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Free trade, maybe, but smaller companies are buried in costs

For Stephen Harper, signing free trade deals in Europe and Asia isn't just about selling more Canadian planes, beef or potash.

It's about creating jobs at home by turning smaller Canadian companies into export champions.

"We have made it a priority to support the men and women who run [small and medium enterprises], especially as they explore opportunities in emerging markets and look to take advantage of Canada's new trade agreements," the Prime Minister said at a recent event in Mississauga.

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It's a laudable goal.

But the strategy may be more political slogan than effective policy at work.

"To get small businesses into exports is very difficult, and free trade agreements don't necessarily do a great job of that," argued Dan Ciuriak, a former assistant chief economist at the Department of Foreign Affairs and International Trade Canada.

For all the talk of turning small and medium enterprises (SMEs) into exporters, the global trade game remains dominated by multinationals and bulk commodity exporters, who can spread the steep costs of foreign transactions over massive volumes. These costs can include border red tape, currency fluctuations, transportation, language barriers, different product standards and on-the-ground logistics.

Even with free trade, the paperwork necessary to take advantage of lower duties can prove onerous for small companies. The lower tariffs that typically come with free trade deals may be great for the big guys, but for smaller, inexperienced exporters, they may not be enough to offset the prohibitive burden of all the other costs involved.

"Even instruments designed to reduce trade costs come with their own costs," Mr. Ciuriak, now an independent consultant, recently told the Senate Committee on Foreign Affairs and International Trade.

A key part of all trade deals are the rules of origin. For example, to take advantage of new lower tariff rates in the Canada-Korea free trade deal, a Canadian company must produce a certificate to prove that its product is truly Canadian.

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Rules-of-origin regulations are dense, technical and legalistic. And the penalties for making a mistake can be punishing. Unless the tariff reduction is substantial, many smaller shippers simply opt to pay the old tariff rate to avoid the hassle, Mr. Ciuriak said.

Likewise, various "trusted trader" programs are designed to reduce border costs by putting shippers into a fast lane, but relatively few companies use them because compliance costs are so high, he said.

Ottawa rolled out new resources for trade promotion in March, including money to help SMEs join trade missions, do export market research and to beef up trade offices.

But here, too, the results are mixed. Mr. Ciuriak has calculated that having an embassy in a country and expanding direct contact with foreign government officials boosts trade by 40-45 per cent, but the record on consulates is less clear. Research by Mr. Ciuriak, published in a recent C.D. Howe Institute report, found that putting more "boots on the ground" in consulates to do trade promotion produced no measurable trade gains because few Canadian exporters even use them.

Ottawa added new consulates and trade promotion staff in China and India in recent years. Meanwhile, it has scaled back its network of consulates in the United States, where exporters need less hand-holding.

Mr. Harper is correct that Canada needs more exporters, and to diversify markets beyond the United States.

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The question is how to do that.

One way for smaller companies to get into the export game is to ride on the coattails of larger exporters, as suppliers. Canada's challenge is that it is home to relatively few large so-called integrators, such as Bombardier or BlackBerry, that are already established in foreign markets.

Another route is to lower trade costs for smaller exporters. To do that, Mr. Ciuriak suggested negotiating more seamless borders with key trading partners, simplifying rules of origin in future free trade deals and expanding trade diplomacy to engage more directly with foreign governments, particularly in countries where business is more regulated.

But be wary when Mr. Harper promises the Trans-Pacific Partnership or some other trade deal will turn a tech startup into the next BlackBerry.

These agreements are undeniably good for Cargill, PotashCorp and Bombardier, and for Canada.

SMEs? Perhaps not.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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