Industrial
Spring 2017
Industrial Impact Series
NAFTA & Canada – what’s next?
As the newly elected U.S. administration progresses into
their first year in office, the economic policies continue to
take shape. While many of their decisions will have a direct
impact on the Canadian economy, NAFTA in particular is
being watched closely.
Created in 1994, NAFTA superseded the U.S. – Canada free
trade agreement of 1988. Its formation meant a free flow of
goods and labour between all three member countries,
and defined the trade relationship that exists today
between them.
The trade relationship between the United States and
Canada is strong. In 2016, Canada was the largest goods
export market for the U.S. and the third largest importer of
goods to the United States (this generated a trade volume
of Canadian $727.8 billion). Conversely, the U.S. is Canada’s
largest export and import partner in the world (generating
a trade volume of Canadian $752.3 billion in 2016).
US
Rest of the World
Canadian exports
34%
$80
$70
$60
$50
$40
$30
$20
$10
$0
Auto
Petroluem Products
Lumber
Source: Statistics Canada
There is an interdependence between Canada and the
United States when it comes to trade. So if there is a shift
by either country to renegotiate NAFTA or remove it
altogether, what would that look like?
Issues specific to Canada
25%
66%
Source: Statistics Canada
$90
More specifically, how would manufacturing and
logistics in Canada be impacted? And the industrial
markets within the country?
Canadian imports
75%
Canadian exports to the U.S. in 2016 (CAD)
Billions
How NAFTA has shaped trade on both sides of the
border
The United States and Canada haven’t publicly stated what
they may seek from each other in a potential NAFTA
renegotiation. Some discussions may include dairy,
softwood lumber (of which Canada exported Canadian
$7.5 billion to the U.S. in 2016) and/or “Buy American”
provisions. From a Canadian manufacturing perspective,
the “Buy American” provisions will be critical to the sector’s
growth.
2
NAFTA – what’s next? | Canada | Spring 2017
The traditional “Buy American” policies are designed in
part to promote the ability of U.S. companies to win
business, such as the infrastructure spending projects
pledged by the new administration. In the past Canada has
competed to have their steel used in some of these
infrastructure projects, as they fall under the scope of
NAFTA - this meant parts and components were able to be
sourced from both countries. If Canada is able to continue
to compete for these and other projects, it will be a positive
for manufacturing in the country.
Impact on the Supply Chain
NAFTA was instrumental in the development and refining
of supply chains throughout North America, especially in
the auto industry. Many North American automotive
assembly lines and parts makers work together as one
integrated production chain from cities such as Toronto in
Canada through Detroit and into numerous regions of
Mexico. Should there be a change to the entire agreement,
we foresee stress in the supply chain which will have an
effect on the manufacturing and logistics industry within
Canada. Tariffs or trade barriers have the potential of
disrupting these production chains.
A recent proposal by the U.S. trade representative’s office
regarding NAFTA cites that the U.S. is considering
reintroducing tariffs if there is a flood of imports that could
impact domestic industries1, if so, Canada is likely to
respond in kind with its’ own set of tariffs. With new tariffs
or duties imposed on items that cross the border, there will
likely be a dramatic slow-down to the movement of goods.
Customs brokers would have to examine items to
determine their appropriate tariff classification (of which
there are thousands) and the applicable rate.
In Ontario, the Long Combination Vehicle (LCV) program
enables 2 x 53' trailers to be pulled along Highway 401.
If the implication is bulk orders/shipping, we only see
this expanding.
Industrial markets
Industrial markets in Canada will be impacted by NAFTA so
far as the industries or trade within them are tied
to NAFTA.
The Greater Toronto Area
With Canadian $300.9 billion dollars in sales in 2016,
Ontario is the manufacturing powerhouse of the country. In
the Greater Toronto Area there is over 207 million square
feet of manufacturing space to enable this amount of
production and sale (for context, Philadelphia has 215
million square feet of manufacturing space). If NAFTA
impedes on Ontario’s ability to trade across the border,
expect less demand for Ontario manufactured goods. The
trickle-down effect would mean less companies
manufacturing, and hence, less of a need for
manufacturing space.
Ontario’s manufacturing that is related to transportation
equipment could feel the most pressure, as it is the major
producer of goods in dollar volume by a wide margin.
Transportation equipment sales in Ontario versus other
product types, 2016 (CAD)
$12
A decrease in the movement of goods across the border
would negatively impact traditional retail distribution
companies as well as carriers, and force companies that in
the past fulfilled orders in their own country to reshape
their logistics’ map.
Expect such companies to now ship product in bulk (to cut
down on logistics costs and ease clearance of customs),
and/or, fulfill their orders from inventory on the customer’s
side of the border. This will impact positively the demand
for warehouse space (particularly at points of entry to a
country such as border crossings, rail crossings, a port, or
an airport) to hold bulk inventory that might previously
have been stored, sorted and shipped as individual items
in the United States.
1 The
Wall Street Journal
Billions
Traditional retail & e-commerce distribution
$10
$8
$6
$4
$2
$0
Source: Statistics Canada
3
NAFTA – what’s next? | Canada | Spring 2017
Canada’s reliance on manufacturing isn’t what it once was,
however. Instead, services account for 70 percent of GDP, a
number that has been trending steadily upward
for decades2.
Further to this, when manufacturing has been in a position
to expand, it has not. With a low Canadian dollar compared
to the U.S., businesses should have more of an opportunity
to invest into growing their space footprints, in order to
increase production. But that has not been the case in the
past two years, as both investment in non-residential
structures as well as machinery and equipment have
trended downward.
Billions
Investment spending in Canada (CAD)
The Alberta industrial markets
The price of oil plays a large part in Canada’s economy. In
2016, it was the second largest export into the United
States, totaling Canadian $76.2 billion. This was behind
only passenger cars and light trucks3, that totaled
Canadian $84.7 billion. Oil and the price it achieves is not
only important to the health of the Canadian economy, but
the health of Alberta’s industrial markets. For instance, the
vacancy rates in the province’s two largest industrial
markets (the Calgary & Area and the Greater Edmonton
Area) started to trend upward when the price per barrel
crashed at the end of 2014.
Industrial vacancy rates and the Oil Price WTI (USD)
$140
10.0%
$110
$120
8.0%
$100
$80
$83
6.0%
$60
$55
$40
4.0%
$20
$28
2.0%
$0
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2008 2009 2010 2011 2012 2013 2014 2015 2016
Non-residential structures
Machinery and equipment
Source: Statistics Canada
0.0%
$0
Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016
Oil Price WTI
The Calgary & Area
The Greater Edmonton Area
Since reducing capacity, due to automation and the
greater manufacturing of goods in other parts of the world,
Canada is not able to achieve the production amounts it
once did.
From Q1 2015 to Q4 2016, investment spending for
machinery and equipment in Canada has dropped
by 11 percent. Investment spending in non-residential
structures has dropped by an even greater extent.
During the same time period it dropped 19 percent.
2, 3 The
Globe and Mail
Source: Daily Oil Bulletin
If a border tax is introduced to oil going into the United
States, then there could be less demand for Canadian oil
that is now at a higher price. In turn, the price per barrel
could remain low, keeping the industrial vacancy rates
high in both markets.
Optimism for the Alberta industrial markets, however,
could be found in President Trump’s approval of the
Keystone XL pipeline. If materials to build the pipeline do
not have to be sourced from the U.S. then manufacturing
in the province could benefit. Specifically coal and
petroleum manufacturing, which is the third largest
manufacturing industry in the province. Also with
construction, there would be a need to store supplies,
increasing the demand for yard and warehouse space.
4
NAFTA – what’s next? | Canada | Spring 2017
Metro Vancouver & the Greater Montreal Area
If trade volumes through the port are unaffected, expect
port related businesses and their demand for warehouse
space to remain the same.
As stated by Canada’s Trade Minister, a change to NAFTA
could represent a closer trade relationship between the
country and China, India, and Japan4. For the Port of
Vancouver that could mean increased TEU volumes. In
2015, China was the top destination for outbound
containerized cargo and the top supplier of inbound
containerized cargo, while Japan was second and sixth,
respectively. More trade through the Port of Vancouver
with these countries could mean even more demand for
industrial space, from port related businesses, in
Metro Vancouver.
What’s next?
However, if NAFTA disrupts Canada’s trade with the United
States TEU volumes could go down. For containerized
imports coming into North America 22.9 percent of them
have the U.S. as their end destination. These containerized
volumes could be rerouted to a West Coast port in the U.S.
to avoid tariffs and duties. Meaning less trade through the
port and less demand for industrial space, from port
related businesses, in Metro Vancouver.
The impact to the Port of Montreal would be minimal as
trade with the U.S. is limited. In 2016, the U.S. did not
register any amount of containerized trade volume with
Canada’s largest East Coast port.
If U.S. administration introduces protectionist measures
against Canada, logistics’ maps will have to be remapped
for traditional retail distribution and e-commerce
companies operating on both sides of the border.
Industrial markets in Canada will also be impacted, as
most markets have an industry that relies on uninterrupted
trade with the U.S.. If there is an interruption, there could
be higher vacancy in the Greater Toronto Area and Alberta
markets for manufacturing space. In Metro Vancouver it
might mean more (or less) demand for warehouse and
distribution space.
A recent draft proposal to NAFTA by the U.S. trade
representative’s office suggested there would only be
minor changes to the agreement. What exactly will happen
remains to be seen however, and while it does, Canada will
continue to follow the developments of NAFTA very
closely.
Containerized traffic by trading partner, Port of Montreal 2016
6%
.3%
3%
9%
U.K. / Europe
Asia
Mediterranean
Middle East
Latin America
20%
Africa
Oceania
Source: Port of Montreal
4 The
Globe and Mail
23%
39%
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