Challenging Trends for Canada’s Chemical Sector

As noted by many in the business community, there will be challenges on both sides of the border with respect to manufacturing for a number of reasons beyond the recent negotiations on NAFTA or possibly the new agreement (USMCA), if and when approved by Congress.  The Business Council of Canada represents the largest group of major companies in Canada representing half the value of the Toronto Stock Exchange and they have indicated real concerns.  The Council just released a report done for them by PwC confirming concerns related to the potential impacts of recent US tax reform on Canada’s economy. The US corporate tax rate is now two points below Canada’s and that is having a bullish effect on foreign investment in the United States.

Meanwhile, Canada’s last eight quarters saw stagnation in direct foreign investment. This is largely due to the new US business tax rate, but others have argued it is also due to the nature of increasing regulations in Canada. It may also have to do with the number of large projects in Canada having been stalled for various business and political reasons over the past two years.

PwC’s detailed analysis showed that US tax reform has eliminated one of Canada’s main competitive advantages and that

PwC notes that capital-intensive sectors most at risk include manufacturing related to chemicals, machinery, plastic, rubber, and transportation. Other sectors would be less impacted by the US tax reform.

For the chemical sector, this new business environment is expected to have a long-term impact with direct and indirect GDP at risk in the order of $10-billion, out of an overall negative GDP impact of $85-billion in total. Also at risk are more than 78,000 direct and indirect jobs.

How this will play out over time will, of course, be tempered by how the new trade USMCA trade agreement plays out over time. This will include whether or not Canada responds to US tax reform, how regulatory issues are aligned across the Canada-US border, the impact of new carbon pricing taxes, whether current direct investments in key projects move forward, and if regulatory approval processes are shortened.  These are many of the issues CPCA has been addressing on for the paint and coatings sector in Canada. This relatively new trend for Canada all hinges on the need to reduce business uncertainty and create a more focused economic growth agenda for Canada.

The paint and coatings industry must be mindful of the challenges and continue to seek greater alignment of regulations where possible. We were encouraged by the renewal of the Canada-US Regulatory Cooperation Council last June and remain hopeful that the ongoing work plans of the RCC will lead to positive outcomes for industry. Positive approaches in this respect will ensure that both Canadian and multi-national companies operating in Canada have consistent regulations.

This is most critical for the coatings industry when one considers the fact that 50 per cent of the total volume of paint and coatings sold in Canada is now imported from the United States. Much of the product now manufactured here in Canada is done largely by US-based companies. We were also encouraged to learn late in 2018 that the federal government had decided not to amend existing chemical management regulations in its current mandate, as that would create even greater uncertainty for the chemical sector.

CPCA has long been advocating that the federal government must deal with regulations that conform to its own regulatory policy as noted below:

• Protect and advance the public interest in health, safety and security, the quality of the environment, and the social and economic well-being of Canadians, as reflected in legislation
• Promote a fair and competitive market economy that encourages entrepreneurship, investment, and innovation
• Make decisions based on evidence and the best available knowledge and science in Canada and worldwide
• Create accessible, understandable, and responsive regulation through inclusiveness, transparency, accountability, and public scrutiny
• Advance the efficiency and effectiveness of regulation by ascertaining that the benefits of regulation justify the costs, by focusing on human and financial resources where they can do the most good, and by demonstrating tangible results for Canadians
• Require timeliness, policy coherence, and minimal duplication throughout the regulatory process by consulting, coordinating, and cooperating across the federal government, with other governments in Canada and abroad, and with businesses and Canadians

(Source: Federal Cabinet Directive on Streamlining Regulation, Treasury Board of Canada)

Given the foregoing, industry has little choice but to remain positive and support what’s best for the economy and address the real challenges where we find them. For the coatings industry – and many other sectors – there appears to be much to ponder these days.