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Business Briefing And then I go and spoil it all by saying something stupid like ‘totally on our terms’: NAFTA under a cloud

Briefing highlights

  • What’s better for Canada on NAFTA?
  • Markets at a glance
  • Bank of Canada holds key rate steady
  • Central bank cites trade uncertainty
  • Nevsun agrees to takeover
  • Crescent Point names CEO, cuts jobs
  • Canada's trade gap shrinks in July
  • U.S. trade deficit at five-month high

And then I go and spoil it all by saying something stupid like ‘I love you’

— C. Carson Parks, from the 1967 hit song Somethin' Stupid, performed by Frank and Nancy Sinatra

Totally on our terms

— President Donald Trump, from his hit 2018 leaked off-the-record interview with Bloomberg News

NAFTA talks resume today under a cloud, raising the question of what’s better for Canada: no deal or a “somewhat worse” one.

There are benefits to Canada in the two-way deal struck between the U.S. and Mexico, analysts say.

But the question of what's best for Canada is hanging out there after negotiators from Ottawa and Washington failed to reach a deal by what was said to be Friday's deadline to join the pact that would overhaul the North American free-trade agreement.

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Canada and the U.S. are divided. As The Globe and Mail’s Steven Chase, Robert Fife and Ian Bailey report, Prime Minister Justin Trudeau stressed Tuesday he will not agree to kill NAFTA's dispute-settlement process or do anything that doesn't shelter Canadian media from foreign ownership.

A quick recap:

President Donald Trump threatened to slap crippling tariffs on Canadian auto exports if the two sides can’t agree, and told Congress Friday he plans to push ahead with the U.S.-Mexico deal, though he added that Ottawa is working hard to strike an agreement.

And, oops, in an off-the-record interview that was leaked Friday, Mr. Trump said a new agreement would be "totally on our terms," and that he was dangling the auto tariff threat over the heads of Foreign Affairs Minister Chrystia Freeland and her team.

(Here's what Bank of Montreal chief economist Douglas Porter said about that: "Trump continually wielded the cudgel of 'Carmaggedon' over Canada [last] week, stating that 'the easiest thing we can do is tariff their cars.' It’s unclear what’s more obnoxious about that statement - the casual economic threat against a long-time friend and neighbour, or using ‘tariff’ as a verb.")

Mr. Trump continued to push that theme on the weekend, warning on Twitter that "if we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out,” and that Congress should keep its nose out of it.

That's where things stand as Canada and the U.S. go back at it today.

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Foreign Affairs Minister Chrystia Freeland

Chris Wattie/Reuters

"The problem is that, unlike in most negotiations, no deal will probably not mean that the status quo remains intact," said Stephen Brown, the senior Canada economist at Capital Economics.

"Instead, Canada seems to have the choice between no NAFTA (plus the risk of auto tariffs) and a somewhat worse NAFTA. A somewhat worse NAFTA is likely to be the better option."

Chapter 19 provisions mean Canada, the U.S. and Mexico can seek a panel of independent lawyers to arbitrate disputes, and "if Canada capitulates, it will find it harder to oppose any anti-dumping measures the U.S. imposes on commodity imports," Mr. Brown said.

"But Chapter 19 has proved to be a pretty ineffective tool in preventing, for example, tariffs against softwood lumber," he added.

“So its benefits seem smaller than the Canadian government claims. Ultimately, the negative effects of a somewhat worse agreement would be small and spread over a long time.”

But Mr. Trump taking the “nuclear option” of killing NAFTA would hit Canada hard and fast.

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BMO's Mr. Porter didn't wade into a debate over what's best, but did cite in a report "some potential positives" for Ottawa in the deal between the Americans and Mexicans, notably "some serious concessions" on autos by the latter.

"There were also some parts that Canada likely isn’t thrilled about handing over without some give in return from the U.S., including extended patent protection on drugs, longer copyrights, and the ramped-up de minimis limits," he added.

Andrew Kenningham, chief global economist and Mr. Brown's colleague at Capital Economics, warned about "overinterpreting" every development in what has become a global trade war.

"In particular, we doubt that the U.S.-Mexico accord means that wider trade tensions will dissipate," Mr. Kenningham, said

“For a start, talks between the U.S. and Canada have not been concluded, and there are legislative hurdles to cross,” he added.

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Markets at a glance

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Poloz holds the line

The Bank of Canada is starting to put some of its demons to rest, while others continue to plague the outlook.

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As The Globe and Mail’s Barrie McKenna reports, the central bank held its key overnight ready at 1.5 per cent today, though it still said rates will be “warranted” down the line.

Economists had expected governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues to hold steady today, and move again in October.

As for its demons, the central bank said the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” As well, borrowing has “moderated” and the debt burden among households is starting to inch down.

Ah, but then there’s trade.

“Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower,” the Bank of Canada said in its statement.

But “while uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters.”

It added that it is monitoring the NAFTA talks closely.

Bank of Canada senior deputy governor Carolyn Wilkins and Governor Stephen Poloz

PATRICK DOYLE/The Canadian Press

“Discretion is the better part of valour, so a Bank of Canada potentially only days away from getting some clarity on NAFTA was wise enough to defer the next rate move until that news was at hand,” said CIBC World Markets chief economist Avery Shenfeld.

“An October rate hike looks highly likely if, as we expect, we have the makings of a NAFTA deal by then,” he added.

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