Big enough for gold medals, big enough for Europe

New trade agreements mean new offshore opportunity for Canadian manufacturers

Canada’s wood industry has changed — probably forever. Competition from importers has made the domestic market far more competitive. A more expensive Canadian dollar has made exporting a challenge. A forever-recovering U.S. economy has sidelined a once-powerhouse buyer of Canadian goods. As a result, Canadian manufacturers have been forced to scramble for new markets. The Canadian government has obliged by engaging in some historical free-trade agreements. But is Canada’s wood industry ready to take advantage?

As an example of just how trade friendly Canada has become, free trade agreements have recently been signed with South Korea, Colombia, Honduras, Panama, Peru, Switzerland, Iceland, Norway, Lichtenstein and Jordan. Canada is also currently in free-trade negotiations with Peru, Bolivia, Ecuador, the Dominican Republic, India, Japan, Morocco, Singapore, Ukraine, Turkey, China, Australia, Mexico, Singapore and more.

This is all in addition to the free-trade agreement already in place between Canada, the U.S. and Mexico (NAFTA). Yet much of all this pales in comparison to an agreement Canada has signed with the European Union to significantly reduce many trade barriers, including those in the wood industry. It is called the Comprehensive Economic and Trade Agreement (CETA), and is perhaps the most significant free trade document Canada has ever signed. If it is ratified by the legislatures of both Canada and the EU, it could mark a fundamental shift in international trade.

So what’s at stake for Canada’s wood industry? Access to (and competition from) 28 industrialized countries in the EU. As Valerie D’Erman, instructor at the University of Victoria in B.C and expert on CETA, says, “It almost makes you wonder what’s in this for the Europeans. To them, we’re a small market. To us, they’re a huge market with almost limitless opportunities.”

FAREWELL TO TARIFFS

One definitive benefit of most trade agreements, according to D’Erman, is their positive impact on the revenues of participating countries. She says, “Governments are often reluctant to raise taxes, or implement other revenue-increasing measures. A free-trade agreement is a relatively low-risk political decision that has demonstrated historical benefits.”

According to Claude Rochon, spokesperson for Foreign Affairs, Trade and Development Canada, “Wooden cabinetry and furniture currently face EU tariffs of up to 2.7 percent. Upon entry into force of the CETA, EU tariffs on all wood products, including wooden cabinetry and furniture, will be eliminated immediately. She adds, “Canadian exports to the EU of wooden cabinetry and furniture were valued at $9.3 million in 2013. Canadian global exports of wooden cabinetry and furniture were valued at $1.4 billion in 2013 with over 95 percent of these exports destined for the United States.”

Trade figures provided by the European Commission show that European exports of wood furniture to Canada represent only 1.9 percent of total exports in that sector. In other words, given the relatively low amount of trade between Canada and the EU in the secondary wood sector, reducing tariffs to zero can only provide even more opportunity to explore yet-to-be tapped markets.

According to Monique Moreau, director of national affairs for the Canadian Federation of Independent Business (CFIB), cost is cited by her organization’s members as the greatest barrier to international trade. A 2.7 percent reduction in that cost as a result of the tariff elimination with Europe might prove tempting to Canadian exporters. Moreau says, “As volumes of trade increase, even a small percentage reduction can lead to huge cost savings.”

The CFIB represents small businesses, including countless small- and medium-sized wood shops across Canada. Moreau says, “Yes, the readers of Wood Industry most definitely form a part of our manufacturing membership, which is one of the most significant segments of the CFIB. We take our positions based on direct surveys of these members. When it comes to trade in general, including that with Europe, our members say they welcome the chance to compete in new markets. They’re up for the challenge.”

WHICH SECTOR BENEFITS?

A challenge with Canada’s wood industry, however, is that it tends to get dominated by the forestry/primary sector. This reality hasn’t changed with the drafting of CETA. One of the first organizations to heap praise upon the signing was the Forest Products Association of Canada. Readily-available government information on how wood products are affected by CETA focus almost exclusively on forestry products, or “value-added” wood used mostly in constructing buildings. How about the secondary sector? A government statement alludes to benefits of CETA to a hypothetical woodworker in B.C. No specifics are offered.

There is no doubt that CETA will benefit Canada’s primary wood sector, which has been trying to penetrate new markets for years. Canadian sawmills will see steep reduction in European tariffs on plywood, veneered panels, fibreboard, particleboard and oriented strand board, as well as prefabricated buildings. For that matter, trade agreements like those with South Korea include some of the same primary-side benefits.             

On the secondary side, however, the situation might not be unlike that faced by Canadian dairy farmers in relation to CETA. The great fear in that sector is that small Canadian producers of such dairy products as cheese might get swamped by lower-cost alternatives imported by large European producers. Similarly, we have already seen in Canada the rise of European importers of furniture and cabinetry, a situation that might be exacerbated with a newly-signed free trade agreement.

Of course, there are remedies for such challenges. Already we are seeing Canadian-based Aya Kitchens, for example, coming up with manufacturing solutions to directly compete with European importers (see “An inside look” story on page 11.) According to Aya’s vice president of sales, Hugh Wahab, “I think we can go head-to-head with the Europeans. We can compete on quality, and on value. Of that I have no doubt.”

Another remedy for the challenge posed by European importers is to turn the tables. As mentioned earlier, Canada’s secondary wood exports to Europe are only a drop in the bucket. On the other hand, Europe constitutes countless new opportunities for Canadian manufacturers already scouring the planet for new markets — or at least they should be. Canada’s demographics can only add to the potential.

D’Erman says, “Just look at all the diverse cultural communities in Canada, especially those from Europe. One would think that a Canadian manufacturer with Italian roots, for example, might find some opportunities in Italy. The same thing would apply to the other 27 member countries of the EU. All it takes is a few connections, some research, and a new market can open.”

Moreau agrees. She says, “It’s been our experience that Canadian companies, especially small businesses, are far too reluctant to take advantage of government services that help with international trade. And, to its credit, the government provides an abundance of these services, including trade commissions that serve the interest of Canadian businesses overseas.”

SMALL CAN WIN

The Canadian Trade Commissioner Service provides all Canadian companies and organizations with on-the-ground assistance, intelligence and practical advice on how to do business in foreign markets — free of charge. Moreau also believes that nothing should prevent ambitious Canadian entrepreneurs from taking the initiative, too. She says, “Entrepreneurship is about seeking opportunity and assessing risk, whether it’s down the street, or across the Atlantic.”

As an indication that not all trade agreements that Canada signs necessarily benefit large corporate interests, the country’s auto sector, including its unions, have already voiced displeasure at the free-trade agreement with South Korea, suggesting that it would allow that country’s auto imports into Canada to come in at even cheaper prices.

Asked if the CFIB’s small-business members are fearful of a corporate takeover, so to speak, of these free-trade agreements, Moreau says, “Not at all. We find that Canadian businesses at all levels seek business opportunities wherever they are. If anything, small businesses can be more adaptable in meeting the demands of niche markets in Europe, or elsewhere.”

Moreau provides a couple of examples: “We have a small-business member that specializes in some kind of nano-technology. It’s so complicated I’m not even sure what to call it. But it’s a one man shop succeeding in Europe. Another member sells hockey insurance in the EU and is doing extremely well. These are examples of innovative Canadian small businesses that are serving the European market. They are making it work.”

If the Canadian secondary wood sector has a reputation, it’s for providing high-quality products and services to niche markets seeking value. That’s why Canadian manufacturers have historically had success in the U.S. Before Canada’s free-trade agreement with the U.S., and later with NAFTA, there were all kinds of fears that Canada was too small to compete. Those fears were proven wrong. Historically, there is no reason to believe that Canada can’t compete with Europe — or anyone else, for that matter.