Taxing times

Taxing times

How hard is the global trade tiff and its increasingly punitive tariffs hitting small Atlantic Canadian firms? And what do owner-operators think will happen next?

MALLEY INDUSTRIES is a 55-employee firm in Dieppe, N.B. that makes and distributes mobile shelters, laboratories, and command posts, as well as ambulances, police and emergency vehicles. The company, which depends on the U.S. for roughly half its sales revenue, is heavily integrated into North America’s complex cross-border supply chains, especially when it comes to steel and aluminum.

A good example is Malley’s Ram ProMaster ambulances. The vehicles are built on bases and with drive chains imported from the U.S., and with bodies from Europe. Malley then ships the ambulances to Mexico for assembly, then back to the U.S. and Dieppe, “where we do our thing again, before selling them into the U.S.,” explains second-generation owner/ operator Terry Malley.

This cross-border interdependency means Malley is being directly affected by the 25 per cent and 10 per cent tariffs on Canadian steel and aluminum respectively imposed by the U.S. in June (see sidebar.) Speaking to Atlantic Business Magazine mid-summer, Malley said the trade war had already caused one of his U.S. suppliers to increase prices by eight per cent. He predicts that’s “just the beginning,” and that some suppliers will even use tariffs as “an excuse to raise prices.”

“Right now, we have to really watch our nickels and dimes, so we can continue to compete in the U.S. And if President Trump’s 25 per cent auto tariff becomes reality, [for this industry] things could get ugly real quick. It would devastate Ontario. We’re watching Trump and NAFTA very carefully.”

In the meantime, Malley is close to incorporating in the U.S., a move he’s made to streamline the company’s cross-border operations “as much as possible.”

If President Trump’s 25 per cent auto tariff becomes reality, [for this industry] things could get ugly real quick.
Terry Malley, President and CEO, Malley Industries

Another New Brunswick owner/operator already hit by the trade war is Sébastien Roy, founder of 11-employee firm Distillerie Fils du Roy Inc., in Petit-Paquetville. The distillery sells most of its whiskey domestically, with some going to Europe.

For Roy, the trade war hurts three ways. It will slow down whiskey sales and leave stock stuck in warehouses, thereby driving up the price of the already “extremely expensive” business critical barrels. Secondly, more expensive steel and aluminum makes it harder to invest in new equipment, and expand. Thirdly, says Roy, the trade war is causing the Loonie to fluctuate—making it hard for him to know what Canada’s dollar will buy him a month from now.

Says Roy: “For us, the trade war means more risk, and less clarity when it comes to forecasting. Costs are going up, the dollar might go down— the more you look at it, the less you want to invest in a major project. Everything is linked. And everything will start to cost more, the deeper we go into the war. There’s no winners. We’ll all have to pay, one way or another.”

Over in Mount Pearl, N.L, a spokesman for the Abell Group—which owns five small companies across the region including K&D Pratt, in Dartmouth, Nova Scotia—said Canada’s retaliatory tariffs (see sidebar story) have already increased the price of some of the goods Abell buys from the U.S. by approximately 10 per cent.

“That’s quite significant,” says spokesperson George Murray. “For us, uncertainty is the biggest concern going forward. You can hedge against currency exchange rates, and other variables. But there’s no predicting when and what will happen in a trade war and how it may impact the marketplace.”

Forty-seven-year-old Atlantic Hardchrome, in Dartmouth, employs approximately 12 people. Like Malley Industries, Atlantic Hardchrome depends on steel imported from outside the region, and the U.S. General manager Jim Muir told Atlantic Business Magazine that while the trade war hasn’t yet pushed up prices, it has caused “confusion, and constant changes” when it comes to the HS codes (American international export codes) the company uses to do business with U.S. brokers.

David Duplisea, CEO at the Saint John Region Chamber of Commerce in New Brunswick, says his members are also worried about how the tariff tiff will impact their bottom lines. Says Duplisea: “Atlantic Canada is highly dependent on U.S. trade, and additional barriers could cripple our already slow-growing economies. [Metal tariffs] trickle down to the business building a six-storey apartment, all of a sudden facing a five per cent cost increase.”

The trade war is also spooking members of the Greater Charlottetown Area Chamber of Commerce, chamber CEO Penny Walsh McGuire told Atlantic Business Magazine. “Members are talking about Trump, and the uncertainty, and what it means for their business. P.E.I. manufacturers have been talking to us about rising input costs. They’re starting to feel the pinch from suppliers.

“The construction industry has told us they’re worried about price rises. In addition, I spoke with a retailer recently who has had to increase prices on certain models and makes of washing machines. And we heard from a food manufacturer who had started an expansion, and is now worried about the rising cost of maintaining and upgrading the new equipment,” says Walsh McGuire.

She says the best defence for small businesses is to maintain and increase competitiveness, get closer to customers and suppliers, and to use the war as an opportunity to diversify and broaden export markets—both domestic and international. “The war will force firms to look outside of the U.S.—Canada trade corridor, to force open some new relationships.”

Roy agrees, and recalls a July visit to his distillery from a Canadian firm that exports to China. “There’s a lot of Chinese interest in Canadian products, and I hear it’s easy to export to China. Unlike other markets, they don’t want the labels translated, or replaced. And there, you’re dealing with only one market, instead of 50 U.S. states.”

Malley, however, isn’t sold on the diversification angle. “It’s easy to say, ‘look at other markets’. We do that. We sell to Mexico and South America. But ultimately, the big market is the U.S. There’s no denying that.”

Adds Malley, “Mexico has a new president. What if the U.S. makes a side deal within NAFTA with Mexico? How will that impact our negotiating power?

“Canadian manufactures are going to feel some pain. In terms of trade agreements, we’ve been turning the other cheek, and it’s all been one-way. Trump’s pissing everybody off. It’s like a bull in a china shop. How do you react to that?” asks Malley.

University of New Brunswick economist David Murrell says the trade war will “dramatically” affect the region’s exporters. “For small businesses, especially ones doing a lot of U.S. business, it will be a question of survival. I ensured my investment portfolio is now focused away from export businesses, into areas unaffected by a trade war. Personally, I’m very defensive.”

Adds Duplisea, “Trade wars are never won, invariably they start a cycle of disruption, increased costs and a return to negotiation.”

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