TRADE BAIT
While Trump focuses on China, Canada and Mexico can breathe a little easier.
U.S. confusion on NAFTA It’s becoming apparent that NAFTA is a sideshow to China in the new U.S. administration’s proposed disruptions to global trade.
The key players on U.S. President Donald Trump’s economic team, including his treasury and commerce secretaries and the head of his National Economic Council, speak in a conciliatory tone on NAFTA. They reserve their cowboy talk for China — “the biggest trade cheater in the world,” according to Peter Navarro, likely to be a lead U.S. representative in the North American free trade talks.
On NAFTA, by contrast, Navarro speaks respectfully, saying earlier this month he foresees a NAFTA that is reworked into a “mutually beneficial regional powerhouse.”
Which, of course, NAFTA already is. The mere “tweaks” to NAFTA of which Trump has spoken since his inauguration suggest that any “new NAFTA” will be “basically a continuation of the status quo,” Viraj Patel, a foreign-exchange strategist in London at ING Bank NV, told Bloomberg this month.
The one and only substantial change to NAFTA that the U.S. has so far made clear it seeks is a rise in the “rules of origin.” That’s the amount of North American content in a product that qualifies it as tarifffree, currently set at 62.5 per cent. The Trump team wants to boost that percentage, to get non-North American components out of the supply chain.
Which brings us back to China, and more broadly, the Pacific Rim. The NAFTA talks will not be an assault on Canada and Mexico, but on China, Taiwan, South Korea and the emerging export prowess of component exporters like Malaysia and Vietnam.
As a practical matter, cutting the Pacific Rim (and South Asia, to be consistent) out of the North American economy is needlessly counter- productive. But politically, it means Ottawa and Mexico City can probably breathe a sigh of relief. Have you owned a Ford share lately? In the late 2000s, Ford Motor Co. mortgaged itself to the hilt to revamp its entire product line. Ford’s new offerings hit showrooms just as a seven-year boom in vehicle sales was getting underway — one of the most successful bet-the-company strategies in history.
Ford shares increased about 10fold in value between 2008 and 2011. Today, Ford stock is languishing at $11.72 after the company warned last week that profits this year will fall from 2016’s $4.6 billion (U.S.). The stock is now dismissed in some quarters as a “high yield” security, code for junk.
The only good news short term is that Ford’s diminished profit has pushed the yield up to a handsome 4.8 per cent.
But Ford’s current profit slump is due mostly to another wise heavy reinvestment in the company’s products.
Among Ford’s costly but imperative megaproject investments are EVs (electric vehicles); driverless, or autonomous, vehicles; and advanced battery technology.
Ford’s urgency in seeking leadership in all three realms is such that it has been aggressively buying outside expertise with a raft of tech acquisitions.
As it did roughly a decade ago, Ford is positioning itself to be at the industry forefront when those advances gain widespread acceptance among vehicle buyers. EVs are expected to account for at least 20 per cent of vehicles on the road by 2025. And driverless cars already are being embraced by policy-makers as a public-safety advance.
The auto sector offers cheaper stocks than Ford, with its current price-earnings multiple of 10.2. They include BMW AG (7.9) and Daimler AG (8.9). But with its greater volume and distribution network worldwide, Ford arguably stands to benefit most when we get beyond the early-adopter stage with the industry’s newest, truly 21st-century vehicles. Next endangered species: Megacities The rise of megacities in China and India (defined as more than 10 million in population) gives the impression that ever-larger cities are the future. But “the growth of very high productivity cities will reach a limit,” warns U.S. economist Tyler Cowen.
Soaring costs for housing in mature centres of wealth creation such as New York, Paris, London, Tokyo, Toronto and B.C.’s Lower Mainland, among others, is a long-term threat to their innovative strength in creating cultural and technological wealth.
Quite simply, neither homegrown talent nor imported talent on which high productivity cities rely can afford to live in these cities, or soon won’t be.
Young innovators and aspiring entrepreneurs eventually will be driven away from the likes of Toronto and Vancouver to lower-cost jurisdictions, which helps explain the rise of Boise as a significant high-tech hub.
And neither are the newest immigrants, also essential to a city’s creation of intellectual capital, sufficiently established to afford current Toronto rent of $1,327 for a twobedroom apartment.
The xenophobic backlash in highcost London and in U.S. clusters of innovation is a double-blow.
For Canada, which highly values multiculturalism, the decline or stagnation of intellectual-wealth powerhouses is more easily avoided, simply by making affordable housing more widely available.
Ottawa has been short-sighted in a budget last week that took such a casual regard of the housing crisis, with a commitment to spend just $3 billion of $11.2 billion set aside for affordable housing over the next five years.
During that time, you can be sure, the GTA risks a brain drain and a growing reluctance of immigrants to choose Toronto or Vancouver as their new home.
“They may prefer,” warns Cowen, “to experiment with their new ideas in lower-rent environments, if only because that will make it easier to hire other people.” dolive@thestar.com
NAFTA talks will not be an assault on Canada and Mexico, but on China, Taiwan and South Korea