TRUMP ADMINISTRATION SASKATCHEWAN EXPORTS Q&A. February 2017

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1 TRUMP ADMINISTRATION & SASKATCHEWAN EXPORTS Q&A February 2017

2 About STEP Saskatchewan Trade and Export Partnership (STEP) was officially launched on August 21, 1996 with a mandate to increase Saskatchewan's exports to existing markets and to tap into new markets by initiating sales, contracts, and projects for Saskatchewan exporters. Operating as a government/industry partnership, STEP champions the province s export industry and assists provincial businesses in realizing global marketing opportunities while finding custom solutions for Saskatchewan exporters. As a non-profit, membership based organization, STEP brings these resources together to provide world-class specially tailored services and programs that are of primary value to companies who are exporting outside the borders of Saskatchewan. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Saskatchewan Trade & Export Partnership (STEP). The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that STEP delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such STEP can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.

3 On January 20, 2017, President Donald Trump became the 45th President of the United States (U.S.). President Trump campaigned on a pro-u.s. growth, largely protectionist platform including committing to re-negotiate or terminate the North American Free Trade Agreement (NAFTA), withdraw U.S. support for the Trans-Pacific Partnership (TPP), protect U.S. jobs (including bring U.S. jobs back to the U.S. - primarily from Mexico) and focus on the enforcement of all trade agreements with a goal of protecting U.S. interests. While the environment under the new Trump Administration remains unpredictable, we remain confident that they understand the mutual benefits of the Canada/US business and trade relationship. This brief Q & A is offered to provide some basic answers to some questions that you, your employees, or your customers may have regarding this complicated but important issue. Please note that the views expressed here are those of STEP and do not necessarily express the views of individual members or those of the provincial government. What is Saskatchewan s current export position with the United States? The United States of America is Saskatchewan s biggest customer - by far. In 2016, Saskatchewan shipped 48.6% of our total exports to the United Sates (U.S.) (about $12.8 billion). This is lower than our historical proportion (closer to 63%) in part due to the reduced value of oil exports to the U.S. Saskatchewan has been successful in diversifying its international markets and reducing the reliance on the U.S market. In 2016, 76% of total Canadian exports were shipped to the United States. In comparison, Saskatchewan s exports into emerging markets such as China and India have doubled since What does Saskatchewan export to the U.S.? The provinces exports to the U.S. reflect the propulsive sectors of Saskatchewan s economy. The most significant Saskatchewan export into the U.S. is oil at approximately $4.7B in Commodities and resources including potash, canola (seed and oil), livestock, uranium, and wheat are also major exports. Significant manufactured goods shipped include steel and farm machinery (seeders and planters). What does Saskatchewan import from the U.S.? In 2016, Saskatchewan imported $7.5 billion in goods from the U.S. Reflecting the integrated supply chain, oil is the number one import from the U.S. Recreational trailers, herbicides, agricultural machinery (e.g. harvesters), mechanical shovels and excavators and motor vehicles also figure prominently.

4 What about Saskatchewan s trade with Mexico? Canada shipped $7.6 billion in goods to Mexico in 2016 with just over 9% of that ($695 million) originating in Saskatchewan - mostly in the form of canola products, wheat, canary seed, potash, oats, and lentils. Saskatchewan imported a variety of products from Mexico including trucks and truck tractors, transformers, railway tank cars, motor vehicles, and herbicides. The most significant food product brought in from Mexico was fresh tomatoes. Total imports amounted to $203 million. What is the Trump Administration s position on international trade? At a meeting between President Trump and Prime Minister Trudeau on February 13 th, 2017, Trump acknowledged that his bigger concern is the Mexican end of NAFTA, saying that the goal would be to tweak those elements affecting Canada in order to better streamline cross-border trade. The genesis of the new President s protectionist sentiments, including the alarm about foreign competition and suspicion of trade deals, seems to be connected to job loss (real or perceived) and focused toward Mexico and China - countries with large trade deficits with the U.S. In the absence of specifics, it is difficult to forecast what portions, if any, of the political rhetoric expressed during and after the American election will make its way into trade policy affecting Canada. Other than renegotiating the North American Free Trade Agreement (NAFTA) and scrapping the Trans Pacific Partnership (TPP) proposal, very little detail has been expressed. President Trump has already withdrawn from the Trans Pacific Partnership (TPP), what does that mean for Saskatchewan/Canada? It is important to understand that the TPP had not yet been approved or implemented and, as such, there will be no change to the trading patterns among the 12 participating countries as a result of the U.S. withdrawal. For Saskatchewan, it is an opportunity loss, particularly in the Japanese market. Many of the province s export goods face significant tariffs which would have been reduced and/or removed through the TPP. Saskatchewan is urging the federal government to re-engage with Japan on bilateral discussions which were put on hold during the TPP negotiations and to look for opportunities to liberalize trade in the Asia Pacific Region. What is NAFTA? The North American Free Trade Agreement (NAFTA) is a comprehensive agreement signed in 1994 that sets the rules for international trade and investment between Canada, the United States, and Mexico. Prior to NAFTA, Canada and U.S. trade relations were governed by the 1989 Canada - U.S. Free Trade Agreement which remains in place - NAFTA simply superseded it.

5 When implemented, NAFTA immediately lifted tariffs on the majority of goods produced by the NAFTA partners and called for the phased elimination of most remaining barriers to the movement of goods and services between the three countries. On January 1, 2008, the last remaining tariffs were removed within North America. How have we benefited from NAFTA? Most economists and analysts agree that NAFTA has been economically beneficial for the U.S., Canada and Mexico. Between 1993 and 2015, trade between the three members quadrupled, from $297 billion to $1.14 trillion. That increase in trade boosted economic growth, profits, and jobs for all three countries. The U.S. Chamber of Commerce notes that 5 million jobs in America are supported by the increase in NAFTA trade. It is estimated that more than $3 billion of trade takes place every day between the U.S. and its NAFTA trading partners and the three countries have become increasingly integrated over the last 22 years. Lower tariffs have also reduced prices and increased choices for consumers. What, specifically, is the Trump Administration looking to renegotiate within NAFTA? Good question. Again, in the absence of details, it is difficult to determine any definite objective or if the focus is industry specific or country specific (Mexico vs Canada). To date, the Trump Administration has only indicated a desire to discuss rule of origin and dispute resolutions. To be sure, it is more likely that non-tariff changes might be targeted including: The U.S. Merchandise Processing Fee: The United States levies a Merchandise Processing Fee on every commercial import transaction (the amount varies depending on total value). NAFTA qualifying shipments are exempt creating an important cost advantage for Canadian companies. NAFTA Accumulation Rules: Under this provision, Canadian companies are able to reduce the non-originating (inputs from outside of North America) value of materials used in production and destined to the U.S. or Mexico. NAFTA Drawback and Duty Deferral: The NAFTA provisions on drawback and duty deferral applies to goods imported by a NAFTA party and subsequently exported to another NAFTA party. The drawback is the refund, reduction or waiver of customs duties assessed or collected upon importation of an article or materials which are subsequently exported. NAFTA countries, on condition of export, are not allowed to waive this duty.

6 What would happen if President Trump were to withdraw completely from NAFTA? Again, unlikely, but the issue gets more complicated. As mentioned earlier, a withdrawal from NAFTA would leave the original Canada - U.S. Free Trade Agreement in force as a separate bi-lateral treaty. And what if President Trump were to tear up the Canada - U.S. Free Trade Agreement? Well, backstopping all trade agreements are the provisions under the World Trade Organization (WTO). Andrei Sulzenko, who negotiated the Canada - U.S. agreement and is currently the executive fellow at the School of Public Policy, University of Calgary, noted that with respect to tariffs, duty-free access under NAFTA or the FTA would be replaced with most-favoured-nation (MFN) tariffs bound under WTO agreements. In the case of the United States, its trade-weighted average MFN tariff is 2.2 per cent, while Canada s is 3.2 per cent. On the surface then, Canadian industry would become relatively more protected than U.S. industry. Can the President implement tariffs unilaterally? Following through on trade threats would likely involve the U.S. Congress, since the question of authority to revoke or change treaties is not definitively settled under the U.S. Constitution. However, a recent legal study by the Peterson Institute for International Economics notes that, in the short-term the answer could be yes because of the president s constitutional power over foreign affairs and because multiple statutes enacted by Congress over the past century authorize the president to impose tariffs or quotas on imports and regulate foreign commerce in other ways as well. The study also notes that in the longer term, however, as self-inflicted damage to the US economy became evident and widespread, Trump would face vigorous court challenges by adversely affected US firms and possibly some states, arguing that the president had exercised powers and invoked statutes in ways that the Constitution or Congress never intended. Has the U.S. applied protectionist measures in the past? Using similar arguments expressed by President Trump today, the United States implemented the Tariff Act (Smoot-Hawley) in 1930 which increased duties on nearly 900 American imports. Canada retaliated by imposing new tariffs on 16 products that accounted for approximately 30% of US exports. 22 other trading partners also implemented retaliatory actions. The Tariff Act brought international trade almost to a standstill and exacerbated and lengthened the Great Depression. Are there other U.S. trade issues that should be monitored? There are trade issues not directly covered by NAFTA that Saskatchewan needs to be concerned about protectionist polices like Buy America, the Soft Wood Lumber Agreement, and Country of Origin Labelling (COOL)

7 Softwood Lumber Agreement (SLA): Most forests in Canada are provincially-owned, while in the U.S. they re privately-owned. The U.S. has long alleged that allows Canadian producers to sell their lumber at a lower price, undercutting American producers in the process. The Americans claim that amounts to a subsidy, a claim Canada has fought (largely successfully) at the World Trade Organization. While Canada has been able to secure trade peace over lumber for periods of up to eight or 10 years, softwood lumber has largely remained a managed trade issue. The last SLA ended in October of 2015 and negotiations toward a new agreement have not produced a successful outcome. In November of 2016, the U.S. launched a countervailing duty and anti-dumping investigation against Canadian imports. A preliminary determination is expected in early spring Experts believe that U.S. lumber interests will be looking to decrease Canadian market share to less than 25 per cent of the American market - down from its current 31 per cent - through some form of an unacceptable quota system. While most of Saskatchewan s wood product exports to the U.S. are in Oriented Strand Board ($220 million in 2016) and not part of the SLA, softwood lumber is a significant business component of some of our lumber mills in Saskatchewan. In 2016, dimensional lumber shipped to the U.S. amounted to $83 million. Country of Origin Labelling (COOL) : COOL requirements for beef, veal, lamb, pork, fish and shellfish, fruits and vegetables and peanuts sold at certain U.S. retail outlets were implemented in The issue for Canada/Saskatchewan is the substantial additional costs that are incurred by those in the U.S. meat supply chain who must segregate Canadian animals from American animals - and the meat derived from them - at each step in the production process. The WTO has ruled that COOL discriminates against Canadian cattle and hogs and violates U.S. trade obligations. As a result, the U.S. repealed COOL for beef and pork in December of While COOL has, for the most part been resolved, Canada will need to remain vigilant against any other protections policies similar to COOL being introduced. In 2016, Saskatchewan exported just over $215 million in cattle to the U.S. What is the border tax that is being considered? Republican legislators have suggested a plan that would lower the U.S. corporate tax rate to 20 percent and exempt businesses from paying taxes on profits they earn internationally. Domestically produced products that are exported would not be taxed (no tax on export sales) but would no longer allow U.S. companies to deduct the cost of imported inputs (products or services) as a business expense.

8 President Trump originally dismissed the idea saying it was too complicated. However the President is now reconsidering the idea of imposing a border tax as part of a sweeping overhaul of corporate taxation and in context with his notion of having Mexico pay for the proposed border wall. So far, Canada has not been mentioned in this discussion. Are there any positive export-related announcements from the Trump Administration? President Trump has invited TransCanada to resubmit its application for the Keystone XL Project and has ordered the U.S. State Department to expedite its review to reach a decision on the project within 60 days. This is great news for Saskatchewan s number one export - oil. Keystone XL is an oil pipeline, beginning in Hardisty, Alberta, and extending through Saskatchewan and then south to Steele City, Nebraska. This pipeline is a critical infrastructure project for the oil industry in western Canada and for the economic strength and energy security of the United States. Crude oil from Alberta/Saskatchewan receives a price based on the West Texas Intermediate (WTI) price for barrels of light oil. The WTI price is typically much less than the Brent price for internationally traded barrels of light oil (in 2012, the difference was as much as $18 per barrel). The WTI-Brent discount has a significant impact on royalty revenue for Saskatchewan and is caused by transportation bottlenecks that are addressed by Keystone XL. It has been estimated that the project will also result in some 2,000 jobs to build the 530 kilometres of the Keystone pipeline through Alberta and Saskatchewan and add $1.3 million in annual property tax revenues in Saskatchewan. Is there anything Saskatchewan companies can do? The Government of Saskatchewan is working closely with the Government of Canada, including the Canadian Embassy in Washington, to ensure that the province s priority interests (including those of industry) are proactively advanced and managed under the new U.S. administration. However, everyone needs to continue to promote the benefits of the existing trade relationship with American counterparts at the individual, business, and industry levels. Saskatchewan provides high quality products at competitive prices, and delivers them to U.S. customers effectively and efficiently. As well, it is important to highlight the interconnectedness of the economies (i.e., integrated supply chains). Wherever two or more are gathered, we need to help them understand that any America First policy must include an open border with their largest, most loyal, and friendliest customer. Saskatchewan companies can also ensure they are well-versed on how to export into and do business in the United States.