/‘Shock’: A tiny Canadian cosmetics firm won its first big export order. And then Trump started tweeting

‘Shock’: A tiny Canadian cosmetics firm won its first big export order. And then Trump started tweeting

Part of an ongoing series that looks at changes one year after the global trade wars ignited.

Joy Yap’s first lesson in how politics can put a stranglehold on trade came in January, when the biggest order in her young company’s history became entangled in customs at the Port of Los Angeles.

The request for 130,000 units of Wyld Skincare’s konjac facial sponges, Yap’s bestseller, had come as a surprise, with a tight deadline for delivery and a hefty penalty for any delay. The potential payoff from the order was huge for Yap, who had only ever exported “tiny shipments” to the United States from factories in China and Canada. But accepting it was also like taking a leap into the unknown.

“I had never, ever done anything that big so I was really scared,” said Yap, 36, who founded her company three years ago. “I got a freight company to help me, to hold my hand I guess. Then I kept calling and checking on it. They told me it had arrived from China and was in customs. Then it just never left.”

Unbeknownst to Yap, a partial shutdown of the U.S. government — sparked by a political impasse between U.S. President Donald Trump and a Democrat-controlled Congress over funding for a U.S.–Mexico border wall — had left thousands of government employees and customs clearance personnel furloughed or working without pay.

With the clock ticking on her deadline, Yap’s shipment was left to languish in a port warehouse for two weeks.

“It was a huge deal for me because I had an enormous value of goods just sitting there,” said Yap, whose order was ultimately released just in time to save the sale. “If the customer had cancelled, that would have bankrupted my company so you can imagine how that felt. For a small business, it’s already complicated, but then you add all this political stuff. It’s just so unpredictable.”

Joy Yap, owner of Wyld Skincare, at her office in Toronto.

J.P. Moczulski for Postmedia NEws

Convincing small business owners such as Yap to jump into the exporting game has been a headline policy goal for the federal government. As Canada racks up new free trade deals — including an 11-country Asia-Pacific trade agreement, a hard-won pact with the European Union and a revamped North American Free Trade Agreement — federal ministers and trade officials have crisscrossed the country to promote them to the small businesses that account for 98 per cent of enterprises.

“We want to enable our small businesses to be successful — successful meaning growing,” said Mary Ng, Minister of Small Business and Export Promotion, who was appointed to her role last summer. “We’re working very hard to help them understand there are customers they can grow through the various trade deals we have done.”

Yet those efforts are playing out against a rapidly shifting global trade landscape, one that has proven daunting even for large corporations with significant resources, never mind small enterprises operating on a knife’s edge.

Tariffs that were once decided only after a lengthy consultation process are now announced abruptly via tweets. The use of sanctions and export controls is on the rise and more companies are getting caught in corruption cases abroad.

These sorts of issues can be a “shock” for small businesses with modest operating budgets, said John Boscariol, head of the international trade and investment law group at McCarthy Tétrault LLP.

“You have the Canadian government constantly encouraging our manufacturers to look to export markets, especially beyond the United States,” he said. “Well, when these mid-sized and smaller companies start to do that, they are encountering trade barriers to a higher degree and they’re encountering corruption, too, in some of these markets.”

Diversifying trade has been a longstanding Canadian goal, one embraced with particular vigour by the current administration in Ottawa. Last year, Canada launched a $1.1-billion trade diversification strategy, setting a 2025 target to increase the value of exports by 50 per cent.

Since 2015, the value of goods exported by SMEs has grown by 12 per cent to $215 billion — 30 per cent of Canada’s overall exports — as the ranks of smaller companies choosing to export increased by 1,100 or 2.5 per cent.

That growth rate is “not nothing,” but it’s not particularly impressive, given that overall exports grew by 18.7 per cent during the same period, said Doug Porter, chief economist at BMO Financial Group.

“I think it’s a worthy goal,” he said of the export target. “But are SMEs realistically going to move the needle on Canada’s overall exports? I have to wonder about that. When you look at Canada’s exports, it’s energy and autos driving things. Those industries are, of course, dominated by very large firms. So whatever U.S. auto sales are doing or whatever oil prices are doing will be the first and second drivers.”

Small businesses have another role to play, however, as crucial engines for employment. The nation’s small and mid-sized companies — which employ up to 100 and 500 workers respectively — provide 70 per cent of Canadian jobs, making their growth and sustainability essential, Ng said.

Mary Ng, minister of small business.

Arlen Redekop/PNG/Postmedia News files

Investments in Canada’s CanExport program, Trade Accelerator Program and Trade Commissioner Service are designed to help companies explore, prepare for and establish themselves in new markets.

“Inevitably, when they grow, they will hire people and that’s what this is all about,” Ng said.

It’s also about reducing Canada’s overwhelming export dependence on the U.S., a goal that took on more urgency following the troubled NAFTA talks. Indeed, the oft-cited “gravitational pull” of the world’s largest economy has long made convincing small-business owners to jump beyond it a tricky task, said Patrick LeBlond, an associate professor of international affairs at the University of Ottawa.

“It’s not just that there are no tariffs, it’s the low transportation costs due to proximity, the cultural similarities, the lack of a language barrier,” he said. “If you have a problem with a customer or supplier you can get on a plane and be there in a few hours. There’s nothing wrong with trying to reduce our dependence on the U.S., but unless the Americans build a wall so we can’t cross it or Trump pulls out of NAFTA, they will remain our largest trading partners.”

For some small businesses, Washington’s push toward more protectionist trade policies combined with the rocky renegotiation of NAFTA has already been enough to tip them toward other markets.

After 20 years of operating in Quebec, Commsoft Technologies Inc. last year decided to make France, not the U.S., the first export market for its small business software.

Shipping containers at the Port of Los Angeles.

Mike Blake/Reuters files

“We were exploring all the different markets and, of course, the U.S. was one of them, but at the time, NAFTA was in limbo,” said Michael Chadwick, a sales specialist at the company. “Then we talked to other Quebec companies that were operating there and they said it’s getting harder for your people to work there, there is a lot more paperwork now.”

Selling in France eliminated the need for major changes to the company’s French language interface, and any existing barriers to the market were addressed by the Comprehensive European Trade Agreement (CETA) between Canada and the EU, he added. The company is now selling an English version of its product in the Greater Toronto Area and has plans to expand to the rest of Canada.

The lure of the vast U.S. market for Wyld Skincare, whose exports have tripled in three years, has been harder to resist. Though its products also have a presence in Canada, Singapore, Belgium, the Netherlands and Bermuda, the U.S. has rapidly become its largest single market, accounting for 80 per cent of its export sales.

But even as the company’s business has grown south of the border, so have the trade headaches. With China and the U.S. locked in an escalating trade war, founder Yap finds herself constantly scanning tariff lists for her Chinese manufactured products.

“Every week, every month, it feels like there’s new things added, so that’s always on my mind,” she said. “But even shipping from Canada to the U.S., there is a lot more scrutiny. It’s not like before when everything was smooth. Things get held up more often and I feel like they get held up longer.”

Even shipping from Canada to the U.S., there is a lot more scrutiny

Joy Yap

Part of the struggle for current exporters of all sizes, Boscariol notes, is knowing when countries will abide by the rules enshrined in trade deals and when they will ignore them. Despite signing a revamped version of NAFTA in May, Trump threatened to slap tariffs on all Mexican imports unless the country stemmed the flow of migrants into the U.S.

“With Trump’s lead, it looks like countries can just toss aside their obligations when they want to punish somebody else,” he said.

The Trump administration has also led the push away from multilateral trade agreements and toward bilateral deals, Boscariol added, creating a “spaghetti bowl” of trade pacts that can complicate supply chains and trip up smaller companies.

“Now when someone is examining or looking at a supply chain, it can involve countries that aren’t just party to one or two or three agreements, they might be party to five or six. When you try to structure that, it’s a lot more challenging,” he said. “What are the rules of origin? They aren’t the same in every agreement and sometimes they’re easy to meet, sometimes a lot more difficult.”

U.S. President Donald Trump and Prime Minister Justin Trudeau change documents after signing a new free trade agreement on Nov. 30, 2018.

Saul Loeb/AFP/Getty Images files

Every business must make its own decisions about how much risk it can tolerate, Ng said, but to help companies understand and prepare for the challenges of the markets they are getting into, the government has pumped funds into a range of initiatives: including $100 million to help SMEs explore new markets, and $184 million for the Trade Commissioners Service, which provides on-the-ground support and market information in various countries.

Ottawa will also help almost 3,000 companies build an export strategy through its Trade Accelerator Program. The Liberals have also pledged to eliminate all fees for business advisory services from the Business Development Bank of Canada, Export Development Canada and Farm Credit Canada.

But companies are on their own should an unexpected tariff or other trade barrier pop up. Rising demand for trade advice from companies of all sizes is such that McCarthy Tétrault has doubled the headcount in its trade division over the past decade, Boscariol estimates.

From companies seeking remissions on tariffs to those accused of violating sanctions in other countries, the cost of doing business abroad as a result of trade barriers is growing all the time, he said.

Yet even with all the challenges it entails, Yap said the benefits of selling her product abroad still outweigh the risks. She will hire her first full-time employee next year and plans to push into more markets after that.

“To be successful, I have to be an exporter,” Yap said. “It’s a lot more complicated than it was, but I wouldn’t let anything stop me.”

Financial Post

• Email: [email protected] | Twitter:

Original Source