Canadian businesses face mounting uncertainty as its top 3 trading partners each battle their own crises, manifested in a painfully low quarterly growth rate of 0.1 per cent for the past 2 quarters. Besides a number of reciprocal global trade barriers that have already gone up, the United States is currently threatening tariffs on Mexico that jeopardise the new Canada-United States-Mexico Trade Agreement (CUSMA), which is meant to replace NAFTA. At the same time, the Chinese economy is entering what appears to be a major economic crisis, accelerated by its trade war with the US, and the United Kingdom is still struggling to clarify even a basic concept of what its trade relationships will look like after its departure from the EU.
Businesses, particularly those with long, complex supply chains, rely on predictable conditions that allow for careful budgeting and long term planning. Unpredictably imposed tariffs, changing regulations, and fluctuating supply costs can lead to cash flow problems, and interfere with a business’ ability to effectively engage with foreign markets and suppliers.
Canadian businesses should beware of knock-on effects
While the US President’s attempt to put tariffs on Canadian goods certainly made headlines, it’s one of the more manageable ways that foreign trading partners might cause trouble for Canadian businesses. The US, Canada, and the UK are all currently engaged in economic struggles that affect Canada, but in which Canada isn’t directly engaged. This is dangerous, because it means Canada has little say in how these events transpire, while still suffering the consequences.
Brexit and the UK-Canada relationship
The provisionally applied Comprehensive Economic and Trade Agreement (CETA) currently lifts 98 per cent of tariffs between Canada and EU member states. The most important of these is the UK, Canada’s #3 trading partner. If the UK decides to leave the EU without a deal, the UK would also automatically leave this treaty, effectively reimposing tariffs overnight. Considering the UK’s unpredictability so far, it’s unlikely that businesses will receive any clear indication when or whether the UK actually will leave the EU.
China’s economic transition
While its trade war with the US is certainly contributing to China’s slowing economy, it was already facing slowed growth well before then. Economists generally agree that China is already in crisis, and will go into recession, potentially accompanied by a financial crisis. The timing of such an event is unclear, though its effects could seriously disrupt business relationships, as chinese companies found themselves battling currency devaluation, loss of government support, or shrinking local consumer demand.
The US’ trade war
The US is engaged in a breathtaking act of economic self-sabotage, as President Trump has either placed or threatened tariffs on key imports from all of the US’ top 10 trading partners. Those that were put into effect have all been answered by retaliatory tariffs, effectively slowing the flow of goods in an out of the country, and dampening its economic growth. These tariffs are already interfering with the ability of many international US businesses to operate cost-effectively. This makes it more difficult for US businesses and consumers to purchase Canadian goods—not because of tariffs on Canada, but simply because they have less capital to work with.
Businesses need ways to manage economic surprises
Cash flow interruptions can happen at any time, regardless of what may be going on in the larger global economy. That said, it’s particularly important for international businesses to be prepared for financial surprises in the current situation. When every new headline could break your carefully managed budget, it’s important to be able to come up with funding in the short term that will allow you to reevaluate and adjust. Fortunately, supply chain finance and invoice finance are designed precisely to buy you the time you need.
Invoice finance allows businesses to almost instantly collect on outstanding invoices, instead of waiting for them to come due. Instead of chasing down customers for payment, businesses can simply trade invoices in for most of their value to their financial institution. Then, after the customer pays the invoice, the remainder of the invoice’s value is paid out, minus a predetermined fee.
Supply chain finance
Supply chain finance gives businesses the ability to pay suppliers anywhere in the world without dipping into their own working capital. Instead, funds are drawn from a separate credit fund. Payments on the balance can then be deferred by up to 90 days, so the business has the time it needs to evaluate and adapt to changes.
Both of these tools have more specialised applications, but fundamentally help businesses to get the cash they need to manage any immediate issue, while also buying time to address longer-term effects.