The Decibel - New trade partners for Canada? Easier said than done

Episode Date: February 24, 2025

As the new deadline for U.S. tariffs approaches, Canadian businesses are trying to suss out whether it’s possible for them to diversify their trading partners to help soften the blow if American demand dries up.Chris Wilson-Smith – who writes The Globe’s daily Business Brief newsletter – recently looked into how feasible diversification is and found there are some significant barriers. But not all hope is lost.Enter this Decibel survey: https://thedecibelsurvey.ca/ and share your thoughts for a chance to win $100 grocery gift cardsQuestions? Comments? Ideas? E-mail us at [e-mail]

Every day I wake up thinking today is the day I'm not going to write about tariffs. Chris Wilson-Smith writes the Globe and Mail's Business Brief. It's a daily newsletter that looks at the biggest business stories in Canada. I'm going to write about something fun, toys, the business of G's, the business of video games or something, but it's really hard to not because it's so central to everything that we all do on a daily basis. The threat of a trade war continues to linger as Canada faces down its new tariff deadline in early March. If the US does proceed with tariffs, it's going to affect the Canadian economy drastically. Because around 75% of all of Canada's exports go to the U.S.

It's hard to get away from tariffs because they have such a personal and immediate effect on people. Those effects can mean everything from less demand for our goods, job losses for Canadians, and even a recession. So to insulate ourselves from these effects of tariffs, Canada has started looking for other trade partners elsewhere in the world. Chris recently looked into how possible this is. Today, he's on the show to discuss why diversifying our trade might not be as simple as we all hope. I'm Meenakaraman Wilms and this is the decibel from the Globe and Mail. Chris great to have you on the show thanks for

joining us. Thanks for having me. So I know that you recently looked into the issue of how Canada can diversify its trading partners. What did you find? I found that it's a lot easier said than done. We hear a lot and see a lot of people saying now we just need to diversify our trade partnerships but unfortunately it's not as easy as just turning a switch or aiming a hose in a different direction. It's in reality a very slow, expensive process, full of regulatory and geopolitical hurdles. And that's not to say it isn't happening. It really is.

Some companies are making progress, but it's far more complex than it's often made to seem. Okay. And is this challenging across the board? Like all Canadian companies find this to be difficult? On a very high level, imagine if we're watching from one of Elon Musk's satellites, I don't know, a Canadian space agency satellite. Every business in Canada is affected to some degree by the level of terrorists that Donald Trump is proposing, because simply they would throw Canada into a recession and that would weigh down consumers and weigh down businesses. But if we zoom in a little further from our satellite, we'll see

that larger companies will still struggle, but they'll at least have the capital and expertise and the sort of political connections and networks. They need to navigate new markets. They're already staffed up to find new partners wherever they are in the world. And that includes not just finding the partners, but overcoming sort of legal and regulatory challenges, tax structures, cultural barriers. These are things that bigger companies are better positioned to do. Unfortunately, for smaller and medium-sized businesses, as you sort of go down the scale of size, the issues become more acute. They often lack the financial cushion or the in-house knowledge to take on the costs and risks of even taking the time to look at growth, let alone pursue it. Especially as you get

done to small businesses, businesses that could maybe field a softball team, you've got a leader in charge who might even also be on the floor pitching in as well, trying to run through all of these costs and risks in his head or her head to make sure they're doing best by their company and at the same time not dropping the ball on their bread and butter business in the U.S. So it's a complex world out there and it gets even more complex or at least the weight is heavier the smaller the company. So really difficult for companies that are heavily integrated with the US, hard for small and medium businesses, but you said maybe more possible for bigger businesses Chris. So let's focus on those

companies that actually might be able to diversify their trading partners. I would imagine the first step is finding those new trading partners and I'm wondering if the federal government has a role here because we are talking about international trade right Chris so so how does that work? So you have from a from a broader standpoint the trade deals that Canada tries to reach with other regions and new markets. Trade missions are themselves part of continuing those relationships and continuing to continuing those relationships and continuing to foster those relationships. The trade missions themselves specifically are kind of a speed dating app for companies who can find and connect

with potential new clients in one space, rather than on their own piecemeal over the course of several years. It gives them a chance to get in the room with potential clients to visit their operations to learn more about their regulations. They can come together, ask them all at the same time and potentially make new friends. Yeah. Okay. So there definitely is a big role for government. It sounds like diplomacy on behalf of the government is a big part of this. Chris, how feasible is it for Canadian companies

to do business with countries where there might be diplomatic tensions there? If we look at places like India and China, how does that play out? Well we definitely see, in both of those examples that you mentioned, Canada's relationship with both of those regions are at historically low points. We saw China bring in import duties on Canada's canola. So it's hard to extricate the two completely. And especially if we look at India, that is perhaps a more clear-cut example and a more recent example of how diplomatics back and kind of end negotiations almost instantaneously.

Yeah. Okay, so it sounds like there are a lot of hurdles here, Chris, to try to diversify the trading partners here. Let's say a company gets past that. They find a partner they want to work with. How quickly can a business, I guess, reorganize themselves to serve those new trading partners? Finding a new client in a new market is one thing, but there's only so much the government can do to help make that connection.

And there's only so much that making that connection itself bears fruit right away. It is a lengthy process, especially in some cultures where they value doing trade deals with countries and companies that they know and they trust. Then there are just the simple logistics of regulatory compliance, logistical adjustments. You can't just sort of sign a few deals with a new client in a new region statistical adjustments, an idea of how challenging it is to maintain that relationship. An economist I spoke with recently said something in the order of 40% of Canadian businesses export once and then that's it. So you can see that the idea is good on paper and it's really challenging to keep an execution over a prolonged period. Yeah. Wow. Yeah, wow.

Okay, so that kind of really covers off difficulties with finding trading partners, the process there. Chris, a little bit earlier, you mentioned regulatory differences and how that can be a challenge for companies trying to break into a new market. How would different standards from different countries, how would that result in difficulties or more costs,

maybe even for Canadian businesses trying to diversify? Sure, and it's not exactly the way that We would think we would think that it would mean Is spending more on our product here before we ship it there and it does mean that in some cases But as one example because of high standards over over agriculture in Canada and dairy, for example, those standards make production of those goods here more expensive than in some countries, say in the European Union. So it doesn't actually make sense for some exporters to even bother with those markets

because their product on the shelf would be compared next to one that's much cheaper. to even bother with those markets because their product on the shelf would be compared next to one that's much cheaper. But in those same countries, they could have different regulations around traceability is an issue of knowing If a country speaks a different language, the Canadian exporter might have to print different labels. Those are all challenges that companies face up and down the size spectrum, but are definitely felt more acutely on the smaller end.

Yeah, I can imagine you're trying to find new companies to ship your product elsewhere, then you've got to change the labels, and if you've got to tweak how that product is made. I mean, those are big changes that that company would then have to really, they would have to put in more expenses in order to pay for that. And I would say too, I'm leaving out perhaps the most obvious one

is it costs a lot more to ship to Italy than it does to Buffalo. We'll be right back. So Chris, so far we've focused on opportunities outside of Canada, but recently we've been hearing a lot about the possibility of improving inter-provincial trade within Canada. So what about that? What about looking for trading opportunities inside of the country? That also sounds like an obvious next step

and every premier in Canada seems to agree on it and business leaders have been calling in for it for years. And that's yet another thing that's very much easier said than done. Having said that, there are certainly urgency underway in taking down these barriers. And by the way, these aren't barriers that exist largely as protectionist measures.

These are provinces that have created these different barriers and regulations over time because they have their own responsibilities. So it's not as though provinces are needing to be mean to each other. But we are nevertheless left with a whole host of issues that are easier to talk about knocking you away than done. So this is like the result of this is like in Ontario, you can't easily buy BC wine, that kind of thing.

It's kind of segmented across the country then. Right. I'm from New Brunswick and I don't think that I can have a New Brunswick craft beer sent to me. And I might be able to get my LCBO to order it, but they're unlikely to do that on a bigger scale. Not that I would drink all that beer, because the LCBO wants to support Ontario beer. And at the same time, you can see why these regulations are maybe past their point of

utility if there's an entire section for international beers that people kind of make a beeline to anyway. So we're kind of shooting ourselves in the foot was the metaphor I was looking for. And of course, we should say that the federal government has made this something they're focusing on with all the news of the possible tariffs from the US. They said that they're trying to increase interprovincial trade and just recently announced that they're going to remove more

than half of the exemptions from the Canada Free Trade Agreement. So again, trying to increase trade across Canada. Yeah, and that's something that could significantly help grow Canada's gross domestic product, which is to say that grow its economy. It's been estimated in the billions. So it'd be interesting to see how Ottawa and the provinces work together to knock down those barriers.

And many of those barriers, I should say, are the very same ones that companies face on a global scale. So we're shooting ourselves in the foot already if our starting point is a nation that already is facing these challenges that we're asking our companies to face on their own in the world. So Chris, we've talked about some different opportunities for companies trying to expand and diversify their trading partners. Do we know if any businesses are actually doing this now, like actually looking abroad in particular for new trade opportunities in spite of all the challenges that we've

just talked about? Absolutely. Very recently, Senavis, one of Canada's biggest energy companies said it plans on expanding its output toward Asia and at present, it's sending about 50% of its output from the recently expanded trans mountain pipeline extension to the US. It's about 50-50, I think the CEO said. You expect to see that ratio change if Trump moves ahead with the separate tariff that he's suggested on Canadian energy imports of 10%.

So that is one major oil company among probably all of them that are looking in some way at moving more oil to, in particular, Asian markets as a way to mitigate the added costs of sending oil to the South. So companies, even if they can scale up, they still have concerns about the tariffs that are being threatened around the world. So just because the US is becoming less of a friend, let's say by imposing tariffs on imports of Canadian goods, doesn't mean that markets elsewhere are suddenly much more welcoming because they too could be hit by those same tariffs.

But as we've talked about, this can be a really difficult process. So if there are some companies that can't or decide not to diversify, Chris, I guess what are their options? Well, some companies are unfortunately in the most visible way. If they have facilities in the U.S., they're turning up the volume there and turning the volume down here on those facilities. And by that I mean, you know, they're ramping up production, if possible, on their bread and butter output at the facility in the United States. And unfortunately, that means less demand for staffing

on the Canadian side. And I keep reminding myself, in small communities, these are big companies. The weight on the leaders shoulders of these companies is a very personal one and I've spoken with a couple of business operators on this level who are, these are their friends and family and they they're faced with very difficult decisions about whether or not they're going to keep this operation open or keep the company alive

by shifting its operations to the south. And some companies are suggesting that they'll move entirely. Move entirely to the states then. So from Canada to the states. Wow. Yeah. Most recently, one of the biggest companies,

mining companies in Canada, Barrick, said that it's looking at domiciling to the States. And a major transport truck operator, a Canadian one, said that it likes the look of the business environment in the South. And that's another point too is it's hard to argue with that logic if President Trump is promising lower taxes, looser regulations. And some have even said to me if I had the chance, if I started over again, I wouldn't start a business in Canada. And that's a scary

prospect. And I guess this is all kind of part of Trump's plan with these tariffs, right? Creating this uncertainty if companies want access to that massive American market then they're forced to move into it, to actually produce things there instead. Yeah, and even before Trump, businesses in Canada have long said that the tax regime here is not supportive of Canadian innovation and Canadian businesses. That's why you saw such an uproar over the capital gains tax, which business leaders said was essentially a tax on success and innovation. Which is now getting postponed to mid next year, so we won't actually see that in the near future. And that uncertainty as well is something

weighing on businesses that just don't know from one government to the next what environment they'll be creating a business in. You can see the logic of wanting to have access to this very wealthy market, wide market, a market in the US that on a consumer level is healthier than Canada's, avoiding the possibility of tariffs. You can see the logic there. Just lastly here, Chris,

we've talked about some pretty big challenges for Canadian businesses, and a lot of this looks a little bit dire for a number of companies. I guess I wonder, is there an upside here? Are there any advantages that a Canadian business might have when trying to diversify to other parts of the world? I think one interesting point made to me by an economist I spoke with recently. She herself an immigrant from China and she says that she's seen evidence that that you know immigration can be a very powerful tool

for Canada. More businesses led by immigrants in Canada are more likely to be able to transcend all of those issues. They know the the landscape, they know the language, they have networks already. So you see more immigrant led businesses reaching out that way. So maybe there's a maybe we're not looking at it quite from the right angle or at least not considering that as being something we could encourage. And I thought that was an interesting observation from her. Yeah. And that alone isn't going to be a silver bullet, but it's one obvious thing, at least

it seems obvious to me now, that we might not have considered in a grander scale. But these are the kinds of things that are emerging because we're having this conversation much more urgently. And so if there is one thing that I learned just in the last couple of days that kind of gave me hope, maybe there will be more ideas that just sort of, because this conversation is having such a wide impact at this moment. I don't know that we've had this conversation about Canada's economy to such an existential degree at this level and with such urgency. It's because of that that we're learning these things. And I think that that one example

that that was an aha moment for me, we might have more of those. Chris, thank you so much for taking the time to be here. Thank you so much for having me. If you want to get daily updates from Chris on all things business, including the tariffs, you can sign up for his newsletter online. Head to theglobanmail.com slash newsletters. That's it for today. I'm Maynika Ramon-Welms. Our producers are Madeleine White, Michal Stein, and Ali Graham.

David Crosby edits the show. Adrian Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you tomorrow.