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Executive Summaries Jul 2, 2020

COVID-19 or Not, Protectionist Tendencies in International Trade Are Here to Stay

We sometimes take for granted the principle of free trade, even though it has been the dominant doctrine in the West for less than a century. There were already several signs that protectionism was returning, but the COVID-19 pandemic has accentuated this trend. Therefore, it is important for Quebec businesses to be aware of this and to adjust their decisions and actions accordingly.

In fact, a World Trade Organization (“WTO”)’s report, published in November 2019, indicated that trade restrictions in the G20 countries was already at historic highs. For example, trade import-restrictive measures between mid-May and mid-October 2019 was estimated at US$460.4 billion, a 37% increase over the previous period. WTO Director-General Roberto Azevêdo even called on the G20 countries to “de-escalate trade tensions to spur investment, growth and job creation.”

Protectionist Measures Already in Place before the COVID-19 Crisis

Even pre-COVID, protectionist measures were a reality that exporting companies had to deal with. These protectionist measures are intended to limit international trade in order to protect local businesses from foreign competition. They can take many forms, such as tariff measures, quotas, export subsidies, technical or sanitary standards, local content requirements, restrictions on global mobility, etc.

One of the most notorious examples of protectionism affecting Canadian companies can be found in the Buy American Act. This Act stipulates that products intended for U.S. federal government markets must be manufactured in the United States. Many states and municipalities also have similar geographic obligations. These local content requirements come in addition to the infrastructure expenditures measures of the American Recovery and Reinvestment Act of 2009.

What Can We Expect in the Post-COVID Era?

Protectionist measures are likely to increase in the post-COVID era. Governments have invested massive amounts of money to maintain the jobs of their citizens. They may want to justify these investments by continuing to favour local businesses and jobs. These measures are likely to be well received by a population that is aware of the importance of buying locally. Protectionist tendencies will also be easy to justify with respect to services deemed "essential" or "priority", such as medical and protective equipment and drugs. Finally, a protectionist approach will be required to protect our local businesses that have lost value and become attractive targets for acquisition.

While many of the trade restrictions are based on seemingly laudable or at least justifiable objectives, including job protection, national security, cultural, environmental and data protection, they could be detrimental to peace and global enrichment, according to free trade theory. In order to favour a solid economic recovery from the current crisis, it will therefore be necessary to restraint our protectionist tendencies to some extent.

4 Recommendations for Exporting Despite the Protectionist Trend

Beyond the macroeconomic considerations, what do trade barriers mean for Quebec businesses willing to export, and how can they adapt to them? Here are a few recommendations:

1. Understand the restrictions that apply to each project or product. There may be exceptions. The Buy American Act, for example, contains exceptions that can be invoked. It should be noted that the WTO  Agreement on Government Procurement gives free access to federal government purchases above a certain threshold and to those of several entities in more than 37 U.S. states. The 2010  Canada-U.S. Agreement on Government Procurement also grants exemptions to Canada for certain programs. For rules that cannot be circumvented or avoided, it is essential to comply with them in order to keep what you have acquired in the conquered territory or avoid risk of contravention.

2. Develop new markets, primarily to countries with which Canada has free trade treaties, including the new  Comprehensive Economic and Trade Agreement ("CETA") with Europe and the  Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") with Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

3. If required and appropriate, proceed by way of investment rather than direct export. For example, Canadian foreign direct investment ("FDI") in the United States jumped from $20 billion to $100 billion between 2012 and 2017. However, one must be aware of the complexity of such investment. Among other things, a Canadian-controlled private corporation must be careful not to lose its eligibility for a qualifying small business corporation, so as to be able to claim the lifetime capital gains exemptions on the eventual sale of shares. The investment must be structured accordingly.

4. Increase productivity by improving production processes, training effectively the workforce and investing in new technologies.

There are no shortcuts to be taken to develop new markets. Therefore, it is important to be well prepared before jumping on the adventure, be properly informed and be surrounded with the right resources. The ongoing global pandemic will certainly not make things any easier. Quebec entrepreneurship being what it is, and exports being vital to our Quebec economy, our businesses will have to overcome these obstacles and continue to improve their products and processes to remain competitive. 

For 25 years, BCF's mission has been to support Canadian businesses. We understand the issues you face and our International Trade team is available to help you use the resources at your disposal. Do not hesitate to contact Dominique Babin for advice and assistance in the process.

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