Author: Pierre Cleroux, Chief Economist, Business Development Bank of Canada (BDC)
The COVID pandemic has transformed the global economy and one of the major consequences will likely be a strengthening of the already robust trading relationship between Canada and the United States.
The pandemic has changed the way we work, disrupted global supply chains and accelerated technology adoption, among other effects. The war in Ukraine has given added impetus to many of the changes and injected geopolitical uncertainty into the economy.
The changes mean businesses have to face a new set of challenges on top of the ones that pre-dated the pandemic. These include an aging population that’s led to labour shortages in Canada, the U.S. and elsewhere in the developed world.
Stronger North American trade will help companies trying to navigate the post-pandemic economic landscape and bolster economies on both sides of the Canada-U.S. border.
Supply chain disruptions
One of the biggest impacts of the pandemic has been the disruption of global supply chains. According to a recent BDC survey, 85% of Canadian businesses report experiencing longer delivery times, difficulties in obtaining products and higher transportation costs.
Just-in-time inventory management gained popularity throughout North America thanks to the huge cost and efficiency gains it delivered to companies. However, a reliance on foreign suppliers working on tight delivery schedules left companies, and the economy as a whole, vulnerable when demand exploded as the pandemic progressed.
High demand, combined with the pandemic-related difficulties, produced major supply chain disruptions that continue to this day. Most recently, China responded aggressively to a rise in COVID cases by imposing harsh lockdowns in Shanghai and other cities in the spring of 2022. This exacerbated an already difficult supply situation for many North American companies that source in China.
Russia’s invasion of Ukraine also worsened disruptions in many sectors. Ukraine is a large producer of equipment and parts and the war has created chaos in some supply chains, notably in the automotive industry.
More disruptions ahead?
These developments may appear to be exceptional but are they really?
COVID was the first global pandemic in a century, but many experts believe this type of event will occur more frequently in the future, given the pace at which new viruses are appearing and spreading around the world due to globalization.
Similarly, the war in Ukraine was unexpected, but geopolitical tensions affecting global trade patterns are nothing new. Also, climate change is creating more extreme weather events that have the potential to further disrupt global supply chains.
All of these developments favour the reinforcement of trade within North America. Canada and the United States have among the most stable economies in the world. And while the countries are not immune from trade tensions or extreme events, the strong commercial relationship built between the two over the decades is simply extraordinary.
For these reasons, it appears many businesses will seek to bring production back to North America to avoid, or at least hedge, the risks of using overseas suppliers.
Aging labour force
Another factor that favours North American trade is the aging population and the labour shortages it’s causing.
In the U.S., 17% of the population is over 65 compared to only 12% in 2000. This percentage will rise to 21% by 2030. In Canada, the population is aging even faster. Today, 20% of the population is over 65 and this percentage will hit 25% in 2030.
As the population ages, baby boomers are retiring, causing labour shortages and the situation will not go away. There are no easy solutions for businesses grappling with labour shortages. Immigration will help but will not be enough to compensate for all the baby boomers retiring.
Our research indicates that investing in technology and automation is the best strategy for businesses that are facing this problem.
Those investments will push down labour costs and increase efficiency, making North America production more affordable—an additional driver of trade between Canada and the U.S.
Canadian businesses need to scale-up
While businesses on both sides of the border stand to benefit from a heavier reliance on North American supply chains, it will be critical for Canadian companies to scale up and become more productive if they hope to compete in this new environment.
Canadian businesses are smaller than those in most developed economies and especially the United States. In Canada, 80% of businesses have fewer than 10 employees compared to 74% in the U.S. Canadian companies also badly lag their U.S. counterparts when it comes to the productivity of their operations.
Businesses reap many benefits from growth, including the ability to maximize their use of technology and enter new markets. However, to achieve scale, Canadian companies need to become more productive and export more.
We need more trade
Canada and the U.S. have a long and successful history of trade built on geographic proximity, familiar cultures and successive free trade agreements since 1989. The result is one of the largest two-way trading relationships in the world. And the future looks even brighter.
Locating production in North America is now more appealing than ever as a way to secure supply chains, reduce delays and cut transportation costs. In the new business environment, North America’s stability and the free flow of goods and services between Canada and the U.S. are important assets that should be protected and encouraged.
Tips for expanding into the U.S. market
The U.S. market is among the most vibrant and prosperous in the world and naturally draws the interest of Canadian companies that are seeking growth opportunities. However, many Canadian businesses have discovered just how challenging it can be to expand into the U.S. with its different business culture and highly competitive economy.
BDC’s Advisory Services experts have guided Canadian entrepreneurs for many years on how to successfully expand into the U.S. market, both through exporting and physical expansion. Here are some tips for making it in the United States.
1. Assess your company’s readiness for U.S. expansion
Expanding to the U.S. is a big project that requires careful planning and dedicated resources. It’s critical to closely look at your organization’s current capacities in terms of people, finances and operations to identify and address gaps.
Addressing weaknesses before embarking on a U.S. expansion will help you avoid costly mistakes and becoming overwhelmed. As you examine your company, ask these questions:
Do we have the scale to meet export demand or open operations in the U.S.?
Are the owners and senior managers on board? Do we have an executive who can lead the initiative and enough employees to take on the added work?
Do we have the financial resources to take on a multi-year expansion project, knowing it may be more expensive than forecast?
What technology systems do we need?
2. Develop a market entry strategy
The U.S. is not one huge market but a collection of distinct local markets, each with its own characteristics, regulations, logistics challenges and consumer tastes. Export Development Canada (EDC), for example, breaks the country down into 11 regions.
This means it usually makes sense for Canadian companies to start with one state or region and build from there. You can first identify two or three high-potential states or regions and then narrow down your selection by conducting market research and attending trade shows or business events to learn more and make contacts.
A typical market entry plan will take six to 18 months to come to fruition. As part of your plan, you should set clear, measurable and achievable objectives for your expansion initiative that include detailed financial projections and budgets. The Government of Canada’s Trade Commissioner Service and EDC as well as U.S. federal, state and local agencies offer a wealth of information and resources to Canadian companies looking to expand south of the border.
3. Get your products to market
Logistics and distribution in the U.S. can be trickier than you expect and have the potential to make or break your expansion project.
Options for reaching customers include using a distributor or agent, opening physical locations or selling through online marketplaces or an e-commerce site. You may decide to combine some of these in a multi-channel blend of direct and indirect approaches.
It’s important to find local partners who can help you understand the market you’re targeting and make recommendations of other resources you can tap. Make sure to do your homework in choosing partners and intermediaries, including by getting references.
There are numerous rules and regulations to follow in exporting to the U.S. or setting up operations there. Here again, trade development agencies can point you in the right direction to ensure you covered all the bases before you start selling to customers.
The bottom line is that prospects look good for a significant acceleration in North American trade in the coming years due to the important changes in the economy.
Entrepreneurs should be looking to see how their company can take advantage of this opportunity and make the necessary investments to make it happen.
For more information on the Business Development Bank of Canada, please visit www.bdc.ca.