Renegotiating the North American Free Trade Agreement: Retail Impact

October 2017

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Renegotiating the North American Free Trade Agreement (NAFTA) with the promise of increased duties on imports and tighter content requirements to drive an ‘America First’ agenda was a cornerstone of U.S. President Donald Trump’s presidential campaign. It worked, but it took many by surprise. In hindsight, however, modernizing NAFTA for the 21st century was inevitable.

The original agreement came into effect in 1994. The retail world in particular has changed considerably over the last 20 years as a result of the Internet and the explosion of online retailers. What’s more, the original NAFTA was much more focused on the industrial rather than the consumer economy.

Fast-forward to today and the Internet and ongoing technological advancements are turning the spotlight on many of the gaps in NAFTA that are allowing shoppers to bypass sovereignty issues both around physical goods and intellectual property. There was cross-border shopping back in the 1980s, it’s just that it was physical, not yet virtual. Now two-thirds of Canadian Netflix subscribers are on a U.S. server.

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‘De minimis’ threshold will likely rise

Currently the value of goods Canadians can bring into Canada from the U.S. without paying duties, known as the ‘de minimis’ threshold, is $20. It was established in the early 1980s and is currently the lowest among industrialized nations. The Trump administration wants to increase the duty-free limit for Canadians to US$800, similar to its own limit as another tactic to make good the ‘America First’ agenda. This has drawn a clear line between US online retailers and many of the Canadian brick and mortar retailers.

Online powerhouses such as eBay, Amazon, and UPS, whose customers often make purchases from U.S.-based retailers, are leading the lobby to raise the threshold, arguing it benefits consumers on both sides of the border. Their main argument: the consumer is king, should have access to the widest array of goods, and should have access to real world pricing with less interference from government. Of course, raising Canada’s de minimis threshold is also a good opportunity for them to grow revenues.

Retail Council fighting for retailers

The Retail Council of Canada (RCC) wants to keep the threshold where it is. The RCC argues that raising the de minimis threshold would hurt Canadian retailers, who fear that the majority of online sales would go to the U.S. juggernauts. While this is possible, it is also true that many U.S. retailers do not offer free shipping to Canada and increasing the de minimis threshold isn’t likely to change that. In addition, electronics and books are two of the most mature e-commerce categories and pricing is close to parity now. Raising the threshold should not change that.

Another key concern is that raising the threshold might make an already unfair playing field more skewed, as Canadian retailers must contend with higher wages, higher transportation costs, higher overall taxes and higher real estate costs than their competitors in the U.S.

NAFTA’s renegotiation comes at a time when retail is in the process of reinventing itself. Physical shopping malls are closing, individual brick and mortar store footprints are shrinking and e-commerce is on the rise. Consumers are looking for more personalized service and unique, seamless shopping experiences. The new NAFTA will accelerate that evolution.

Key considerations for Canadian retailers

Canadian retailers should prepare for the possible changes associated with NAFTA. With this in mind, some of the planning considerations may include:

  • Incorporating an online mode: E-commerce sales will continue to increase at the expense of in-store sales. Accelerate your move into e-commerce and hybrid models like click and collect. Look at the most recent retailers filing for bankruptcy: Toys ‘R’ Us and Aerosoles. Unless you are selling a highly advanced product, it is more than likely that your products are already available online. Thanks to reverse shipping, it’s easy for consumers to return products that don’t fit or they don’t want.
  • Consider partnerships: As retailers around the world continue to grow, Canadian retailers should consider potential partnerships with logistics and ecommerce companies to expand their reach.
  • Build unique offerings: Give consumers a reason to shop in your stores by offering unique merchandise, unique experiences and personalized service.
  • Leverage technology to lower costs: Canadian companies tend to lag in this area. It’s time to invest. With the minimum wage increase in Ontario, there will be a huge push to boost the number of self-checkouts and automate as much as possible.
  • Improve supply chain efficiency: Re-examine your entire supply chain with an eye to improving processes.
  • Create immersive customer experiences: Give your consumers a reason to go to your physical location. Think test-driving a canoe onsite, stores within stores, the ability to eat and shop. As with any real estate investment, location is key. Shopping malls are not dead yet. The key is to be in malls that are destinations, such as the Eaton Centre (which is the busiest mall in North America) or other prestige malls. Simply being in these locations makes a brand statement.

What’s next?

NAFTA negotiations continue. In the meantime BDO are updating business owners and decision makers as and when updates are announced.

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For more information about NAFTA, read our other NAFTA insights:
NAFTA 2.0: Key Issues and Next Steps
Summary of NAFTA Round 1 Negotiations (Washington, August 16-20)
Summary of NAFTA Round 2 Negotiations (Mexico City, September 1-5)
Summary of NAFTA Round 3 Negotiations (Ottawa, September 23-27)
Summary of NAFTA Round 4 Negotiations (Washington, October 11-15)
NAFTA Renegotiation Impact on Immigration
NAFTA Renegotiation Impact on Government Procurement