SMALL AGRICULTURAL BUSINESSES EXPORTING AND IMPORTING WITH CANADA Mary A. Morrisand, State College Pennsylvania INTRODUCTION Foreign trade is often viewed in American business as a process that only involves large organizations such as General Motors and IBM. Businesses that buy or sell products abroad are supposed to be multifaceted firms whose assets total in the billions of dollars. This fictitious profile often prevents many smaller companies from trying to export or import goods. However, selling to foreign markets can sometimes stimulate growth for a product that has saturated its U.S. market. A foreign market can also provide raw materials cheaper than a U. S. market. Cheaper raw materials can result in a more competitive product, thus higher productions and profits that could lead to company expansion. Canadian trade is the single largest component of U.S. trade, and U.S. trade makes up three-fourths of all Canadian trade. Additionally, 1.5 million American jobs are supported by trade with Canada (2). In 1987, the United States exported $59.6 billion of goods to Canada while the U. S. imported $69.2 billion of Canadian goods. It is a market that can provide excellent opportunities for potential exporters because most small businesses view Canada as a safe and secure trading environment (9). Besides minimal language and cultural differences, U.S. and Canada share similar economic systems making Canadian business practices much simpler to understand than those of many other foreign countries. In addition, sales can be made directly to the customer in Canada, eliminating the need for export agents thus making Canada a simpler market to enter. Still, most smaller businesses are not willing to investigate international markets unless they have a chance of getting some positive results. (It is important to note that small businesses are defined by the Small Business Administration standards for each industry. For instance, wholesalers are small if they employ fewer than 100 people and retail/service industry is small when annual receipts do not exceed $3.5 and $13.5 million, depending on the industry.) Like other companies who fall far below the SBA maximum standards for "small companies," the companies in this study need to see firms similar to themselves successfully exporting and/or importing goods. In other words, current exporters and importers can serve as role models to new companies who are interested in trading products. Agricultural products are just some of the many products that are being exported to Canada. The agriculture industry includes not only farmers and herders, but also food processors and wood harvesters. The market for U.S. hardwoods and other wood products is particularly profitable right now because of an expanding Canadian furniture market (5). Other agricultural markets are expected to grow as trade barriers are eliminated between the U.S. and Canada in the next ten years. The Southern Alleghenies Region of Pennsylvania could be faced with losing a significant portion of its forest should its trees die as a result of the gypsy moth infestation. Presently, the lumber from these trees is only being sold as kindling. However, a higher value product could be produced with the development of conscientious plan to harvest, mill and sell these trees before they begin to deteriorate and depreciate in value. The increased profits from the sale of the value-added timber would allow something positive to result from the loss of these trees . A large portion of this plan entails the identification of a market for the surplus lumber. Canada could prove to be an excellent market for this timber because of an expanding household furniture market. The Canadian furniture industry needs the imported raw materials to make furniture and/or furniture imports to satisfy demand. This area's native Appalachian hardwoods are very popular with the Canadians who would be willing to pay a premium for the timber. This study's objective to show how small agricultural businesses in the Southern Alleghenies Region export to markets such as Canada. A profile of small agricultural companies that trade these goods is also offered, dispelling some of the myths about exporters. The problems that can be associated with foreign trade are also indicated along with some suggestions that could provide resolutions to these issues. BACKGROUND

The U.S./Canadian Free Trade Agreement that was signed on October 3, 1987, by the United States and Canada is best considered as a capstone to over 200 years of trade and 130 years of trade agreements between the two nations. Separate territories since the American Revolutionary War, Canada and the U.S. have been natural trading partners who share the worlds longest border. Even before Canada gained its independence from the British Empire in 1867, efforts were being made to ensure that trade between the two nations would not be impeded (3). The following is a brief summary of trade agreements between the U.S. and Canada: 1854 - First free trade agreement signed. Animosities created during the American Civil War between the U.S. and Great Britain ended that treaty in 1866. 1911 - A second attempt at a free trade agreement was signed. This agreement, however, did not even last a year due to internal Canadian political problems. 1935 - A Most Favored Nation agreement was signed as part of the U. S. Reciprocal Trade Agreement Program in an attempt to break down protectionist barriers. 1947 - 1979 - Seven rounds of the General Agreement on Tariffs and Trade (GATT) talks are held. U.S. and Canada are participants and make a number of agreements that begin to lower their trade barriers. 1965 - Auto Pact is signed making all trade in cars, trucks and parts duty-free. The latest free trade agreement took effect on January 1, 1989. it was the biggest step ever taken by both nations to ensure that markets remained open for exporting/importing and that any existing protectionist barriers were dismantled. This agreement is expected to bring about a 3% rise in Canadian GNP and a 1% rise in U.S. GNP (1). A significant part of the agreement is the elimination of all bilateral tariffs between Canada and the United States. All tariffs will be eliminated in stages beginning January 1, 1989, and ending January 1, 1998. There are three levels of tariff reduction and all products have been assigned to one of these levels: Level 1 - Immediate elimination of tariffs Level 2 - Elimination of tariffs within 5 years, 20% cut per year Level 3 - Elimination of tariffs within 10 years, 10% cut per year In addition, a bi-national tribunal has been created to settle any trade disputes between U.S. and Canadian companies. Traditionally, agriculture has been one of the more protected markets, but the agreement implements numerous measures to encourage more trade. The U.S. should benefit from (11): 1) Reduced tariffs on fresh and processed fruits and vegetables, an area with traditionally high tariffs . 2) Raised import quotas on poultry and poultry products 3) Elimination of Canadian import licenses for U.S. wheat, barley and oats when U.S. price supports are less than or equal to Canadian support levels for their products. The two countries are also working towards harmonizing technical regulations affecting agriculture, food, beverages and certain other goods. These regulations often resulted in non-tariff trade barriers that kept U.S. goods out of Canada (11). PROCESS Agriculture is the largest industry in the state of Pennsylvania, and in 1988 its exports contributed #236.8 million to the state (7). The Pennsylvania State Department of Agriculture sponsors programs that support the export of food and wood products by assisting with marketing and networking with exporting specialists.

Since agriculture is also the single significant industry within Pennsylvania's Southern Alleghenies Region, a survey sample group was developed from its agricultural companies. A database of 280 local agriculture companies which include farming, forestry, and food processing was developed. The names were collected from numerous public and private directories that were published for specific agricultural industries and for firms already identified as being involved in foreign trade. All the businesses surveyed were from the six-county Southern Alleghenies Region served by the Saint Francis College Small Business Development Center and includes Bedford, Blair, Cambia, Fulton, Huntingdon and Somerset Counties. Each agricultural company was sent a three-part questionnaire asking information about: 1) company demographics 2) exporting/importing involvement in Canada 3) exporting/importing in countries other than Canada The purpose of the first part of the questionnaire was to develop a profile of businesses involved in trade. The other two parts placed special emphasis on accessing information from the companies about: 1) What they had learned about exporting/importing, either in practice or through research 2) Why they were or were not interested in exporting/importing 3) Foreign firms that had requested to trade with them Since the responses to the surveys often raised further questions, responders who had agreed to provide further information were personally contacted. The questions they were asked dealt primarily with background information about their particular industry and how they fit into foreign markets. For instance, one company that has exported to Canada discussed the problems and solutions that it had encountered when exporting. The agriculture trade marketing specialist for the Commonwealth of Pennsylvania was contacted for further information about Pennsylvania agriculture in general and about the services offered to potential exporters. RESULTS A total of fifty-seven surveys were returned, which represents approximately 20% of those distributed. (See Figure I) Therefore, the data from this survey should be significant, since most literature considers 20% to be a high rate of return. Part of the process included sending reminder cards to encourage more companies to return the survey. Before the cards, 34 surveys were returned and after the cards were sent an additional 23 were returned. These 23 surveys were 40% of the total return which justified the time and money involved in the creation of the cards. Of the 57 surveys returned, 5 provided no information because the companies had gone out of business. Fifty-two businesses thus contributed information about themselves and their exporting/importing history. The majority of those companies (46%) reported gross sales of over $1 million in 1989 and they employed an average of 29 full-time workers. The operations of these businesses ranged from manufacturing to retailing and the types of customers they served were equally diverse. Sixteen companies, or 31%, were involved in foreign trade. Sixty-three percent of those 16 reported gross sales of over $1 million in 1989. Two of the companies employed over 300 people while the rest averaged twenty-three full-time employees. Most of these companies were involved in manufacturing or wholesaling. Fourteen companies had been involved in trade with Canada. Quebec and Ontario were the primary sources and/or destinations of their goods, but almost every province had been involved in a transaction. The principal products being exported are lumber products: hardwoods, furniture squares and upholstered chair framing lumber. At one time, two other companies had exported some processed food products. One had its product discontinued and was looking for a new market. The other had become frustrated with the paperwork and restrictions on colors and stabilizers and the bilingual ingredient labels required on all packaging. One lumber exporter was not comfortable with collecting payments from buyers that lived out of the country. Lumber is also currently being imported from Canada as a fish and lobster.

Thirteen of the businesses (93%) that had traded with Canada had been approached by Canadian firms to export/import products. All of the American companies had accepted the offers, and half of them listed a good selling price as being an important factor in their decision. One importer commented that low freight rates had made it cheaper for him to import his french fries from Canada than to buy them from the West Coast. Thirty-eight companies had not traded with Canada but 24% were interested in and wanted more information about trading with Canada. Only 5% had even investigated the possibility of trading the Canada. Three firms had been approached by Canadians to begin trade relations, but one had found a U.S. division of the same firm to handle its business, one had gone out of the logging business and the third could not produce the quantities of raw materials that the Canadian firm needed. (See Table 1) Nine companies had traded with countries other than Canada. These businesses had exported to Europe and Asia and imported from the Far East, Israel, Europe, Mexico and Guatemala. Current exports consisted of lumber and leather while imports were mostly food products such as sesame seeds and tomatoes. One company that no longer imports mentioned that it had not been very impressed by the quality of the product it had received and was very cautious about re-entering foreign markets. Two other businesses who no longer traded goods wanted to find new markets where they could begin trading again. Eight of these companies had been approached by foreigners to become involved in trade but three had refused the offers. One had been concerned that his mode of payment was unsecured, and another had been required to purchase more than his company could have afforded. Price was again the primary reason that companies had accepted the offers. Of the 43 companies that had not traded with countries other than Canada, almost one third of the businesses were interested in getting involved in trade. Nine percent had investigated the possibility of doing so, but found exporting and/or importing to be too complicated or too expensive, and one company simply was holding off until it had ore information. Six companies had been approached by foreigners to trade goods, ut limited resources and unstable markets kept companies from entering international markets. One food processor who was interviewed bout is Canadian trade, exports its product through a Canadian distributor to 11 of the provinces. Despite its success, he company is not pleased with the amount f paperwork that must be filled out before shipment can cross the border. The paperwork is not only time consuming but complicated so that "guesswork" is often used for answering unclear or vague questions. Regardless, the company has benefitted from the Free Trade Agreement because tariffs on this product have already been cut twice. This business had also been approached to export to Israel nd the Philippines but it is cautious bout entering other foreign markets because of the additional paperwork and the concerns about ensuring the quality of it product. Some implications that could be significant o small businesses in the Southern Alleghenies region include: 1)Small businesses are trading with Canada and other foreign countries (277% in Canada, 17% in countries other than Canada). 2)Small businesses are interested in getting involved in foreign trade (24% in Canada, 30% in countries other than Canada). 3)Small Businesses are being approached by foreign firms who want to trade with them (31% in Canada, 31% in countries other than Canada). 4)Most of the companies from this region involved in foreign trade had gross sales over $1 million in 1989. They employ an average of 23 full-time employees and are primarily manufacturers and wholesalers. 5)Lumber is one of the primary products being exported from this region into Canada. 6)The majority of companies choose to export because the are offered a good price for their product. 7)Small businesses often find that they do not have the resources available to produce enough product for export. Other

small businesses do not have enough capital to import products that must be bought in large quantities. 8)The bureaucratic component of exporting can sometimes prohibit companies from exporting. APPLICATIONS The results from this survey reaffirm the importance of foreign trade to the Southern Alleghenies Region. Nevertheless, there are still a number of businesses that are not involved in trade because they have never been approached by anyone to trade or they have never had the initiative to investigate it themselves. It is these companies that need to be made aware of the opportunities available in exporting and importing. Presently, members of the Southern Alleghenies Planning and Development Commission (SAPDC)and the Saint Francis College Small Business Development Center (SBDC) are involved in two projects that could expand participation in the area of exporting. First, the data results from this survey were presented to the Southern Alleghenies Agricultural and Natural Resource Committee. Following the meeting where the gypsy moth problem was also discussed, a letter was written to the committee's chairperson suggesting that exporting their hardwoods and their value-added products to Canada should be investigated more thoroughly. It was also recommended that a cooperative be established among the members of the silviculture industry. The idea for the cooperative is based upon a similar cooperative that is being considered by this region's hay industry. Since exporting can often require more resources than one company can supply, the purpose of the cooperative would be to enable its members to combine their resources and thus increase profits. Second, the SAPDC and the SBDC formed a Southern Alleghenies World Trade Association. The organization's members are private companies, banks and export specialists interested in learning about and exploiting the exporting capabilities of this region. The goal of the organization is to provide exporters and potential exporters with an opportunity to network with each other and with service providers. The forum for the networking is a quarterly dinner/presentation meeting where a presenter will discuss current issues that affect small businesses in foreign trade. Even more can be done to get businesses involved in foreign trade markets. For instance, organizations such as the SBDC and the SAPDC could research potential markets for small businesses to enter. They could also provide educational services such as seminars so that companies can begin to understand the issues related to international trade. The survey points out that exporting and importing products with Canada and other countries is a profitable marketing option for small agricultural businesses. When conducted successfully, exporting and importing can provide the means for these companies to revitalize and expand their operations. To help them start successful trading ventures, agricultural businesses should be aware of the services available. For example, many government agencies exist for the sole purpose of providing information and services to exporters. These organizations will take products abroad to trade shows assist companies with identifying trade leads and help find ways for businesses to simplify and expedite their trade transactions. Some of these are: Agricultural Information and Marketing Services (AIMS) - A part of the Foreign Agricultural Service (FAS). AIMS provides trade leads to interested companies, maintains a database of 15,000 foreign buyers who want to purchase U.S. food products and publishes a newsletter for foreign importers with lists of U.S. companies that are offering goods for export. Many of these services are offered at no charge to the exporter (10). Eastern United States Agriculture and Food Export Council, Inc. (EUSAFEC) - EUSAFEC represents the department of agriculture of ten northeastern states, one of which is Pennsylvania. It provides assistance with the mechanics of exporting, education about export issues and collects data and other information for companies interested in exporting (4). Mid-Atlantic Forest Products Export Coal in - This is an organization that helps coordinate the export of value-added wood from the states of Pennsylvania, New Jersey, Maryland and Delaware. It collects trade leads and helps companies set up their initial exporting ventures (6). Pennsylvania Department of Agriculture The Department of Agriculture's International Trade Division takes

Pennsylvania products to foreign trade shows, provides credit reports on foreign buyers to exporters, can help with export documents and can help companies deal with the U.S. and other foreign governments (8). The United States had a negative balance of trade in 1989 and will continue to do so unless more businesses take an interest in exporting. Importing goods can be beneficial too, because materials that are imported created jobs for the people who process those materials. Foreign trade is a viable option for small agricultural businesses that benefits not only the businesses but the economy as a whole. These companies should be encouraged to explore and become involved in international trade. *This survey was supported by the Saint Francis College Small Business Development Center through he Small Business Institute program. The Saint Francis College Small Business Development Center is partially funded under cooperative agreement #SB-2M-00048-09 by the U.S. Small Business Administration. The support given by the U.S. Small Business Administration through such funding does not constitute an express or implied endorsement of any of the cosponsor's or participants' opinions, findings, conclusions, recommendations, products or services. REFERENCES (1) Brock, William and Robert Hormats, eds. The Global Economy. (New York: W. W. Norton and Company, 1990.) (2) Canada. External Affairs. "Canada - USA: The Relationship" (1989) (3) Canada. External Affairs. "Overview: The Canada - United States Trade Agreement, Trade: Securing Canada's Future" (4) Eastern United States Agricultural and Food Export Council, Inc. "Food and Related Products for Export" (1989). (5) Keim, Kathleen. "'Best U.S. Export Prospects to Canada, "Business America: The Magazine of International Trade (January 30, 1989), 18-19. (6) Mid-Atlantic Forest Products Export Initiative. "Federal Focusing Assistance Proposal" (1988). (7) Pennsylvania. Agricultural Statistics Service. Statistical Summary 1988-89 and Pennsylvania Department of Agriculture Annual Report 1988. (8) Pennsylvania. Department of Agriculture, Bureau of Market Development. "International Trade Development Programs" (1990). (9) Swed, Sheryl. "Small Business and the U.S. - Canada Free Trade Agreement: A Natural Match," Business America: The Magazine of International Trade (January 30, 1989), 25. (10) United States. Department of Agriculture, Foreign Agricultural Service. "AIMS Is the Exporter's Bridge to New Markets" (1989). (11) United States. Department of Commerce, International Trade Division. "Summary of the U.S. Canada Free Trade Agreement" (February, 1988). Table 1 Summary of Survey Results about Canadian Trade QUESTION RESPONSEN % Traded with Canada? Yes 14 27.0 No 38 73.0

Of those that have traded with Canada Still trading with Canada? Yes 10 71.4 No 4 28.6 Wants to resume trade with Yes 3 75.0 Canada? No 0 0.0 Not sure 1 25.0 Approached by a Canadian Yes 13 92.9 Company to trade goods? No 1 7.1 Accepted offer made by Yes 13 100.0 Canadian Company? No 0 0.0 Of those that have not traded with Canada Interested in trading Yes 9 23.7 with Canada? No 25 65.8 No response 4 10.5 Investigated the possibility Yes 2 5.3 of trade with Canada? No 33 86.8 No response 3 7.9 Approached by a Canadian Yes 3 7.9 Company to trade goods? No 32 84.2 No response 2 7.9