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.
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.
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 Len. 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.
Secure Market Access: The NAFTA provides secure access for Canadian exports to the U.S. and Mexico.
Dispute Settlement: Settlement or determination of remedies regarding anti- -dumping and countervailing disputes is by bi-national panels, not domestic courts. Disagreements between investors and NAFTA governments may be settled through international arbitration.
Government Procurement: All three countries have agreed to provide substantially increased access to government procurement opportunities not only in goods, but also in services, including construction services.
Business Travel: Simplified procedures expedite business travel. Eligible business people can be granted temporary entry without prior approval procedures.
Intellectual Property: The NAFTA includes comprehensive coverage of intellectual property rights to encompass standards of rules and enforcement.
Under the NAFTA, many Mexican tariffs were eliminated immediately, including those on a range of Canada’s key exports: agricultural and fish products, many metals and minerals, most telecommunications equipment, many types of machinery, and certain wood and paper items. (For more information on NAFTA, see the FaxLink document 60170.)
The first year of NAFTA saw a large jump in Canada’s trade with the U.S. and Mexico. Canada’s two-way trade with the U.S. rose by 21 percent, to reach $311 billion, while that with Mexico grew at a similar rate, to total $5.5 billion. These growth rates were higher than the increase in Canada’s overall trade, meaning that North America is becoming even more important for Canadian exporters and importers. In 1994, 82 percent of Canadian exports went to the U.S. and Mexico, and 70 percent of imports were from these countries.
North-south Transportation Links
North-South linkages by road, rail, marine, air, pipeline, and intermodal services permit easy access to North American markets, especially the U.S. Since transborder business is a vital part of their operations, Canadian carriers get goods to the U.S. quickly and inexpensively.
“The continent has shrunk to overnight delivery by air and three days by truck from all of the major industrial centres. We look at North America as one big country.” Max Persaud, Manager Corporate Logistics, Customs and Traffic Philips Electronics Ltd.
Road transport is dominant, a fact which reflects the large flow of manufactured goods and the integration of regional markets. The trucking industry has adapted well to the demands of just-in-time (JIT) manufacturing. The Canadian for-hire trucking industry earns about one fifth of its intercity revenues from transborder business. Several trucking companies specialise in this increasingly competitive area.
In preparation for expanded traffic throughout North America, rail networks are expanding on a continental scale. Strategic alliances between Canadian and U.S. railways speed the flow of goods to market, expedite border crossings, and provide quality intermodal services. Canadian rail carriers have co-ordinated Canada-Mexico freight services through agreements with the Mexican state railway and with U.S. railways and barge lines.
Several of Canada’s deep-water ports are strategically located near large U.S. markets. Many of these facilities are open year-round. Marine travel is concentrated in the Great Lakes/St. Lawrence Seaway system and on the east and west coasts of North America. The St. Lawrence Seaway serves an area containing some 61 million people in much of the industrial heartland of North America.
Flights from Canadian airports serve all major North American centres, allowing for overnight delivery by air cargo. Following the signing of the 1994 “Open Skies” agreement, Canadian carriers have unlimited rights to fly from anywhere in Canada to any point in the United States. U.S. airlines enjoy similar rights to destinations other than Toronto, Montreal and Vancouver. Equal access for U.S. carriers will be phased in over three years. The arrangement will mean better connections and more competitive pricing for both passengers and cargo.
Complementing the agreement is the “Border Management Accord,” a planned expansion of pre-clearing facilities to allow travellers to the U.S. to clear customs before leaving Canada.
Intermodal transportation combines the attributes of more than one mode. Increasingly, intermodal services are competing with trucking companies for transborder traffic. Railways are making important investments in intermodal terminals and equipment to ensure their competitiveness. Specialised container trains provide timely, high-quality service to Canadian and U.S. cities. CP Rail has direct access to the port of Philadelphia via one of its U.S. subsidiaries. Access to other U.S. ports is available through interchanges with U.S. carriers.
Strong Support Services
Massive North American trade flows have spawned extensive support services for Canadian companies that ship to the U.S. and Mexico. Customs brokers are familiar with all aspects of international shipping, from packaging and labelling requirements to the relative cost-effectiveness of different routings to and from Canada. Freight forwarders consolidate shipments from several sources to take advantage of volume discounts and design efficient and cost- effective distribution systems.
Companies doing business in Canada also benefit from a nation-wide system of 142 privately-owned warehouses licensed and bonded by the federal government. Warehouses in all large metropolitan centres offer on-site customs inspection, bar-coded storage and handling, and after-hours clearance.
Efficient Border Crossing
The Canadian and U.S. governments are actively co-operating to streamline the border crossing process. Programs that use electronic data interchange, bar- coding technology and pre-clearance of goods are speeding up the release of shipments. These innovations make it even easier for companies located in Canada to export to the U.S.
“Pratt & Whitney has a world-wide distribution network. Customs operations have been streamlined to the point that the Canada-U.S. border plays no role in our distribution system…” Brian McGill, Director of Transportation Pratt & Whitney Canada Inc.
With the NAFTA and the modernised, efficient transportation links throughout the continent, the entire North American market is easily served from a Canadian- based company. Foreign investors from outside North America should therefore look upon a Canadian location as an entry into all regional markets of the NAFTA countries.
A number of U.S. multinational enterprises — 3M, Dow, DEC, IBM, Bell Helicopter-Textron, and Procter and Gamble — have already made moves toward serving the North American market from Canadian subsidiaries. To create economies of scale in manufacturing, these subsidiaries are being given North American or global mandates. There will undoubtedly be more examples of this trend in the near future.
As the number of NAFTA signatory countries expands, the market will become even more attractive. Negotiations are currently under way for Chilean accession to the NAFTA, and other South American countries have expressed interest.
The North American Free Trade Agreement–An Overview
The North American Free Trade Agreement, (NAFTA) has, since it became effective on January 1, 1994, created a free trade area comprised the United States, Mexico and Canada. The agreement’s major objectives are to eliminate tariffs, to improve market access to the goods and services among NAFTA countries, to eliminate barriers to manufacturing, agricultural and services trade, to remove investments restrictions, and to protect intellectual property rights. It also addresses labor and environmental concerns.
The U.S.-Canada Free Trade Agreement (CFTA) has been effective since January 1, 1989, and the NAFTA expands this agreement within services, investment, land transport, intellectual property and government procurement, but keeps the status quo in agriculture and energy.
NAFTA negotiations represented an opportunity for the U.S. to achieve its economic objectives: expanding sales opportunities in Mexico for U.S. companies; formalizing recent Mexican market liberalization initiatives; and enhancing North American international competitiveness by permitting companies to establish operations anywhere in North America without facing the obstacles caused by trade or investments barriers.
For Mexico, the agreement represented a turning point in its relations with the U.S. By entering NAFTA, Mexico turned its back on decades of nationalism and economic protectionism and culminated its move from a nationalized, protected economy to one governed by market-oriented principles.
Canada’s participation in the Agreement can be seen as a defensive maneuver to ensure that NAFTA would not dilute the Canadian benefits of origin of goods so that free trade status is effective among the NAFTA countries. Generally, 50 % of the tariffs between the U.S. and Mexico has been eliminated immediately, 65 % will be by 1999. Most U.S.-Canada tariffs will be phased out by 1998.