NAFTA the only rain hanging over our parade
The North American economy appears to be unfolding as it should, or as it was largely predicted, but with more than enough uncertainties to still hold our interest and feed our concerns.
Inflation rates in Canada and the United States are flirting near — but still below — the two-per-cent level that central bankers in both countries hold so dear to their monetary policies.
Ditto for employment growth, which has been even better than anticipated, along with lower jobless trends — all seemingly set to ensure an orderly return to not-too-hot, not-too-cold economic growth following outsized gains in the first half of 2017. A gradual return to “normal” interest-rate levels — around two per cent — in Canada and the U.S., after years of ultra-low post-recession borrowing costs, is now becoming well entrenched.
So, what’s to worry about? Five letters, NAFTA.
“Our concerns (are) that the negotiations are running off the rails,” warns Avery Shenfeld, chief economist at CIBC World Markets.
Re-crafting the North American Free Trade Agreement was bound to be a rough ride for all concerned, no matter who finally comes out on top. But now there are other worries.
“The major impact isn’t from the return of normal mostfavoured-nation tariffs, which are low. It’s from the loss of a dispute resolution process that has helped Canada stay out of the way of much larger countervailing, anti-dumping, national security or global safeguard duties — or at least a way of having them removed on appeal,” Shenfeld says.
“The only positive scenario for Canada would be if we could, before NAFTA expires, get a bilateral deal with the U.S. that has all those features. But the Trump administration team seems unwilling to have that sort of dispute review process in a bilateral deal.”
This puts Canada — and Mexico — in a wait-and-cringe disadvantage.
The fifth round of three-party talks will wrap up Tuesday in Mexico City, still in an apparent standoff and with the U.S. still demanding major changes to the 23-year-old agreement. Among the issues expected to be discussed this session affect sectors ranging from textiles and labour, to services and intellectual property.
Not surprisingly, however, U.S. President Donald Trump’s bigpicture focus will be on cutting corporate taxes in the U.S. and throwing up new trade barriers for Canadian and Mexican businesses — both issues certain to cause major headaches for companies on either side of the American border.
“There is a wait-and-see approach right now, but the competitive landscape is changing,” says Joy Thomas, president and CEO of Chartered Professional Accountants of Canada (CPA). “We have an opportunity to strengthen Canada’s position through a comprehensive review of our tax system, one that promotes fairness, simplicity and efficiency.”
According to a quarterly survey of business leaders, conducted by the Nielsen polling agency for the CPA, 74 per cent believe that U.S. corporate tax cuts “will pose a competitive challenge for Canadian businesses.” The survey also found that 29 per cent of respondents view U.S. protectionist trade sentiments as the biggest challenge to Canada’s economic growth.
“On taxes, Canada is really losing an edge we previously had versus the U.S., rather than being put at a disadvantage, although a move to have immediate expensing of capital costs will be attractive for companies that have U.S. earnings to apply those deductions against,” says CIBC’s Shenfeld.
“There are also some nuances in proposed changes in U.S. taxation on international business that, according to some experts, create incentives for American companies to operate abroad. As Trump said about health care, who knew that tax reform could be so complicated?”
Douglas Porter, chief economist at BMO Capital Markets, says “an important element here is the fate of the tax reform bill in Congress.”
“The conventional thinking there is if the Republicans have success there and get a win, there will be less pressure on NAFTA. That remains to be seen,” says Porter.
“If you look at the broad spectres, it’s manufacturing that’s likely to face the biggest challenge were NAFTA to be terminated. That’s no forgone conclusion, by any means, that is going to be terminated.”
Porter adds: “It’s not as if (Canadian) policy is going to stand still in the face of NAFTA coming under strain. We would see monetary policy change. We may well see fiscal policy change, we’d probably see trade policy change. So, it’s not as if Ottawa would stand still if there is a bad outcome.”