Chartered Accountants.
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Author:Buschhausen, John
Publication:Canadian Manager
Date:Dec 22, 1992
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