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U.S. businesses keen on international trade opportunities with Canada may wish to analyze local production and consumption of their product type in Canada

U.S.-Canada International TradeARTICLE

By Karen Lynch

When U.S. companies think international trade, many think first of Canada. After all, Canada is the United States’ largest export market (and vice versa).1 This article delves into the current state of U.S.-Canada trade as part of a series of country profiles that addresses markets worldwide, focusing on the factors companies consider when deciding which foreign markets to enter or where to expand their global trade.

Bilateral trade generally thrives along the 5,525-mile border between the U.S. and Canada,2 given the well-developed Canadian economy, the two countries’ cultural affinity, and long-standing business ties. U.S. companies see Canada as a robust market in its own right, as well as a strong link in regional and global supply chains.

U.S. businesses considering international trade with Canada may wish to be aware of currency trends. The Canadian “loonie” is down from $1.00 in February 2012 to $0.76 approximately five years later, which has made U.S. products more expensive for Canadian buyers. That has slightly dampened exports to Canada but can have a beneficial impact on imports from, and business investment in, Canada.3

Exporting to Canada

It is often noted that the U.S. and Canada share the longest international border in the world, and 90 percent of Canada’s 35 million citizens live within about 100 miles of that border.4 That makes for a particularly close, centuries-old trade relationship in the Great Lakes Region, for example, comprising eight U.S. states and the province of Ontario.5

Geography aside, Canada also ranks among the Top 10 global business-to-consumer (B2C) e-commerce markets – one that is growing faster than in the U.S.6 By 2018, Canada is expected to have some 20 million digital buyers.7 Three-quarters of the country’s online shoppers buy from international sources, the biggest of which is the U.S.8 However, with the Canadian dollar’s weakness against the U.S. dollar, costs are a growing concern for these cross-border shoppers.

Overall, U.S. goods and services exports to Canada totaled $337.3 billion in 2015,9 or 15 percent of all U.S. exports.10 Other top exporters to Canada, in order, are China, Mexico, Germany and Japan.11

The U.S. exported $280 billion in goods to Canada in 2015, the biggest categories of which were vehicles, machinery, electrical machinery, food/agricultural products, mineral fuels and plastics. Automobile manufacturing, for instance, can involve highly integrated production and assembly of auto parts across the border. U.S. services exports to Canada totaled $57.3 billion in 2015; the top U.S. services exports include travel and intellectual property such as software and media.12

The U.S. trade surplus for goods and services with Canada was $11.9 billion in 2015. Goods exports to Canada were down 10 percent year-over-year in 2015, while services exports dropped 6.6 percent,13 due to factors including the falling CAD-USD exchange rate and the impact that Canada’s dropping commodity revenues has had on its buying power.14 Still, the long-term trend has been growth: both goods and services trade were up significantly from 2005 levels (by 32 percent and 75 percent, respectively).15

The Canadian economy grew at about 1.3 percent in 2016, with projections of 1.8 percent growth in 2017,16 which is roughly on par with U.S. GDP growth of 1.9 percent in 2016 and 1.7 percent in 2017.17 At almost $1.6 trillion,18 however, the overall Canadian market is smaller than the U.S. (GDP of $17.9 trillion). Average inflation in 2016 was 1.45 percent.19

Canadians’ GDP per capita is around $43,000, compared to U.S. GDP per capita of about $56,000.20 Median household income in Canada is about $60,000.21 Over 80 percent of working Canadians are employed in the services sector.22 Canada’s unemployment rate is around 7 percent, “just slightly above its estimated full-employment level,” according to the Royal Bank of Canada.23 “A healthy labor market, low interest rates and the implementation of the federal government’s child care benefit will provide consumers with the wherewithal to spend,” the bank said, adding that households will be responsible for more than 60 percent of Canada’s economic activity.

Some trade friction exists, in the form of border and regulatory delays, which can add an estimated 5 percent to the cost of a product.24 Overall, Canada ranks 24th out of 136 countries in the WEF’s Global Enabling Trade Index 2016.25 International trade barriers can also be compounded by non-tariff regulatory and legislative differences among Canada’s provinces.26

On the global trade front, Canada’s current account deficit narrowed in the third quarter of 2016, to $13.6 billion.27 In 2015, Canada’s net capital account registered a negative $85.5 million.28 Its foreign exchange reserves were $83.4 billion in October 2016, down from a record high of $84.3 billion in May of 2016.29

The chart displays statistics that U.S. businesses should consider before initiating international trade initiatives with Canada

Importing from Canada

Canada is the United States’ second-largest foreign supplier of goods, after China, with top import categories including mineral fuels, vehicles, agricultural products, machinery and plastics. Leading services imports from Canada to the U.S. are in the travel, transportation, telecommunications and information services sectors.30 The U.S. imported $325.4 billion in goods and services from Canada in 2015.

The same shared border and cultural affinities that ease U.S.-Canada exports are at play on the import side as well, with the added benefit of lower costs for U.S. importers, due to the stronger U.S. dollar.

Setting up Shop for International Trade in Canada

As the world’s 10th largest economy (measured in nominal GDP),31 Canada is home to multinational companies in such industries as paper, technology, aerospace, automobiles, machinery, food, clothing and many other goods.32 Major Canadian services industries include transportation, construction and retail; its major natural resources industries are forestry, fishing, agriculture and mining.

U.S. companies considering establishing a subsidiary in Canada would be competing in a market that also attracts companies from around the world. In 2016, Statistics Canada estimated that employment at foreign-controlled Canadian companies totaled 1.9 million in 2013, representing 12.3 percent of all jobs in the country.33

Paving the way for U.S. companies, the cost of doing business in Canada is 14.6 percent lower than in the U.S., according to KPMG.34 Canada ranks 22nd out of 190 countries in the World Bank’s (WB’s) Ease of Doing Business rankings, and a breakdown of that statistic ranks Canada second in the ease of starting a business and seventh in the ease of getting credit.35 Its tax system is rated 17th in the index. The government offers research and development tax credits and incentives, especially in support of developing an innovation economy.36 The country has a highly skilled workforce, ranking ninth out of 130 countries in the World Economic Forum’s (WEF’s) Human Capital Index 2016.37

U.S. annual foreign direct investment in Canada was $30.8 billion in 2015.38 The U.S.-Canada exchange rate has also had an impact on U.S. companies setting up shop in Canada. “The low Canadian dollar has meant more than American businesses purchasing an increased quantity of goods, it’s been leading to investment, the most well-known of which being automotive industry investments,” according to the Trade Ready blog.39

Cultural Considerations for International Trade

Canadian “exports” to the U.S. such as comedian Jim Carrey, actor William Shatner and singer Justin Bieber underscore the similarities between the two cultures. Nevertheless, “despite their surface-level commonalities, Canadian and American consumers are incredibly different and retailers must understand the nuances between them in order to successfully cross the border,” according to Buxton, a customer analytics company.40 For example, there can be relatively low transferability between U.S. and Canadian ads.41 And despite similar earnings, Canadians may have less disposable income than Americans, due to a higher cost of living.42

In addition, when doing business with Canadians, “their communication style is pragmatic and relies on common sense rather than aggression. If you come from a more direct culture, you may wish to soften your demeanor and tone,” according to one expats’ guide to doing business.43 Nor is Canada a monolithic culture. “French Canadians will carefully analyze every detail of a proposal,” the guide says, while business in Western Canada tends to be more relaxed. Language is a consideration in the Province of Quebec, where French is required in many business situations by the Charter of the French Language.44

The Takeaway

In international trade, the U.S.-Canada relationship has generally prospered, though cross-border exports are down slightly of late. The U.S.-Canada exchange rate has had varying impacts across the board – on exports, imports and business investments. In addition to weighing such factors, trade groups generally advise any U.S. company evaluating its prospects in the Canadian market carefully analyze local production, import and consumption of its own type of product.45

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

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3. Canadian Dollar Trend Dashboard, Canadian Forex;http://www.canadianforex.ca/forex-tools/my-fx-dashboard
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8. ibid
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13. ibid
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25. "Global Enabling Trade Index 2016, World Economic Forum"http://www3.weforum.org/docs/WEF_GETR_2016_report.pdf
26. "Tear Down These Walls"Senate Committee on Banking, Trade and Commerce; http://www.parl.gc.ca/content/sen/committee/421/BANC/Reports/2016-06-13_BANC_FifthReport_SS-2_tradebarriers(FINAL)_E.pdf
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40. "Americans & Canadian Consumers: Not as Similar as You Think,"Buxton; https://www.buxtonco.com/news/news-detail/american-canadian-consumers-not-as-similar-as-you-think/
41. "Advertising to Canadians with Beer, Joie de Vivre, and Sid Lee,",Ipsos; http://www.ipsos-na.com/knowledge-ideas/advertising/articles/?q=advertising-to-canadians
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43. "Doing Business with Americans? HSBC Has Some (Hilarious) Cultural Advice,"MacLean’s magazine; http://www.macleans.ca/economy/business/doing-business-across-the-border-hsbc-has-some-hilarious-cultural-advice/
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