DISRUPTION’S VIRTUES.
One emerging threat to world growth is policy disruption coming from the sudden wave of political instability. In the U. S., we’re seeing it in spades with all the on- andoff policy proclamations from the Trump administration, while partisanship in Congress ratchets up to new heights. As of last week, the U. K.’s recent plan to Brexit the EU — last year’s destabilizing surprise — suddenly looks shaky with Prime Minister Theresa May’s failure to achieve a stable and strong majority government. Here in Canada, the implications of an unforeseen election result in B.C. might well undermine federalism as we know it today.
Overall, policy disruption can put sand in the gears of economic growth. Nonetheless, it will be worth the effort if it ultimately leads to better economic policy.
After former FBI director James Comey’s Senate testimony last week the United States will be absorbed possibly for years in a debate as to whether the president obstructed justice and his campaign colluded with Russia. Whether either is true or not, the most worrisome concern is that a weakened president will be unable to push through a rancorous Con- gress his pro-growth agenda of tax reform and deregulation. Hopefully, Republicans will steel themselves enough to achieve enough meaningful reform to avoid a major rout in mid- year 2018 elections. It’s notable that while everyone else was focused on Comey last week, the House went ahead and passed new rules lightening the burden of Dodd- Frank on smaller financial institutions and improving governance at the U. S. Consumer Financial Protection Bureau.
Still, the policy disruption won’t easily go away. Trump was elected to make big changes with his America First policy, which is cause for trading partners to worry. Of course, if NAFTA negotiations and trade disputes ultimately result in removing barriers to trade — like agriculture and aerospace subsidies — then the outcome could be good for the world economy. Businesses are now unsure about whether to invest in markets that export to the faster-growing U. S. economy or, given the protectionist threat, to just invest in the U. S. itself. Any company looking to minimize risk will opt for the latter.
In the U. K., there’s now significant uncertainty over the European Union negotiations over Brexit. While it’s clearly in the interest of both parties that a positive outcome provides a healthy economic and investment climate for both the U. K. and the rest of Europe, that outcome now looks more difficult. The Conservative government is weaker than it was before last week’s election, requiring support to govern from Ireland’s Democratic Unionist Party, which has its own demands for relatively open borders with Ireland. Given Britain’s weakness, the EU is going to get tougher about certain post- Brexit trade terms, in- cluding keeping free trade linked to open migration. That won’t sit well with British Leavers, especially after London’s recent spate of terrorist attacks.
Of course, the EU is no paragon of stability, either. While Emmanuel Macron, France’s new president, will push for a stronger EU with f i scal t ransfers between north and south, Germany looks increasingly uncomfortable with the prospect of picking up the bulk of that bill. Italy is still haunted by the euroskeptic Five Star Movement as a new election possibly looms. Investors would love to have faith in an EU that knows clearly its direction for reform, but that’s far from what they’re seeing.
Canada is not immune f r om policy disruption. Global investors were already unnerved about putting their money here — especially in our crucial resource sector — before B.C.’s postelection deal between the NDP and Green party promised a government that would do everything in its power to stop the Trans Mountain pipeline and the tanker traffic it would bring to southern B.C.
That comes after t he Trudeau government introduced legislation preventing tanker traffic in Northern B.C. The prime minister — willing to back tankers along the southern coastline but not the northern one — has said he will ensure the pipeline gets built, given the clear federal constitutional responsibility over inter- provincial transportation. If he fails, the ramifications could be serious. Alberta might react, for example, by taxing natural gas transported eastward from B. C. Provinces across the country might feel liberated to start erecting new barriers to transport and trade.
As if that weren’t enough disruption, the energy sector could soon get hit by onerous new regulatory proposals that the federal government is looking at f or pipeline and energy project approvals. If they come to pass, they will ultimately create a far more costly regulatory process for any infrastructure that the country needs built in the coming years.
Prime Minister Justin Trudeau therefore faces the most difficult decision in his 19- month- old government. He could take a lesson from his father’s approach to Quebec nationalists, stare down B.C. and push through Trans Mountain in the name of the national interest — even if it means losing some West Coast seats. Doing that could set a new tone that leads to falling barriers to interprovincial trade, as tolerance with interprovincial game- playing wears thin, and the spirit of Section 121 of Canada’s Constitution Act is revivified. Obviously this would be the ideal outcome for Canadians. Disruption that l eads bad economic policy won’t help anyone. But if we can turn disruption into pro- growth outcomes, in the end all this uncertainty might have been worth it.