The most successful Canadian businesses are prepared to expand beyond the country’s borders
When the leaders of Canada, the US and Mexico meet in Ottawa this week for a summit – their first since Canadian Prime Minister Justin Trudeau took office – top of the agenda will be how the three members of the North American Free Trade Agreement (NAFTA) can build closer ties.
Increased co-operation on trade could bring huge benefits for all three economies – and Canada has everything to gain.
The US is Canada’s largest trading partner by far. Mexico’s importance to Canada, however, should not be overlooked. On a bilateral trading basis, Mexico is Canada’s third biggest partner. And there is still plenty of scope for this trade relationship to develop further. Mexico’s young and growing population – a third of its citizens are millennials aged between 15 and 34 – ought to provide a growing market for Canadian exports.
In the future NAFTA’s three trading partners stand to gain from another, bigger trade agreement – the Trans-Pacific Partnership
Recent reforms under President Enrique Peña Nieto have spurred economic growth and begun to open up Mexico to foreign competition. This should benefit Canadian companies, particularly in sectors such as agriculture, food and beverages, wood, metals, autos and transport. Canada could also capitalise on its strong position in financial services and telecommunications.
Yet while Canada’s biggest and most successful companies export their goods and services, many other Canadian companies are failing to take advantage of the country’s many trade pacts. There are 1.1 million small and medium-sized enterprises in Canada, yet only 10 per cent of them generate sales internationally.
International expansion will be increasingly important for Canadian companies, for three main reasons. First, Canada has been experiencing a period of modest economic growth, with lower commodity prices having an impact on the currency. Second, its population is ageing and relatively small. And third, competition in the domestic market is growing as businesses from Asia and elsewhere extend their presence in Canada.
Some Canadian companies are trying to widen their customer base. The internet is helping them, making it easier to reach new customers abroad. We know that customers that do business internationally grow faster than their domestic competitors. And many exporters have already grown rapidly by looking to the US, Europe and Asia. But what does it take to succeed internationally and, more than 20 years on, how can Canadian companies take better advantage of NAFTA?
There is no single blueprint for success, but an HSBC-commissioned report by The Conference Board of Canada pinpointed certain common characteristics. Successful Canadian exporters often grow through specialisation. Some of the country’s software providers, for example, have targeted niche markets in payments, billing, transport and logistics that are not well served by much larger global competitors. Canadian exporters are also more likely to invest in research and development. Above all, the most successful exporters see expansion abroad as a means not just to survive but to thrive.
Since 1993, the year before NAFTA came into effect, Canada has created millions of new jobs and foreign direct investment between member nations has increased significantly. Bilateral trade between Canada and Mexico more than quadrupled in the 20 years after NAFTA became law. And there is scope for more growth.
In the future NAFTA’s three trading partners stand to gain from another, bigger trade agreement – the Trans-Pacific Partnership (TPP). Signed earlier this year by 12 Pacific countries including Canada, Mexico and the US, the TPP will cut tariffs on more than USD500 billion of trade annually. If ratified, like NAFTA it will make it easier for Canadian companies to trade internationally.
Canadian businesses have a choice. While many companies continue to focus on their domestic market, the most successful are prepared to expand beyond Canada’s borders, including with its nearest neighbours in the US and in Mexico. In so doing they broaden their pool of potential customers hundreds of times over – opening up new avenues for growth and helping to ensure their long-term sustainability.
A version of this article first appeared on the Canadian website The Vancouver Sun on 27 June 2016.