Canada and the U.S. are each other's largest trading partner, with more than US$1.2bn crossing the border daily. Currently, Canada buys 19 percent of all U.S. exported goods and services, and supplies 16.5 percent of all U.S. imports of goods and services.
Both Canadian and U.S. businesses benefited from NAFTA, as many aspects of trade became duty free in 1998. Trade patterns that had traditionally followed an East-West pattern began to reflect the increasing occurrence of North-South trade. This is a trend that is still growing. Many forward thinking companies are looking at the North American market as a single region, without seeing the border as a barrier. In many cases, regional distribution centers, serving areas of both Canada and the U.S. make more geographic and economic sense.
Many savvy companies are looking to Canada as a good place to expand their businesses. The increased ease of shipping into Canada, a competitive Canadian dollar, reasonable wage rates, a tremendous transportation infrastructure and lower business costs in general make Canada a solid place to invest.
Many U.S. companies are choosing to enter the Canadian market more aggressively. The Canadian economy is strong and expected to grow 3 percent in 2003. The consumer market in Canada is also growing, leading many companies to consider expanding their businesses north of the border.
Canada is an extremely cost-effective location to set up a branch or distribution center. In recent years, the Canadian dollar has been valued at significantly less than the U.S., and although 2003 has seen an increase in the value of the Canadian loonie, it is still valued at less than the U.S. dollar. This makes all business costs more affordable, and will add directly to a company's bottom line when compared to the costs of opening up a similar facility in the U.S. Add to that the less costly labour, lower telecommunication costs and competitive transportation costs, and it isn't difficult to understand why U.S. businesses are considering their northern neighbour as the next step in their expansion plans.
Those companies that have succeeded in establishing a strong presence in Canada have done so seamlessly and without a large investment in capital. Updated Canadian Customs regulations, coupled with the strategic use of a third-party logistics provider have provided these companies with a competitive advantage. Cross-border trade has become much more transparent and efficient in recent years. NAFTA saw the elimination of most tariff barriers between the two countries. At the same time, customs procedures on both sides of the border have been streamlined through new technologies and automation. The U.S. Customs Modernization Act (Mod Act) was created in order to modernize the border management process. The plan outlines very clearly the responsibilities of the exporter/importer, the channels through which goods must be cleared and the process for handling disputes. While guidelines are stringent, they are clear-cut and easily dealt with by either in-house or outsourced customs expertise.
Canada's newly created Public Safety and Emergency Preparedness Ministry has committed to completing implementation of the Canada-U.S. Smart Border Declaration, and to examining measures that would increase efficiency at the border for low-risk commercial goods. Efforts to increase the ease of cross-border shipping will continue as an increasing number of U.S. firms make the strategic move to become more global when developing their North American distribution strategies.
One of the benefits of NAFTA was the elimination of the old tariff walls, which made investment in the Canadian marketplace very costly and onerous. Now U.S. companies can create a presence in Canada without a capital investment. There is no need to invest heavily in infrastructure, or "bricks and mortar." By establishing itself as a Non-Resident Importer (NRI) with the appropriate Canadian agency, a U.S. company can handle the entire Canadian market with sales and customer service representatives, agents, and the strategic use of a 3PL.
Importer and Exporter
Assuming NRI status provides access to Canadian markets in the most efficient and cost-effective manner possible. A NRI allows a company to become both the exporter from the U.S., and the importer of record in Canada. This enables goods to be sold in Canada on a delivered basis, and includes all charges in Canadian dollars. To the customer, there will be no perceived difference between goods produced locally or those imported from the U.S. It is a simple procedure to register as an NRI, with very few complications. The only issue to really consider is the Goods and Services Tax (GST), which is applied to almost all goods imported into Canada. NRI's have the option to register or not, depending on the type of goods and business. However, registering for GST is not a complicated process and should not be seen as a barrier to entry.
For companies, such as parts manufacturers or catalogue retailers, that are moving smaller value shipments into Canada, there are also benefits. Many provisions and special exemptions simplify the procedure for goods crossing the border and reduce the costs to the exporter. For example, goods travelling from Canada into the U.S. valued at less than $200 VFD [Value For Duty] do not require a customs entry, according to Section 321 of the U.S. Customs Act.
The U.S. and Canada enjoy one of the most efficient borders in the world. Changes in the processes of both Canada Customs and U.S. Customs combined with increasing use of information technology have allowed easier transmission of information among all the players. Electronic Release is possible at all automated ports operated by Canada Customs. Electronic Release shipments are given priority over manual releases. Another system, Pre-Arrival Review System (PARS) allows for the transmission of shipment data prior to arrival at the point of clearance. Through barcodes, all information is ready and waiting when the goods reach the border. As a result of updated procedures and technology, the border has and will continue to become more efficient.
The basic function of a distribution strategy is to get the goods efficiently to market at the lowest possible cost, while providing the highest level of customer service. Typically, U.S.-based companies have solid logistics strategies for their national market, but often overlook this step when entering the Canadian market. Rather than developing a comprehensive logistics plan that optimizes transportation routes, small shipments are made from the U.S. distribution center in response to small orders. This can result in substantial transportation costs and delivery delays.
Companies shipping to Canada should consider consolidating shipments to take advantage of the lowest possible transportation rates. Product should then be linehauled direct to Canada to a regional DC, placing the goods closer to the market and lessening the time from order to delivery. If the company chooses to partner with a Canadian third-party logistics provider, it will have access to strong regional distribution and delivery capabilities, minimizing transportation costs and delivery times and maximizing its customer service.
The use of a third-party logistics provider enables businesses to offer landed cost pricing and to invoice in Canadian dollars, providing a definite competitive advantage. A third-party logistics provider will provide hassle-free inventory management and help to minimize inventory-carrying costs. They can also provide the timely, flexible adaptation of the important technologies needed to expedite the clearance of goods on both sides of the border.
As a major component of distribution, delivery services need to be considered. Geographically, both Canada and the U.S. are extremely vast countries with diverse regions. In many cases, shipping North-South is more logical than shipping East-West. Canada can offer a tremendous transportation infrastructure, with world-class courier and shipping companies. When considering site selection for a distribution center, the border should no longer be seen as a barrier. Major considerations such as tax rates, labour costs, transportation infrastructure and costs, and access to market should take precedence. It may make more sense to locate a distribution hub in Canada that will service the entire North American market.
Forward thinking businesses are taking a more global approach to their distribution strategies. The streamlining of regulatory issues and NAFTA have made it easy for companies to ship across the border. It is a logical next step to consider dividing markets into borderless regions, where the North American region is looked at as a seamless whole and the border is not seen as a barrier. The major issues to consider in selecting a location for a distribution center or branch operation should be business issues, not border issues. Geographic location, the costs of doing business and potential cost savings should be the primary considerations. While it's difficult to break with tradition, it just might make more sense to locate in Canada and service the entire North American market from there. With more than $381bn in bilateral trade between the two countries, a seamless border with goods passing back and forth with ease is the future.
John Ferguson is Vice President, Sales & Marketing for PBB Global Logistics, a third-party global logistics provider that has fully integrated supply chain solutions (www.pbb.com).
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