As the dust begins to settle around the 11th-hour deal to pull North America’s continental trade alliance from the brink, the initial sense of relief will be tempered by the realization that Canada didn’t gain much from this new United States-Mexico-Canada Agreement on trade. Except, maybe, the sense of comfort that the biggest element of doubt hanging over its economic future has been removed.
That’s not only enough, it’s huge. For a Canadian economy that has grown increasingly handcuffed by trade uncertainty even as it gained momentum over the past year, the removal of the dark cloud looming over the North American free-trade agreement brightens Canada’s growth prospects significantly.
Canadian businesses have been operating in a shadow of doubt over how dramatically the trade landscape might shift beneath their feet. Even going into this past weekend, employers didn’t know if they would return to work Monday morning to find the North American economy tossed into the chaos of a failed negotiation, or, worse, tumbling toward the black hole of an all-out NAFTA dismantle.
That fear of the unknown, and the risk that the worst-case scenarios might still unfold, has kept Canadian companies much more cautious than they would normally be in an economy that is approaching the peak of its cycle. Many key sectors are already operating at or near full capacity; a wide range of businesses are having a hard time finding enough skilled labour and are hard-pressed to meet growing demand. And yet the paralyzing trade doubts have made them hesitate to spend on expanding their operations, when all other logic says they should.
That fear factor has had a quantifiable effect on Canada’s growth outlook.
In its most recent economic projections released in July, the Bank of Canada estimated that uncertainty surrounding U.S. trade policy was reducing the level of Canadian business investment and exports by about 1 per cent annually. A back-of the-envelope calculation puts that at something like 0.15 per cent of Canada’s total gross domestic product. And that’s just the doubt that is reducing/delaying business spending and thus limiting export capacity growth. The effect of an actual collapse of the trade pact, coupled with U.S. trade actions against key Canadian goods (with the auto sector at the top of the U.S. list), would be much worse.
Bank of Canada Governor Stephen Poloz said just last week that such uncertainties wouldn’t dictate the timing of future interest-rate increases from the central bank. But it’s simple mathematics. If trade fears have actually subtracted from growth, then they have also, by extension, been slowing the buildup of inflationary pressures, thus tempering the pace at which the Bank of Canada would need to raise interest rates.
But Mr. Poloz has also said more than once that a resolution on NAFTA represented a potential upside to the economic outlook. With a deal at hand, we can expect that the negative consequences the central bank has baked into its growth projections will be flipped on its ear. The financial markets were quick to send the Canadian dollar and bond yields higher on Monday in reaction to the trade deal, anticipating the Bank of Canada will nudge its outlook a bit higher when it issues fresh economic projections with its Oct. 24 interest-rate decision – implying a modest upgrade to the expected pace of interest-rate increases from the bank over the next year or two. (Even before the trade deal, markets had anticipated an October rate hike.)
For the federal government, meanwhile, the new deal could mark a key turning point in what has been a pretty miserable track record for championing the interests of Canadian business. After the Trans Mountain pipeline saga, the controversy of carbon taxes and the stumbles on the small-business tax file, the government’s credibility had worn pretty thin with the business community. A successful NAFTA defence is a big first step for a government that has pledged to restore Canada’s competitiveness on the global stage, but so far has little to show for its talk.
There’s a lot more work ahead for the government, and soon. The U.S. corporate tax cuts that came into effect at the start of this year swung the pendulum away from Canada as a destination for business investment, and Ottawa has taken its time coming up with a policy response. With the trade deal out of the way, the attention of both the government and the business community can now shift to the long-awaited package of competitiveness measures Finance Minister Bill Morneau has been working on over the summer; this could come within weeks, as the government draws up its fall budget update.
A meaningful set of pro-business policies, on the heels of the trade deal, could inject a serious boost of confidence into the private sector. That could serve as a catalyst to shift the economy into a new gear, just as the U.S. tax cuts did south of the border.
But without question, the biggest competitiveness issue for a smallish, trade-dependent economy such as Canada’s is access to its biggest markets. This trade deal, whatever warts it might have, locks that down.