Import costs rise with the loonie’s tumble

MarApr2016-WoodIndustry_page_01_thumbnailCurrency exchange rates are like a rising tide that raises — or lowers — all boats.

So, for importers in Canada, the precipitous plunge of the loonie over the past year made many wonder just where the bottom may lie.

According to Joy Nott, president of the Toronto-based Canadian Importers and Exporters Association, “the assumption generally is that when you’re an exporter and the Canadian dollar falls, this makes you very price attractive on the world market.

“That is true, but when you look at many Canadian exporting companies, they have to import at least some of their components or parts or machinery, materials or something to be able to manufacture in Canada and ultimately export.”

Two things are happening simultaneously, observes Mike Holden, director of policy and economics at the Calgary office of Canadian Manufacturers and Exporters. The falling Canadian dollar is almost entirely a falling oil price phenomenon, as well as one that is mostly in relationship to the U.S. dollar, he also notes. “Firstly, there is the cost of imports for manufacturers who are sourcing from the U.S. and elsewhere around the world — especially from the U.S. The Canadian dollar hasn’t fallen at all or not as much against other major currencies,” says Holden.

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“The second thing that’s happening that is a concern is that a lot of the machinery and capital equipment and investment you’d want to see manufacturers make in Canada in order to continue to innovate and make productivity gains. That’s becoming a lot harder because of the cost of equipment coming in from the U.S. in the past year.”

Holden estimates much of this equipment has seen as cost increase of 20 percent or so. A lower, but stable currency exchange is preferable, says Nott. “When the Canadian dollar is falling it’s like catching a falling knife. No one wants to do that. It’s not attractive for exporters because they want to have an attractive price. Their cost of raw materials, parts, machinery and whatever they need to manufacture — those exports are going up because they are buying them on the world market with Canadian dollars.

“This makes for a very uncertain time and unstable market for export when the dollar is actually falling. When things are stable and the dollar is low that’s good for exporters. But most people don’t think of that. They think ‘oh, the dollar is falling, exporters must be deliriously happy.’ No, not while it is falling. It makes things very rocky and very uncertain.”

However, the reality is that many manufacturers base their business transactions entirely in U.S. dollars because “realistically the currency of International trade is pretty much globally is the U.S. dollar,” says Nott.

“If you are an exporter, no matter what country you are in, your exports comprise a substantial part of your overall business. If you are a major exporter, chances are you have U.S. dollar bank accounts and you probably sell in U.S. dollars, collect in U.S. dollars, and use a U.S. dollar bank account when you need to you transfer U.S. dollars into Canadian dollars.”

In addition, says Nott, “companies where a huge part of their business model is to import, most of them also trade, buy and also sell domestically in Canada in U.S. dollars. It’s a way of hedging against that Canadian dollar.

“For a lot of small to medium size businesses the majority of their business is in domestic Canada. If you’re a ‘happenstance’ importer and exporter, do you export when somebody calls you up from outside Canada and wants to buy something? That’s a happenstance exporter.

“That’s not someone who is trying to expand their business and is focused on importing and is intentionally trying to get foreign sales. If you’re a happenstance exporter, chances are it doesn’t make any sense to deal in U.S. dollars and run your entire company with the U.S. dollar being the core of it all.”

Pain points for Canadian importers — and exporters — don’t just stop at the rate of currency exchange. Free trade agreements, such as those with the U.S. and Mexico (NAFTA), the European Union (CETA) and Pacific Rim nations (TPP), effectively eliminate tariff barriers on many defined goods for a broad range of industry sectors, including the wood industry.

“People hear about these things and they think trade is becoming easier. Its becoming freer. Its becoming more open.

“But there are two elements of trade — one is the tariff aspect, the actual duty rates. Then there are the non-tariff trade barriers. They are the rules and regulations that apply to imported and exported products. They don’t have a percentage rate next to them. So actually quantifying what they cost businesses is very difficult.”

Sometimes non-tariff trade barriers go up as duty rates go down. “I think there are countries out there who have a history of throwing up more non-tariff trade barriers as they lower the duty rates as a form of protectionism,” says Nott.

“Canada is not exempt from that; in part its policies that you see that are acting as non-tariff trade barriers are in many cases are a reaction to what some of our trade partners are doing. Of course the most obvious barrier is the U.S. I’ve had some members say to me ‘I wish it was the good old days when all you needed to know was what the duty rate was’ and once you knew what that cost of doing business was, even if it was high. You could plug that into a spreadsheet and forecast with consistency and certainty that you knew by how much you were going to be able to land your product in a foreign market, or export or import it into Canada if you were an importer.

“So when you are talking about wood products, for example, as an exporter there’s always the Lacey Act in the U.S. Its a declaration that you have to file when you’re exporting wood products to the United States. Now furniture specifically or processed wood is exempt, but from 2010 onward you still have to declare what is a wood product and that you are in compliance. That’s an example of a non-tariff trade barrier.”

Nott describes a phenomenon called “supply chain echo,” something that potentially lurks behinds international transactions for Canadian manufacturers. When goods have cleared through the customs authorities at the border and delivery has actually taken place to the purchaser of the product, “everybody thinks great that’s the end of that supply chain,” says Nott.

“In fact it’s not. There is a supply chain echo and that echo can carry on for up to five years after it has cleared through customs, and that is the potential of regulatory compliance audit. Sometimes those audits are driven by the customs authorities, but in many cases they are driven by another government agency. For example, in Canada, it could be driven by the Canadian Food Inspection Agency which also inspects things like wood products for pests.

“The audit can be anything from physical audits of product, coming into warehouses and looking at marking on products and labeling. This means looking for specific attributes or characteristics that declarations were made that the physical product complied with whatever markings they are looking for.”

Another potential source of liability to businesses is assuming that one tariff-free product is as good as the next tariff-free product. Nott says that if products are misidentified and found to be so later during an audit, a financial penalty could be applied up to five years later as well.

“When Canada sits down at the table to negotiate huge trade deals like CETA, TPP, etc.,” she explains, “the trade negotiators in Canada turn to Statistics Canada and say what was the dollar value on our imports from wooden kitchen cabinets? Statistics Canada will look at the trade classification of wooden kitchen cabinets and say the total imported dollar value was this and our total export dollar value was that. The negotiators have a sense of in the Canadian economy how much we import and how much we export.

“If you declare in the wrong tariff classification at time of import or at time of export, you are fudging the statistics that Canada uses to make international trade decisions.”

Moving goods internationally often requires the services of a customs broker, a member of the Ottawa-based Canadian Society of Customs Brokers (CSCB). In 2015, the Canadian Border Service Agency (CBSA) in Ottawa announced the Single Window Initiative, a first step on the path of paperless border transactions.

Michelle Criger, CSCB administrator of education and professional development services, says that “goods are imported and all of the information associated with those goods is sent as data to the CBSA when it is able to be transmitted in an electronic format. However, a lot of goods have other requirements, other government departments that regulate them. For instance, the Food Inspection Agency or Natural Resources Canada, and they may have requirements that cannot be met electronically.

“For example, there is a permit you have to hand in or there’s a license or there’s a certificate or something.

“So what the Single Window is intended to do is bring everything together electronically that will go to one government department. Now that government department is initially the CBSA, and will in turn allow other government departments to access the data that they need where a lot of permits are now going to be able to be sent as an image or they might have a number that can now be transmitted electronically.

“So it’s intended to do two things. It’s intended to enable more electronic transmission and it’s going to consolidate everything to one government department.”

Criger says that so far only one customs broker is beta testing the Single Window system and that there is no timetable for mandatory compliance.

“If the goods that companies are importing are not regulated and they don’t need a permit, certificate or any kind of document from any government agency to import them now, they shouldn’t need them under Single Window.”

Eventually, she says, “it will streamline the process and hopefully documents won’t get lost, but the process today still works.”

The ins and outs of the supply chain are in constant need of monitoring by everyone in the wood industry — from government regulations to shop floor processes.

“At the end of the day, productivity is the only thing that matters,” says Holden, “whether through it’s improving the skills of your workforce or investing more in machinery and equipment in order to produce more with less labour.

“That’s how you become or remain competitive, its how you gain an advantage in foreign markets, its how you attract more investment in the country whether its from existing firms already or foreign companies looking to set up shop some where around the world.

“Along with maintaining quality, it’s important to be competitive and pay attention to how production takes place.”

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