Trump Rates Cost of Canadian Small Companies as Big Business, Oil Enjoy Exceptions
The telescope accessory business based in Toronto Steve Mallia developed rapidly until March when the Trump government imposed a 25% tariff on US-bound orders that did not comply with local content rules based on US-Mexico-Kanada agreements.
The tariff, which was charged immediately after US President Donald Trump served in January, effectively stopped the Starfield Mallia optics to compete in its main market, because many components used in their products originated in China.
“When we started selling to the US, the business was very strong. We made money,” Mallia said. “Once the tariff began to really happen, it disappeared.”
Mallia, who founded her company in 2018, quickly decided on the best hope of the company to survive was to make its products in accordance with USMCA, the 2018 trade agreement which replaced the North American free trade agreement.
Difficult decisions of small businesses such as Mallia must now highlight the uneven consequences of Trump’s efforts to reverse the global trade order.
While the existing trade agreement means Canada and Mexico have so far been less affected by Trump tariffs than many other economies, there are hundreds of small and medium companies in Canada that faced direct blows because it was not in accordance with USMCA.
Small and medium businesses represent almost 98% of all companies in Canada and contribute more than 50% of the economy, according to government data.
Mallia said changes in production to achieve compliance came at large costs: six months from missing sales, along with additional costs to establish a factory, change the supply chain and increase production.
Even so, the analysis of the costs of convincing Mallia that it was the money that was spent well. Changes will allow him to regain access from October to the market that has contributed around 60% of Starfield’s sales, he estimates.
Mallia began the transition long before Thursday, when Trump climbed the tariff to 35% of the 25% of the goods imported from Canada who did not comply with the free trade agreement.
The steel, aluminum, and Canadian cars are devastated because they face separate tariffs between 25% and 50%. Increasing uncertainty, USMCA is ready for next anniversary negotiations.
To be obedient, companies like Starfield must prove that they produce most of their products in the US, Mexico or Canada, or they have substantially changed import products in one of the three countries.
In Canada, failure to comply with trade agreements means that there is no or expensive access to the largest economy in the world.
“Some companies cannot do that (obey), and some companies will not be able to do it in the short term,” said Clifford Sosnow, partner and head of the International Trade and Investment Group in Fasken, a Canadian law firm.
Export of Oil Free Duty
Around 92% of Canadian exports with the value of entering US tariff free in June because they were released, data from the US census bureau showed. However, that number is leaning with oil and gas delivery, Canadian top exports so far, because almost 99% of oil shipments have entered the US free of charge in June.
Without oil and gas, total imports of free tariffs to the US from Canada dropped six points percentage in June each year to 89% of 95%.
Other larger oil and oil producers have resources to ensure USMCA compliance, unlike small companies like Mallia.
The number of Canadian exports that officially according to USMCA jumped 20 points percentage in April to 56%, but still almost did not change since then, an analysis of the US census bureau data released on Tuesday was shown.
The oil sector, which contributed almost one third of Canadian exports to the United States, was quickly adapted, with USMCA compliance increased to 84% in June of 25% in the same period last year.
Adding all other free trade provisions such as goods sent directly to free trade zones or free trade bilateral agreements, more than 99% of Canadian oil exports enter the US -free US, the US census bureau data shows.
But outside the oil and gas sector, compliance only moved three points of percentage to 45% in June of the same 42% of the month last year, showing that the company struggled to meet USMCA rules to avoid tariffs.
Bank of Canada assumes that over the next two years 95% of Canadian goods exports tend to be in accordance with USMCA, although export lawyers and consultants say the increase in compliance from the current level will not be fast.
The sectors that struggle to comply with trade agreements and get exceptions include exporters of living animals, meat, vegetables, cereals, chemicals and furniture, the US census data shows.
For many small companies, achieving compliance requires changes in supply chains set a few decades ago, employing legal counsel and documenting their production cycles for months or even for years, said Sosnow from Fasken.
Barry Appleton, a professor in New York Law School and an international trade expert, said he hoped that more Canadian companies would be obedient, but it was very slow and at a large cost that they would eventually forward to customers.
“The low -hanging fruit has been picked,” he said.
Mallia wanted to increase sales to Europe and Australia, but knew she could not ignore the US market. He resigned to pay high fees to continue the shipping duty.
“In the end, they are the largest economy in the world, and they are there,” he said. “You are stupid not to see it.”
Source: Reuters
