The CEO of Friesens Corporation is keeping a close eye on the ever-evolving Canada/U.S. trade war.
After just two days, U.S. President Trump eased up on his economy-wide tariffs on Thursday, pausing them on Canadian goods that are in compliance with the Canada-U.S.-Mexico trade agreement until April 2nd.
With 60 to 70 per cent of the company's finished product exported to the United States, Chad Friesen says if the U.S. tariffs were to apply to them, it would cost the Altona-based book manufacturer $18 million to $20 million annually. During the two days that they were in effect, however, it appeared the books produced by Friesens and shipped to the U.S. were exempt.
In an interview conducted Tuesday, Friesen explained this was because the tariffs were being applied under the American's International Emergency Economic Powers Act.
"That act was in put in place in 1977 and there is a very small number of exemptions that are included in that act, and one of them is an exemption for informational materials, including publications, and so that would include books. And the reason that's in there is, Americans are very protective of their First Amendment rights. We see this in a lot of agreements where there's an acknowledgment of maintaining the free flow of information, knowledge, opinions, et cetera," he said, adding this came at great benefit to Friesens.
The first test of this came Tuesday when the company's first shipment of books headed to the U.S. since the tariffs came into effect, and Friesen says they moved through the border without incident or expense.
"It's very important for us to maintain confidence," said Friesen
The sweeping tariffs have now been clawed back slightly, after previously being delayed a month, but the future remains unclear as to what will happen after April 2nd.
While preparing for the initial February deadline and now, beyond that, Friesen says communication with the company's employee-owners has been critical.
"As an employee-owned company, Friesens operates a little bit differently than most other companies. And so, one of the first things that we did is we wanted to communicate to our employee-owners that our intention was to preserve jobs and preserve the income of our employee-owners as much as we could, for as long as we could.
Whereas a lot of companies are looking at what the share value is going to do next month, we don't have to look at share value. We can think about our business in a different context. And so, that was one of the first things that we communicated to our staff. Reassurance that we've got their back. That doesn't mean that our company can go on forever without any pain, but we wanted to make sure that we protected our employees from that immediate anxiety and crush of the news that's being laid out."
Second, Friesen says the company communicated to all of its customers that they should also remain confident, and presented a plan based on a long-standing practice of saving cash in reserves for unexpected opportunities or threats and carrying a low or zero debt load.
"When we wanted to establish confidence for our customers, especially our U.S. customers or Canadian customers that are distributing into the United States, we brought to them a phased approach.
Phase one, if tariffs were actually going to apply to the products that we are shipping, that our company had the financial wherewithal to absorb the first few weeks of pain and that, essentially, was with the hope that if the trade war could be short lived (and) that our governments could come to reason and resolve some of these differences in short order."
In phase two, some of those added costs would be passed on to the customers.
"Future phases would have to get more significant because, ultimately, we want to make sure that the company survives whatever challenges we're being faced with today," added Friesen.
"The communication was really high on sentiment and low on details," he noted. "But really, it was that message to our employees and to our customers to say 'hey, we've got your back. Stay confident in Friesens and don't take any actions that are going to undermine our relationship with each other."
Closer to home
Meantime, the trade war has sparked much discussion across Canada about reducing interprovincial trade barriers, sourcing raw materials domestically and reducing our reliance on the United States.
However, Friesens already enjoys a very high market share in Canada, noted Friesen, and as a result, he says further expanding its customer base here at home presents a challenge. With limitations to global distribution, Friesen says there is tremendous growth opportunity in the U.S. as the company has a relatively low market share in that country.
"Asia is able to print and produce books and ship into North America, and they are doing that on the backs of really low wage and labour costs," he explained. Because of that, it is prohibitive for Friesens to produce books in North America and distribute them around the world. Europe, added Friesen, also has a very large capacity for book manufacturing, print and book manufacturing.
"Periodically, we ship products to other parts of the world, but it's a very infrequent event at this stage," said Friesen.
There is opportunity, however, on the supply side, he added.
"Some of the products or raw materials that we order for book manufacturing can be sourced in other parts of the world and that is something that we're actively pursuing and working out the details on. But we're going to continue to buy some product from the United States just because there's limited supply, potentially globally, and from a proximity basis, even if there are retaliatory tariffs on some of those raw materials, the cost of importing can be really prohibitive from other areas of the world. That said, we import an awful lot of paper from Europe, specifically from Italy, so it's not unfamiliar ground for us. It's just something that we may need to increase our efforts in."
Unfortunately, noted Friesen, Canada doesn't produce enough of the high-quality paper Friesens uses and, as a result, the company is unable to source as much of that product domestically as it needs. There are, however, other paper stocks produced here in Canada that the company is looking into how it can increase those volumes.