Canada faces a long road of trade tur­moil

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS | OPINION & ANALYSIS - GLEN HODG­SON

The Trump eco­nomic agenda of­fers a mi­rage: Short-term gain for some, but long-term pain for con­sumers and trad­ing part­ners Se­nior fel­low at the Con­fer­ence Board of Canada

The full Trump eco­nomic agenda is be­com­ing more ev­i­dent with each pass­ing day – to at­tract busi­ness in­vest­ment back to the United States, re­store Amer­i­can man­u­fac­tur­ing to its glory days and cre­ate well­pay­ing jobs for his Mid­dle Amer­ica po­lit­i­cal base. The most likely out­come is short-term gain for some in the U.S. econ­omy, but longer-term pain and risk – for Amer­i­can con­sumers, busi­nesses and trad­ing part­ners.

Fol­low­ing a long re­cov­ery from the 2008 fi­nan­cial cri­sis, U.S. Pres­i­dent Don­ald Trump has the ben­e­fit of a healthy U.S. econ­omy to­day. Busi­ness con­fi­dence is ris­ing, as is cor­po­rate profit, and pri­vate in­vest­ment growth is solid if not spec­tac­u­lar. Short­term in­ter­est rates are also ris­ing as the Fed­eral Re­serve aims to re­store more nor­mal mone­tary con­di­tions.

Over all, the U.S. econ­omy is pro­jected to grow by up to 3 per cent in 2018. Con­sumers are feel­ing more buoy­ant. The un­em­ploy­ment rate is down to 3.8 per cent and wages are start­ing to rise a bit more quickly. Hous­ing prices have re­bounded to the highs of a decade ago in many mar­kets. There is some ca­pac­ity for fur­ther labour force growth, as the U.S. em­ploy­ment rate is still below its high prior to the 2008 cri­sis.

The tax cuts passed in 2017 for busi­nesses and in­di­vid­u­als with high in­comes were aimed at boost­ing in­vest­ment and at­tract­ing cap­i­tal back to the United States. So far, firms are re­port­edly us­ing much of the added cash flow to buy back shares and boost share prices. More­over, the U.S. econ­omy is tran­si­tion­ing to­ward high-value ser­vices and the dig­i­tal econ­omy and away from tra­di­tional man­u­fac­tur­ing. In this new world, it is de­bat­able if the tax cuts will fuel a sus­tained boost to U.S. do­mes­tic in­vest­ment in man­u­fac­tur­ing.

And the tax cuts come at a sig­nif­i­cant cost; con­tin­u­ing large fis­cal deficits and mount­ing pub­lic debt that is pro­jected to rise to­ward 100 per cent of GDP over the next decade. Fu­ture ad­min­is­tra­tions will have the task of deal­ing with the con­se­quences.

The eco­nomic ben­e­fits of the tax cuts are fur­ther lim­ited by U.S. tar­iffs – one of the other cen­tral themes of the Trump agenda. Tar­iffs are a tax in­crease, neu­tral­iz­ing the busi­ness tax cuts in some sec­tors. They could lead to higher in­fla­tion and place fur­ther pres­sure on the Fed to raise short­term in­ter­est rates.

The Trump Ad­min­is­tra­tion’s trade rhetoric is highly pro­tec­tion­ist, but its ac­tions are fickle, un­pre­dictable and scat­tered. Long-time al­lies and trade part­ners are tar­geted for ag­gres­sive tar­iff ac­tions, while the tough trade talk to­ward China – which has a mas­sive bi­lat­eral trade sur­plus with the United States – has not re­sulted in equally tough ac­tion.

The tar­iffs just in­tro­duced on alu­minum and steel im­ports from Canada, Mex­ico and the Eu­ro­pean Union are small in the con­text of the over­all U.S. econ­omy. None­the­less, they will neg­a­tively af­fect U.S. busi­nesses and con­sumers, with lit­tle short-term eco­nomic ben­e­fit.

The spe­cific im­ported steel and alu­minum prod­ucts hit by tar­iffs are used pri­mar­ily as in­puts in U.S. man­u­fac­tur­ing pro­cesses. There is lim­ited scope for im­me­di­ate Amer­i­can sub­sti­tutes – par­tic­u­larly for Cana­dian alu­minum. U.S. ex­porters would be neg­a­tively af­fected by the coun­ter­tar­iffs in­tro­duced by trade part­ners, par­tic­u­larly since sub­sti­tutes ap­pear to be read­ily avail­able for many of the U.S. con­sumer goods and busi­ness in­puts se­lected for coun­ter­tar­iffs. With fur­ther tar­iff ac­tion threat­ened in the auto sec­tor – os­ten­si­bly a bar­gain­ing chip in on­go­ing trade ne­go­ti­a­tions – the po­ten­tial for es­ca­la­tion is ris­ing.

Over the longer term, a pur­suit of pro­tec­tion­ist poli­cies will im­pair U.S. and global growth po­ten­tial. Con­sumers and busi­nesses will face added costs and re­stricted choice. U.S. ex­porters will face more coun­ter­vail­ing mea­sures and bar­ri­ers to for­eign mar­ket ac­cess – ul­ti­mately mak­ing the U.S. econ­omy less ef­fi­cient and com­pet­i­tive.

How should Cana­dian pol­icy mak­ers re­spond? It’s time to do our home­work on tax pol­icy op­tions for main­tain­ing Canada’s tax com­pet­i­tive­ness, fo­cus­ing in par­tic­u­lar on tar­geted ini­tia­tives aimed at boost­ing busi­ness in­vest­ment spend­ing in Canada.

Canada had lit­tle choice but to in­tro­duce its own tar­iffs to counter the Trump pro­tec­tion­ist ac­tion on alu­minum and steel. Yet a suc­cess­ful re­spon­sive trade strat­egy will re­quire two other core ac­tions. First, con­tin­u­ing to work closely with af­fected par­ties and in­flu­encers in the United States – in sec­tors, states, com­mu­ni­ties and on Capi­tol Hill – to en­gage in a full dis­cus­sion on the costs of pro­tec­tion­ism, and the ben­e­fits of open trade to Amer­i­cans. And sec­ond, deep en­gage­ment with other af­fected par­ties – specif­i­cally the EU, Ja­pan and Mex­ico – on keep­ing the global trad­ing sys­tem open. The com­mon front at the G7 Sum­mit was an im­por­tant sig­nal that Canada is in good com­pany on what looks to be a dif­fi­cult file.

The Trump tax and trade agenda of­fers the mi­rage of lim­ited short-term gain, but will im­pose sig­nif­i­cant long-term pain on Amer­ica and its trad­ing part­ners. Canada now has lit­tle choice but to pre­pare for a long pe­riod of tur­moil.

TI­MOTHY AEPPEL/REUTERS

Work­ers weld draw­ers on the assem­bly line at Metal Box In­ter­na­tional tool-box fac­tory in Illi­nois in Fe­bru­ary. The spe­cific im­ported steel and alu­minum prod­ucts hit by tar­iffs are used pri­mar­ily as in­puts in U.S. man­u­fac­tur­ing pro­cesses.

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