Volume 1, Issue 1 - Summer 2016

“This year, all bets are off”

The U.S. election, and how it could alter North American manufacturing as we know it. 

By Derek Lothian. 

There are few people more familiar with cross-border business than Birgit Matthiesen.

A former customs officer and 25-year veteran of the Canadian Embassy in Washington, Matthiesen now serves as director of Canada-U.S. business affairs for Arent Fox LLP, a prominent K Street law firm and private lobbying organization.

She is frequently tapped by industry groups on both sides of the 49th Parallel for her take on the state of the world’s most complex and integrated economic relationship.

These days, however, knee-deep in the thralls of a historic U.S. election cycle, even Matthiesen finds herself with more questions than answers.

“There is a lot of trepidation in Canada and the United States,” she laments. “Nothing harms business or the bottom line more than uncertainty, and these are very uncertain times — socially and in terms of long-term corporate strategy.”

As the U.S. primary season draws to a close and the two top-of-ticket candidates all but shore up their respective party nominations, Matthiesen is imploring Prairie manufacturers to keep an eye on several files that may have a significant impact on their operations come the fall:

Trans-Pacific Partnership

The big question for Canadian companies, Matthiesen suggests, is whether the traditionally pro-trade Republican Party will stay the course on GOP frontrunner Donald Trump’s anti-trade campaign rhetoric. House and Senate Republicans have each signalled their support for joining the 12-member Trans-Pacific Partnership (TPP) — the most comprehensive trade agreement ever pursued — yet Trump has remained more aligned with his opponent on the other side of the aisle than those within his own party.

The Democrats’ position is equally unclear. Despite supporting the deal as Secretary of State, Hillary Clinton has also now changed her tune as a presidential candidate.

Matthiesen contends there is reason to believe those positions may change again.

“Apart from the political system, there are two forces at play on TPP,” she explains. “The first is the U.S. business community. Even with NAFTA, I cannot remember another time when there has been this much momentum by most — if not all — of the main business associations in the United States. And they will continue to have their voices heard.”

This past June, 400 American companies across 10 states penned a joint letter to Congress pushing for U.S. ratification of the agreement.

“The second force is geopolitics. Most people would agree that the U.S. and Japan are the two largest members of the TPP. Japan has much to gain, and will put a lot of pressure on the United States. And they have leverage. Not only are there security concerns in the region, but China — the big elephant standing right outside the TPP room — has engaged in exploring its own economic and trade agreements in the Pacific and beyond.”

Many policy experts believe that a driving force of the TPP is to draw China, which is not a TPP signatory, into the world trade body. They worry that if the accord is not ratified, and China remains aggressive in signing its own trade deals, the North American ‘pivot to Asia’ may devolve into heightened levels of outsourcing.

The danger is compounded by an inwardly focused American electorate, agitated by the narrative of lost jobs and unfair competition.

“In the United States, trade has become a bad word,” says Matthiesen. “The traditional messaging has not resonated in many corners of the U.S. community.”

Under the current rules, TPP cannot come into force unless backed by members comprising 85 per cent of the collective GDP — meaning if the United States or Japan were to back out, Canada would not likely capitalize on the immense opportunity the agreement presents.

Borders and regulation

Earlier this spring, Congress passed legislation handing U.S. Customs and Border Protection new authorities and resources to combat the perception that foreign exporters are actively circumventing U.S. trade remedy investigations.

While China and the dumping of cheap Chinese steel were particularly square in Uncle Sam’s crosshairs, Matthiesen cautions that Canada will fall under the same provisions, and Canadian companies must prepare for more intense scrutiny.

“Canada feels it has this really good, special relationship with the United States,” she says, tongue-in-cheek. “The problem with that is every country thinks it has a good and special relationship with the United States. While folks like me may not think it is necessarily fair, Canada will need to comply like everybody else.”

The post-9/11 environment has centred around a border built on security. Moving ahead with a new administration, those parameters will likely edge further towards a border built on competition.

What can Canadian manufacturers do? They need to be ready.

“We have entered a new era of assurances across supply chains, and the word going forward is trust,” Matthiesen exclaims. “U.S. consumers and U.S. companies doing business with a foreign partner need to know that product comes from a trusted manufacturer. It’s a matter of branding — that’s where Canada can have a competitive advantage.”

Competition for investment

Over the past several years, state governments across the United States have been upping their game to entice foreign investment. In fact, New York recently instituted state income tax relief for up to five years from revenues earned as a result of outside investment.

Similar abatements and other incentives are exploding in popularity. The challenge, Matthiesen believes, will be in sustaining those programs.

Federal law dictates that all state budgets must balance at the end of each year. That means the next federal administration may be forced to lean heavily on legislation such as Buy America to continue drawing in companies — but with a ‘stick’ opposed to a ‘carrot.’

“Many Canadian companies have already had to setup U.S. operations because of Buy America policies to meet U.S. domestic content requirements,” she adds, noting the majority of those businesses opt to keep their C-suite, research and development functions, and engineering capacity north of the border. “That will continue. The best advice is to know what Buy America is and what it isn’t. Know the rules, and get professional help if need be.”

Protectionist provisions now span numerous federal agencies and trickle down to state projects where federal funds are used, encompassing infrastructure, transit, aerospace, and countless places in-between.

Other issues to watch

“Prairie manufacturers should be cognisant of what approach a new administration takes to address game-changing events of the past year — for example, how it navigates thawed relations with Cuba or administrative changes to recent U.S. export control reform,” says Matthiesen. “They also need to keep tabs on how the administration will work with Congress to pass foreign corrupt practices laws. That will be important for U.S. investment abroad, and will always impact Canadian suppliers to U.S. regulated exporters.”

Finally, it wouldn’t be an election if we didn’t talk taxes.

“I’ve been hammering this one home with Canadian businesses: Keep an eye on U.S. tax reform. It has been on the backburner for the past five years now. There will be winners and losers, and it will probably come up in the first year of the administration.”