The Trump tariffs hurt small Canadian businesses while big oil companies enjoy exemptions

Steve Mallia, a Toronto-based telescope accessory manufacturer, was thriving up until March 2017, when the Trump Administration imposed a 25 percent tariff on orders bound for the U.S. that did not meet the local content requirements under the U.S. Mexico-Canada Agreement.

The tariffs, which were imposed shortly after Donald Trump became president of the United States in January, prevented Mallia’s StarField Optics, from competing on its main market as many components used in their products came from China.

When we began to sell in the U.S. business was very good. Mallia stated that they were profitable. "As the tariff began to take effect, this disappeared."

Mallia founded his business in 2018 and quickly realized that the best way to ensure his company's survival was by making his products comply with USMCA. This is the trade agreement of 2018, which replaced the North American Free Trade Agreement.

The unintended consequences of Trump's attempts to disrupt the global trading system are evident in the difficult decisions that small businesses, like Mallia, must now take.

Canada and Mexico are less affected by Trump's trade tariffs because of the existing deal. However, hundreds of small to medium businesses in Canada face a direct impact if they do not comply with USMCA.

According to government statistics, small and medium enterprises (SMEs) account for almost 98% of firms in Canada. They also represent over 50% of Canada's economy.

Mallia claimed that the production changes made to achieve compliance were costly: six months' worth of lost sales as well as additional expenses for setting up his factory, changing his supply chain, and ramping up production.

Mallia was convinced by a cost-benefit study that the money spent on StarField had been well worth it. He estimates that the changes will enable him to gain access to a market which, until October, had accounted for 60% of StarField’s sales.

Mallia began the transition long before Trump raised tariffs from 25% to 35% on Canadian goods that did not comply with the Free Trade Agreement.

Canada's auto, steel and aluminum sectors are especially hard hit by separate tariffs ranging from 25% to 50%. USMCA will be renegotiated next year, adding to the uncertainty.

StarField, for example, must demonstrate that the majority of its products are produced in the U.S. or Canada or that it has significantly altered an imported product from one of these three countries.

If you don't comply with the deal, it could cost you or prevent access to Canada, the largest economy in the world.

Clifford Sosnow is a partner at Fasken and the chair of its international trade and investments group.

OIL EXPORTS DUTABLE FREE

Census Bureau data showed that in June, 92% of Canadian exports were duty-free because they were exempt. This figure is skewed, however, by Canada's largest export, oil and gas, which entered the U.S. tariff-free in June.

In June, the total tariff-free Canadian imports to the U.S. fell six percentage points on an annual basis. They went from 95% to 89%.

Mallia's and other smaller companies do not have the resources that oil producers or exporters of larger firms like Mallia’s do to ensure USMCA conformity.

An analysis of U.S. Census Bureau statistics released on Tuesday revealed that the amount of Canadian exports officially compliant with USMCA jumped 20 percentage points to 56% in April, but has remained virtually unchanged since then.

Oil, which represents close to one-third of Canada's exports, adapted quickly. USMCA compliance rose to 84% by June, from 25% during the same period last year.

Census Bureau data show that when you add all the other free-trade provisions, such as goods sent directly to free-trade zones or bilateral free-trade agreements, over 99% of Canadian exports of oil enter the U.S. tax free.

Outside of the oil and natural gas sector, however, compliance only increased by three percentage points, to 45%, in June, from 42%, the same month the previous year. This suggests that companies are struggling with USMCA regulations to avoid tariffs.

Bank of Canada estimates that in the next two to three years, 95% of Canadian exports will be USMCA compliant. However, lawyers and export consultants claim the compliance rate increase from the current level is not likely to happen quickly.

Census data from the United States shows that exporters of meat, vegetables and cereals as well as chemicals, furniture and live animals are among those who struggle to earn exemptions and comply with this trade agreement.

Sosnow, from Fasken, explained that for many smaller businesses, compliance means changing supply chains created decades ago, hiring a legal advisor and documenting the production cycle over months, or even years.

Barry Appleton, professor at New York Law School, and international trade expert, says he expects that more Canadian companies will comply, but at a very slow pace and with a high cost, which they will ultimately pass on to their customers.

He said, "The low hanging fruit has already been picked."

Mallia wants to increase sales in Europe and Australia but knows that he can't ignore the U.S. He has resigned himself to the high price of shipping again duty-free.

He said, "At the very end, they are the largest economy in the entire world. They're right there." You'd be foolish to ignore that.

(source: Reuters)