The Learning Curve for Canadian Companies in Europe
Later this month, Canada and the European Union (EU) are scheduled to sign off on the written text of their Comprehensive Economic and Trade Agreement (CETA). This deal is Canada's most significant international trade agreement in a generation. It opens the door to long-term trade and investment growth with economically troubled but still wealthy Europe. But companies will be able to fully reap the benefits of the deal only if they do their homework now, so that they can burst through the doorway later.
New Conference Board research (co-authored with Sui Sui of Ryerson University) examines the experience of roughly 9,000 Canadian companies in the EU market, how exporting to the EU has affected their sales and profits, and how this compares with the performance of those that have exported elsewhere or not exported at all. The results show that exporting to mature EU markets has boosted Canadian companies' overall sales but not profits—at least not in the short term. In contrast, exports to the United States tend to immediately boost Canadian company profits.
We think that a likely explanation for this is that companies are learning as they go in the highly diverse EU market. Canadian products face one set of relatively low, transparent tariffs upon entry into the EU. Regulations and standards in the EU, however, can be less harmonized and less transparent in areas such as consumer safety, health, and the environment. The real challenges for Canadian companies are these non-tariff barriers (NTB).
This will be the test of CETA's effectiveness: How much does it actually reduce the impact of the NTBs that Canadian firms face? To the extent the deal is actually able to do so, companies should be able to improve their profitability. The agreement includes a mechanism, for example, for Canadian regulatory bodies to assess whether a product meets EU specifications.
Small and medium-sized businesses may have fewer resources to deal with non-tariff barriers—and they are less likely to be able to avoid them by setting up operations directly in the EU. Reducing their impact could benefit these companies disproportionately compared with large businesses. Even if the agreement does eventually take the sting out of NTBs, it will be up to Canadian companies to take advantage and to be competitive in the highly sophisticated EU market. The EU is a less homogeneous market than the U.S. market and requires, for example, different marketing approaches in each market or sub-market. This means that those that are prepared to adapt and tweak their product to EU markets will be most rewarded by any reduction of trade barriers under CETA.
What has worked in the EU market for Canadian firms? The common wisdom that going to the U.S. market first is critical for global success has not applied in the EU. Successful companies sell both manufactured goods and services, despite the latter getting far less attention. Going to emerging EU markets first has not been effective; far better to go first to the more mature EU markets.
The critical factor is product innovation—tweaking products and services to adapt to the diverse EU markets and sub-markets. Conference Board research shows that, regardless of size, companies that introduce new products frequently to the EU market have a greater chance of cracking that market and remaining active in Europe. It is the firms that meet these criteria that are most likely to take advantage of CETA for their benefit. Those that expect CETA to remove obstacles to the EU market but that fail to innovate and adapt their products to EU customers will fail to seize the full benefits of the agreement.