United States and Canada form world's largest free trade area

On Jan. 1, 1989, the United States and Canada formed the world's largest free trade area, stretching from the Arctic Circle to the Rio Grande. The historic U.S.Canada Free Trade Agreement (FTA) covers bilateral trade in goods and services and investment.

The FTA will have a profound effect on American business. The FTA will offer many new trade and investment opportunities; it will fundamentally change the way U.S. and Canadian companies do business with each other; and it will encourage many more companies to consider exporting for the first time.

This issue of Business America guides business persons through the complexities of the Agreement and the changes in regulations which will impact on their marketing strategies and identifies some of the best prospects for U.S. exporters. This article describes the U.S.Canada commercial relationship prior to the FTA; outlines the major provisions of the Agreement; describes the dispute settlement mechanism; and suggests marketing strategies for consideration by exporters, service providers, and investors.

The articles which follow: (1) highlight the major FTA provisions which became effective Jan. 1, 1989; (2) provide greater detail on the Agreement and the implications for business; (3) detail some of the many export opportunities for U.S. firms; (4) describe the implications of the Agreement for small business; and (5) explain Commerce Department services to help U.S. companies take advantage of the FTA.

U.S.-Canada Commercial Relationship

Canada is our largest trading partner. U.S. exports to Canada, a country of 26 million people, reached $60 billion in 1987, just slightly less than our exports to the twelve-member countries of the European Community with a combined population of over 320 million. At the same time, Canada supplied about 20 percent of our imports.

For Canada, the trade relationship is even more important. The United States is Canada's principal supplier and major customer, providing 70 percent of their imports and purchasing 78 percent of their exports. In 1987 the two countries exchanged goods and services totaling $166 billion, and bilateral direct investment totaled $79 billion.

U.S.-Canada Free Trade Agreement

Tariffs. The FTA eliminates all tariffs on U.S.-Canada trade by 1998. About 73 percent of U.S. exports to Canada were already dutyfree, but the remaining Canadian tariffs represent a significant barrier to the sale of a number of American products.

Rules-of-Origin. Only those American and Canadian products which meet the rules-oforigin will qualify for preferential FTA tariff treatment.

Government Procurement. The FTA expands the size of U.S. and Canadian federal government procurement that will be open to fair competition among suppliers from both countries. The value of new contracts open to U.S. firms as a result of the FTA is estimated at $500 million annually.

Services. The FTA assures that the already relatively open U.S. and Canadian markets for services will remain that way. In addition, provision has been made for future liberalization of the laws or regulations affecting those sectors specified in the Agreement.

Investment. The FTA builds on the more liberal investment regime instituted by the Mulroney Government and creates a stable and predictable business environment conducive to investment. The FTA freezes those Canadian measures currently in place and bars most new measures which would adversely affect U.S. investment in Canada. The United States will continue its open investment climate for Canadian investors.

Border-Crossing Procedures. The FTA streamlines border-crossing procedures for business visitors, professionals, traders and investors, and intra-company transferees and assures that qualified persons will be permitted entry.

Energy. The FTA enhances the energy security of North America by promoting further deregulation of the energy sectors in both countries. Almost all barriers to bilateral energy trade will be removed, providing secure access to energy supplies and markets.

Agriculture. The FTA eliminates all bilateral tariffs and export subsidies, limits or eliminates quantitative restrictions on some products, removes Canadian barriers to U.S. wine and distilled spirits exports, and paves the way for harmonizing technical regulations.

Dispute Settlement

Dispute settlement procedures are important components of any commercial relationship as large and as complex as that of Canada and the United States. To date, disputes have been handled in an ad hoc manner, usually only after the two sides have become entrenched in their positions.

The FTA seeks to break this cycle by creating a Canada-U.S. Trade Commission. The Commission's job will include: (1) settling disputes on the interpretation and application of the Agreement; (2) overseeing the further negotiation/elaboration of the Agreement; and (3) considerin? any other matter that might affect its operation.

Emphasis is on dispute avoidance. Failing that, the FTA has a strong and expeditious dispute settlement mechanism. The entire process will take no longer than eight months from the time a complaint is filed until it is resolved. This procedure applies to all disputes under the FTA except antidumping and countervailing (AD/CVD) duty actions and financial services, each of which has its own separate dispute settlement mechanism.

Impact of FTA on U.S. Business

Economists in both countries believe the FTA will expand trade and investment, increase economic growth, lower prices, expand employment opportunities, and enhance the competitiveness of the United States and Canada in the world marketplace.

American business, labor, and consumers will reap these benefits only if U.S. companies pursue the new trade and investment opportunities expected to result from the lowering of barriers. Many small- and medium-sized businesses that have never before exported should seriously consider these opportunities now.

But to maximize the benefits of the Agreement for your firm, you must be aware of the changing business environment. Your marketing must take account of the fact that all tariffs and many non-tariff barriers are being eliminated. Your firm can profit from these opportunities only if you gain a thorough knowledge of the Agreement and adjust your business strategies accordingly.

For example, elimination of tariffs will mean that American products will be more price competitive in Canada. But tariff removal also means that Canadian products will be more price competitive in the United States. American manufacturers may want to consider using Canadian components to increase the North American content of their products to meet the FTA rule-of-origin and qualify for FTA preferential tariffs.

The FTA may improve your product competitiveness if after-sales service is important to your customers. The FTA's border crossing provisions make it easier for your service personnel to cross the border with their tools to service equipment (including computer software), as long as the provision of the service was a part of the original sales contract.

The overlap of the U.S. and Canadian media, especially television, provides an excellent vehicle for reaching your customers in Canada. More than 67 percent of Canadian homes are serviced by cable systems that carry the three major U.S. commercial networks. Thus, most ads that appear on network programs are viewed in Canada as well as in the United States. Today, most of the ads make no reference to Canada. Slogans speak of "America" when "North America" could just as easily be used. The major U.S. national publications also circulate widely in Canada, sometimes in editions specially tailored for Canada. Here again, U.S. companies and their Canadian subsidiaries should emphasiz "North America."

The Challenge

Canada's geographic proximity, common language, and the similarity between U.S. and Canadian distribution practices, business psychology, and promotional techniques means that Canada is an ideal first foreign market for new exporters. Many companies already doing business with Canada say it is only slightly more difficult than selling at home. Under the FTA, exporting north of the border will be even easier and more profitable. Are you ready to meet the challenge? Read on for further details, and send in the coupon on page 27 for further information.

COPYRIGHT 1989 U.S. Government Printing Office
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