The North America market is one of the richest in the world. Measured in terms of GDP, it is the equivalent of Western Europe. But with a somewhat smaller population, GDP per capita in North America, Canada, Mexico and the U.S., is around 12 percent higher than in Western Europe. The North American Free Trade Agreement (NAFTA), which came into effect January 1, 1994, sets out the schedule for tariff elimination for members.. As a small country, Canada has always been careful in it’s dealings it’s large neighbor, the U.S., however,
compliance to this agreement threatens our very existence. Canada was unfairly taken advantage of in the singing of this agreement, our identity of a sovereign nation is at risk.
The North American market is also one of the most sophisticated and
demanding.
It is an excellent base from which to develop and launch new products.
From a
Canadian base, companies can establish a solid market position
throughout North
America and then reach out to serve global markets. This agreement,
which and
contains many key provisions to facilitate the conduct of business among
the
three countries, has been a benefit to Canada-U.S.-Mexico trade. The
continent-
wide transportation system that binds this market together is efficient
and
cost-effective. Carriers of all modes are investing in more
sophisticated technology and entering into strategic alliances to improve
service. Border
crossings are becoming easier.
Canada provides an ideal location for serving the entire North American
market.
Companies based in Canada have preferred access to a market of 380
million
people, with a combined Gross Domestic Product (GDP) of more than $10
trillion
(Canadian dollars). However, our participation in the agreement allows
the U.S.
unobstructed to our market. This poses a serious problem when looking
at pure
numbers. Canada is a country of approximately 28,000,000 people and the
U.S. a
country of about 280,000,000. The extra “0” means the U.S. in ten times
greater
then Canada in population size. The implications of this are enormous.
Because of the difference in size it is logical to assume that the
average
Canadian firm is about ten times smaller then its U.S. counterpart. As
an
example, Bell Canada (Canada’s major telecommunications company) is
worth an
estimated 9 billion dollars. AT&T (U.S. major telecommunications
company) is
worth approximately 108 billion. These numbers should speak for them
selves.
Although it hasn’t happened yet, AT&T could attempt a competition war on
Bell
Canada
There are many ways to view North American markets. Initially, they can
be
viewed as three national markets, with certain differentiating
characteristics
in terms of tastes, preferences, disposable incomes and spending
patterns.
Because national accounts are the source of much of the general
information on
domestic markets, this is often how North American markets are
portrayed.
In fact, though, North America is increasingly a collection of regional
markets
that cut across national boundaries. Companies based in east-central
Canada view
the north-eastern U.S. states as their proximate market area, and
companies in
Vancouver, for example, look southward to the U.S. states of Washington,
Oregon
and California for market opportunities. Although east-west
transportation
routes are well developed and national characteristics of markets are
still
important, there is no escaping the geographic pull of the north-south
axis.
Increasingly, North America will be viewed as a single market. The
market opportunities for products and services produced by a
Canadian-based company are
as likely to be in Chicago, Houston, and Mexico City, as in Canadian
cities.
Thus, although some general characteristics of the three national
markets are
highlighted here, potential investors should also be attuned to the many
cross-
border regional markets that constitute the North American market, and
to the
fact that North America is in many ways a single market.
Canada
Although many investors see Canada as an excellent base from which to
export to
North American and other global markets, the rich domestic market holds
numerous
growth opportunities as well.
Canada’s population, which is increasing at a little over 1 percent
annually, is
fast approaching 30 million. The two central provinces of Ontario and
Quebec
account for over 60 percent of the total, but the western provinces of
British
Columbia and Alberta, with 22 percent, have the highest population
growth.
The majority of Canadians live in urban centres located within 100
kilometres of
the U.S. border. This creates a string of regional market clusters along
the
Canada-U.S. border that can be served from a Canadian location. Even on
their
own, though, several Canadian cities located close to the Canada-U.S.
border are
large markets. The Toronto metropolitan area has a population of 4
million,
Montreal has more than 3 million, and Vancouver has just under 2
million.
The average family income in Canada is about $54,000. With the sharp
increase in
the proportion of working-age women who have entered the labour market
since the
mid-1970s, the typical family tends to have two income-earners. In the
first
half of the 1990s, growth in personal incomes has been 2-3 percent
annually, a
rate which has been affected by the recession and smaller increases in
wage
settlements.
There are regional income differentials, with Ontario,British Columbia,
Alberta
and Quebec having the highest levels of per capita income. But income
redistribution programs limit the variations between the richer and
poorer parts
of the country.
Canadians spend some $450 billion on consumer goods and services each
year. The
amount of discretionary income that is available for purchases of “non-
essential” goods such as electronic products, and services such as
travel,
sports and recreation has been increasing. The market for consumer
products
related to information technologies has been especially buoyant. Between
1981
and 1994, computers and audio/visual electronics enjoyed the fastest
growth in
sales. In the service sector, an ageing and increasingly affluent
population is
increasing demand for home maintenance, health services, financial
services,
travel and leisure activities.
Among the trends shaping the Canadian consumer marketplace of the future
are
increasing ethnic diversity and multiculturalism; continued expansion of
the
service sector; greater public awareness of environmental issues and
values;
increasing consumer demands for convenience; and a trend toward
differentiating,
segmenting and customising consumer markets.
The United States
There is no other national market for consumer and industrial products
and
services that is near the size of the U.S. In terms of GDP, Japan comes
closest,
with a GDP that is two thirds that of the U.S., which in 1994 stood at
US $6,738
billion. The demand for imports in the U.S., at US $669 billion in 1994,
was
about double that of Germany, the second largest market for imports.
Simply put,
the U.S. market is a magnet for companies around the world.
What is less appreciated about the U.S. market is that it is all easily
accessible from Canada. There are more than 110 million consumers within
a day’s
drive of southern Ontario. Montreal, Halifax and Moncton are within a
day’s
drive of New York, Boston and Philadelphia. Winnipeg is just 17 hours by
road
from Chicago and eight hours from Minneapolis. From Vancouver, markets
all along
the Pacific coast of the U.S. can be easily served. It takes about 48
hours to
ship by truck from Vancouver to Los Angeles. With increasingly efficient
transportation routes, even the southern U.S. states are considered to
be close
to major Canadian cities.
In 1994, the population of the U.S. reached 261.5 million. This is
dispersed
across four large regional markets: the Northeast has 19.9 percent of
the total,
the Midwest 23.6 percent, the West 21.7 percent, and the largest, the
South, has
34.7 percent.
The GDP of each of these regions is larger than individual countries of
Western
Europe, with the single exception of Germany. As a share of total U.S.
GDP, the
Northeast, Midwest and West each has roughly 23 percent. The South’s
share is
around 31 percent.
In 1994, per capita GDP in the U.S. was US $25,820, second to Japan
among the G7
countries. Median household income was about US $32,200, with
married-couple
households having a significantly higher US $45,041. Generally speaking,
consumer markets in the U.S. are similar to those in Canada, and
spending patterns do not vary considerably. For companies offering
consumer products and
services, these similarities provide an opportunity to test products in
the
Canadian market before making an entry into the U.S.
If a foreign company is considering an investment in North America to,
among
other things, tap the rich U.S. market, a Canadian location is eminently
attractive. When cost-effective access to the U.S. market is combined
with the
range of other business advantages — generally lower corporate tax
rates, the
most advantageous investment tax credits for R&D activity, and a quality
of life
that is recognised as one of the best in the world — the foreign
investor has
the best of all worlds.
Mexico
In contrast to the advanced economies of Canada and the U.S., Mexico is
an
emerging market. Mexico’s GDP per capita is 15 percent that of the U.S.
and 20
percent of Canada’s, and in terms of income levels and income
distribution,
Mexico resembles a developing country. On the other hand, with a
population of
about 92 million, most of which is young, a growing middle class of
educated
Mexicans, and programs of political and economic reform, there is a
dynamism in
Mexico that is inviting.
With dynamism comes volatility, and Mexico is no stranger to this. The
plunge of
the peso that began at the end of 1994 and continued through the first
quarter
of 1995 created a financial crisis that has led to a significant decline
in
economic activity and real incomes. But the economy is recovering and
investor
confidence is being restored.
In the coming years, there will probably be more vacillations as the
economy
goes through periods of rapid growth and then slows to keep inflation
under
control. Throughout these cycles, Mexico will undoubtedly be relying
more on
international trade and investment as engines of growth. In 1994, total
trade
was the equivalent of almost 40 percent of the country’s GDP. Mexico
will remain
a significant import market in the years ahead. A potential foreign
investor in
North America should therefore consider the advantages of locating in
Canada,
and supplying the Mexican market from a Canadian location.
In approaching the Mexican market, companies should be aware of its
diversity.
There are large disparities in incomes, regional markets vary
considerably, and
there is demand for basic infrastructural needs as well as more
sophisticated
consumer and industrial products.
The largest regional markets are those of metropolitan Mexico City, with
a
population of almost 20 million; Guadalajara, the capital of the
central-western
state of Jalisco; and Monterrey, the capital of the north-eastern state
of Nuevo
Leon. Mexico City is the country’s economic, financial and industrial
centre.
With upper and middle-income groups numbering in the vicinity of five to
six
million, it offers the largest consumer market in the country.
Guadalajara, with
a population of around 3.5 million, is an important commercial and
financial
centre. Monterrey, of roughly the same size as Guadalajara, is one of
the country’s most important industrial centres, with 53 percent of
Mexico’s top 500
businesses.
Despite Mexico’s current economic difficulties, there are many business
opportunities in the Mexican market. Perhaps most enticing, though, is
Mexico’s
potential.
Since the end of World War II, Canada-U.S. trade grew steadily into the
largest
bilateral trading relationship in the world. One of the more significant
developments in the history of the two countries’ trading relationship
came in
1965 with the signing of the Canada-U.S. Auto Pact, which governed
duty-free
trade in automobiles and parts. Largely as the result of this agreement,
trade
in this sector has remained a central part of the two countries’ overall
trade.
The Free Trade Agreement
The Canada-U.S. Free Trade Agreement (FTA) took economic co-operation
between
the two countries to a new level. Effective January 1, 1989, under the
terms of
the FTA, tariffs on goods manufactured in Canada and the U.S. would be
gradually
eliminated over a ten-year period, provided the goods met
“rules-of-origin”
requirements. Many of the tariffs would be eliminated before the end of
the ten-
year time frame, and the initial phase-out schedule for products could
be accelerated if the two sides agreed.
The FTA also provided Canadian products with “national treatment” on
most sales
to U.S. government departments and gave equal access to potential
suppliers on
tendering and bidding information. A number of other sectoral and
institutional
issues were included in the Agreement to facilitate trade, identify
exceptions
and clarify other aspects of the trading relationship.
In addition to the trade-creating provisions of the FTA, Canada and the
U.S.
have been working on the harmonisation of standards, testing and
certification
procedures.
Prior to signing the FTA, most of Canada-U.S. trade was duty-free under
GATT
rules. Nevertheless, the FTA had a dramatic effect on the volume of
two-way
trade. Between 1988 and 1993, trade between the two countries increased
by 40
percent, to $257 billion, with a strong 46 percent growth in Canadian
exports to
the U.S. These gains were registered despite an economic recession in
the middle
of this period. Specific sectors, such as office, telecommunications and
precision equipment; chemical products; pharmaceuticals; and textiles
showed
particularly strong growth in trade.
The North American Free Trade Agreement (NAFTA)
Effective January 1, 1994, the NAFTA improved the FTA and added Mexico
to the
free trade zone. By this time, Canada-U.S. trade was overwhelmingly
duty-free.
Under NAFTA, a tariff-reduction schedule was worked out for trade with
Mexico
whereby tariffs would be reduced over a ten-year period from the
implementation
date. Most of Mexico’s non-tariff barriers, such as import licences,
will also
be eliminated during this period.
The key provisions of the NAFTA are:
Elimination of Tariffs: Tariffs on Canadian exports to Mexico will be
phased out
over 10 years. Mexico has provided immediate duty-free access for many
of Canada’s key export interests.
National Treatment: Canada, the U.S. and Mexico treat each others’
goods, services, and investors as they treat their own. International
investors with
investments in Canada are covered by the NAFTA if they use Canada as a
“home
base” to make investments in the U.S. or Mexico.