The President of the United States recently made headlines when he announced that the United States and Mexico had reached a new bilateral trade deal to replace the North American Free Trade Agreement (NAFTA) and that the countries were prepared to move forward without Canada. Although Canada rejoined the NAFTA negotiations thereafter, the US announcement perpetuated the lingering uncertainty regarding the future of the trade relationship between Canada and its southern neighbour. This uncertainty already seems to have impacted M&A activity coming into, and out of, the “Great White North” and will likely continue to do so until resolved.
According to PricewaterhouseCoopers’ half-year review of Canadian M&A activity, outbound deal volume from Canada into the US rose by 8% in the first half of 2018 compared to the same period last year, while overall inbound deal volume regressed. Certain commentators are attributing these trends to the ambiguous NAFTA situation and the looming threat of trade wars. Outbound deal flow may continue to increase in part because companies faced with the possibility of tighter trade rules and additional protectionist measures might seek to establish a presence directly in the America market through M&A rather than by relying on exports. Inbound deal volume, on the other hand, could remain stagnant until the NAFTA question is resolved as a significant portion of Canada’s appeal as an M&A destination stems from the easy access that it offers to the US market. Without a robust NAFTA providing tariff-free entry for goods and services from Canada into America, Canada could continue to see decreased inbound deal activity from all parts of the world.
Until the dust settles on the NAFTA talks, Canadian companies may be well advised to plan ahead by reviewing their supply chains to identify any potential exposure to increased duties and tariffs. Corporations may want to start evaluating acquisition opportunities in the US or consider partnering with suppliers in other countries with which Canada has free trade agreements in place. For example, the recently signed Comprehensive Economic and Trade Agreement could provide interesting business opportunities in Europe. In these uncertain times, it is crucial for Canadian companies to develop strategies to be able to adapt quickly to whatever form a renegotiated NAFTA might take.
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