October 4th, 2000

Customs Union would benefit small business

The success of the North American Free Trade Accord (NAFTA) in generating jobs and boosting trade was bound to eventually lead to talk about closer economic integration between the signatories. In the absence of a specific proposal it is too early to determine the net effect this would have on Canada's small to medium sized businesses.

In recent weeks, Brian Mulroney, Stockwell Day and Mexican president Vicente Fox have all broached the possibility of a customs union involving Canada and the United States and eventually even Mexico.

Although there does not seem to be a great public demand for such a union here in Canada at the moment, it is clear that the momentum toward North American economic and currency integration is increasing. And this will likely result in new, stronger, formal agreements between the countries over the medium term.

One model that is useful to study to determine how this could work, is the European Economic Community where goods, services and people flow freely across member nation's borders, and which is slowly moving toward the full adoption of a common currency, the Euro.

This model is especially relevant as a framework for closer integration between Canada and the U.S., which have similar economies and standards of living. Although NAFTA substantially eased trade between the two northern nations, many irritants remain. The border remains a visible and not too subtle psychological reminder that the two markets remain separate in many respects.

But the effects go beyond that. Travel delays for those crossing the border persist, ranging from lineups at airports and customs outputs to bureaucratic red tape for those travelling on work permits. In addition, goods and services flowing across the border are still subject to inspection and verification, causing undue hassle and paperwork.

Some companies turn this to their advantage. When Chapters.ca went public last year it bragged to investors in its prospectus that a Canadian online book industry could compete in spite of the threat from Amazon.com, because customs officials routinely delay book shipments coming across the border. In other words bureaucracy is giving Chapters.ca a competitive protectionist advantage against the more efficient southern bookseller.

But while this may be great news for bigger companies, smaller businesses as a rule have fewer specialized personnel on staff to handle the paperwork and deal with the hassles of customs inspections and regulations. This puts them at a considerable disadvantage when it comes to quickly moving equipment, plans, films or similar information across the border. A customs union would eliminate the border and allow goods to flow freely.

A customs union would also encompass a more relaxed attitude toward labor mobility. Lately, because of low American unemployment it has been easier for Canadian companies to transfer staff south of the border, but the reverse is not true. In addition, these transfers still necessitate all sorts of paperwork, delays and conditions.

These hurt small businesses far more than their larger counterparts who can more easily afford the services of pricey immigration lawyers and consultants to steer them through the red tape. Both the Canadian and American economies would benefit from unrestricted labor mobility between the two countries.

There is no reason that a company in Windsor that wants to open up an office in Detroit should not be able to put an employee in a taxi, send him across the border and have him open up an "American subsidiary" within an hour.

Giving unrestricted mobility rights to Mexicans is a much thornier issue. Many Americans' have equivocal attitudes toward their already considerable presence in the American economy. Whatever the social factors at work are, it is clear that Mexican workers have contributed enormously to U.S. small businesses.

The presence of Mexican workers has helped prolong the U.S. economic expansion especially in the later stages with the increasing labor scarcity. Although Canada's employment picture is less strong, there is clearly a role for Mexican workers in many Canadian small businesses.

Ask any Canadian small business owner and they will tell you about the difficulty in getting and keeping highly motivated and hard working employees in spite of the fact that unemployment rates remain high among Canada's youth. This is particularly true in the retail and service sectors.

How closer economic integration would play out is an open question. It is in both Canada's and Mexico's advantage that they negotiate a deal with the U.S. at the same time rather than separately, due to the relative weaknesses in these countries bargaining positions.

But first what is needed is more detailed study of the effects and possible modalities of such a deal by all parties and interest groups, especially those that represent small businesses.

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