With trade wars the new normal, getting Canada’s exports to fresh markets matters more than ever
I’ve spent years looking for a Canadian exporter that defied economic gravity, and Jean-François Bernier, chief executive of Attitude, a Montreal-based maker of natural body creams and household cleaners, earned his way into the paper with these two words: South Korea.
Canada, a “trading nation,” sends almost all its international shipments to the United States, a material amount to China, and very little to anyone else. We learned last year what happens when your idea of hedging against the actions of one capricious president is trading with a country run by an equally capricious president.
“I’m a lot more hesitant to go to China,” Bernier said when I asked about the trade wars during an interview in December.
He was being ironic, a darkly humorous allusion to China’s jailing of Canadians Michael Kovrig and Michael Spavor after Canada apprehended Huawei Technologies Co. Ltd. executive Meng Wanzhou on behalf of U.S. authorities. China also retaliated with its pocketbook, blocking Canadian canola and, until recently, shipments of pork and beef. Chinese propaganda has stirred resentment against Canada, making a notoriously cutthroat market even tougher for anyone hawking goods branded with a Maple Leaf.
“Made in Canada has become a lot less sexy for them,” said Bernier, a former Bombardier Inc. manager in Germany who founded Attitude with some partners in 2005. “We’ve seen it. I would not say through lost opportunities, but we see it through our online sales over there.”
That would be a serious problem if Attitude was a typical Canadian exporter. But Bernier is beholden to neither the U.S. nor China to cover the salaries of the 100 people he employs. Asia accounts for 70 per cent of Attitude’s total sales and South Korea, the region’s fourth-largest economy, is the company’s biggest market. Canada ranks second.
“Most companies don’t want to go through the hustle,” he said, pointing out that Attitude didn’t just choose the Korean market. “We went everywhere.”
Last year, the Financial Post took a closer look at how the trade wars were playing out on the ground in Canada. Our hypothesis was that Canadian exporters accustomed to easy access to the world’s largest economy would struggle to deal with political risk becoming a much bigger part of doing business.
The anecdotal evidence suggested we were correct, and so does the data: non-energy exports plateaued in 2019, according to Statistics Canada’s monthly merchandise shipment data. Mairead Lavery, chief executive of Export Development Canada, the Crown agency that backs riskier international transactions, will report 2019 results in the spring, but they’re not looking great.
Most companies don’t want to go through the hustle
Jean-François Bernier, chief executive of Attitude
“It was a tougher year for exporters,” Lavery said in an interview at the Canadian Chamber of Commerce’s economic summit in Toronto on Jan. 30. “Less investment at large. People really were feeling the uncertainty and were not quite sure where to go.”
But if exporters don’t spread out geographically now, they never will.
Canadian executives have endured more than two years of uncertainty over the future of trade rules in North America, all for an agreement that will result in little economic gain, and might even hurt the economy by making some goods, including automobiles, more expensive to produce.
At the same time, China went from being a plausible bilateral trade agreement partner to a commercial bully. Navigating the regulatory labyrinth in Brussels or finding a partner in Vietnam must look more attractive when companies run their cost-benefit analyses now that shovelling goods into the maws of the U.S. and China can no longer be considered a sure thing.
“Sometimes you think that change is never going to happen because we’ve been living through a quiet period, but, based on history, I think it was pretty naive to think that,” Bernier said. “For us, I think it makes us more careful, smarter about how we do things and less naive. Honestly, I think we’ll make better decisions.”
Canada’s exports are among the most geographically concentrated in the world, according to the Office of the Chief Economist at Global Affairs Canada, which reported last year that we are more dependent on the U.S. than Hong Kong is on mainland China and New Zealand is on Australia.
In some ways, the extreme concentration is natural: Canada shares a border with a single country that has the gravitational pull of Jupiter. (Mexico’s exports are equally concentrated.) But the lack of diversity leaves Canada at the mercy of U.S. business and political cycles. It also represents an opportunity cost, since most companies have essentially missed out on the hyper growth that occurred in China and other emerging markets over the past couple of decades. The companies that benefit most from faster growing emerging markets are the ones who get in early, according to The Office of the Chief Economist at Global Affairs’ latest State of Trade report.
Prime Minister Justin Trudeau’s government appears to be serious about getting Canadian companies into new markets. It set aside more than $1 billion in 2018 to build infrastructure, subsidize export plans and staff up the Trade Commissioner Service. Trade minister’s Mary Ng’s mandate letter is jammed with orders related to the government’s goal of doubling overseas exports by 2025.
Attitude’s story shows why diversification matters. Monthly manufacturing output climbed to about $203 billion in May, the highest since the summer of 2007, but it has been drifting lower since, according to GDP data that Statistics Canada published on Jan. 31. But Bernier’s company has been thriving. Last fall, it opened a state-of-the art factory in Sherbrooke, Que., a $15-million investment made necessary because the company’s contract manufacturers couldn’t keep up with demand.
“It’s a good statement,” he said of the new factory. As for the trade wars, they’re just the new normal. “I try to keep people’s attention on what we can control. This is how we make sure we don’t become too anxious about things we don’t control and we get the most out of our days.”