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Briefing highlights

  • NAFTA scenarios and bets
  • Which reminds me of a song
  • Court quashes approval of Trans Mountain expansion
  • Markets at a glance
  • Economy expands 2.9 per cent
  • Canadian dollar slips to about 77 cents
  • TD profit climbs in quarter
  • Argentina boosts rates to 60%
  • Campbell Soup to sell unit

Scenarios and bets

Many observers believe Canada will sign on to a new NAFTA – or whatever it happens to be called – but it’s far from a done deal as Friday’s deadline looms.

There are various scenarios as to what happens next, and odds on each, as the clock runs down. Canada is perceived to be in a weak position as the U.S. and Mexico struck their own deal, leaving the Trudeau government to scramble to either come on board or face the wrath of the Trump administration via stiff duties on auto imports.

As The Globe and Mail’s Adrian Morrow and Robert Fife report, Foreign Affairs Minister Chrystia Freeland says Ottawa is making progress, but Prime Minister Justin Trudeau also warned he would take no deal rather than a bad deal.

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Canada's Foreign Affairs Minister Chrystia Freeland arrives at the Office of the United States Trade Representative, Wednesday, Aug. 29, 2018

Andrew Harnik/The Associated Press

Then there’s the question of whether President Donald Trump is bluffing when it comes to threatening Canada, though he has generally been true to his word in his time in office to date.

“The exclusion of Canada means the deal will be difficult to implement from a legislative point of view and could be regarded as economically inferior to the U.S. and Canada compared with the NAFTA,” said Dev Ashish of Societe Generale.

“The timing (but not the content) of the new deal is somewhat surprising given we expected it to happen after the midterm polls in the U.S. and when the new Mexican government assumes office,” he added.

“It is likely the idea of approving a deal with Mexico was to pressure Canada to ratify the agreement quickly given the U.S. political context.”

And where the Americans and Mexicans are concerned, the game changes if Ottawa walk away.

“If Canada does not join the agreement or if negotiations on the final terms could not be resolved by late September, it is yet to be seen if the incoming administration in Mexico would be willing to sign the deal, while its ratification by U.S. Congress might not be as smooth as previously expected,” said Cesar Rojas of Citigroup Inc.

Here’s how JPMorgan Chase strategists see things, with what they call “NewFTA”:

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“Progress has been made and we are aiming for NAFTA to prevail, but hurdles abound … This progress paved the way for Canada to rejoin negotiations on Tuesday, suggesting that a trilateral agreement is possible by Friday – the deadline to ensure an agreement in principle could be signed in three months (i.e. by November 29) … While our base case scenario is still that NAFTA will prevail, the risk of a derailment in the negotiations is not small, which could result in either bilateral agreements at some point in the future (suboptimal outcome compared to a refreshed trilateral) or even no agreement at all.”

The other side of JPMorgan’s coin, of course, is “NoFTA”:

“The U.S. government agreement to accept changes on items that were previously a no-go means, in our view, that the risk of NoFTA is currently lower than before. Further, with several hurdles in the political and congressional timeline for the U.S., it seems a wise strategy to wrap negotiations sooner rather than later, as reaching an agreement in principle before the end of August would comply with the deadlines to sign a bill before the Nov. 6 midterm U.S. elections.”

And here are some scenarios, and odds, from Eric Lascelles, RBC Global Asset Management’s chief economist:

There’s a 45-per-cent chance of compromise, which would see NAFTA “weakened but still functional,” and with a “modestly negative” economic impact, though the uncertainty surrounding talks would be put to rest.

Mr. Lascelles gives 15-per-cent odds to killing the deal outright, which could mean Canada and the U.S. operate under the World Trade Organization tariff regime. In turn, that would mean higher costs and supply-chain issues given the integration of businesses.

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Similar, a “U.S. wins” scenario gets 15 per cent, which would see NAFTA “defanged.” The impact would be negative and, Mr. Lascelles said, the result could be “possibly worse than killing NAFTA depending on how substantially [the pact] is undermined.”

There’s a 25-per-cent chance of nothing changing. That would see the Trump administration getting nowhere, its “bluff called,” with Congress “disinclined” to alter the existing trade pact. That, Mr. Lascelles said, would mean uncertainty lingers, but with no protracted impact.

And, finally he gives 1-per-cent odds to a more modern agreement, with a “mix of neutral and good changes,” with, really, little impact.

Here’s how Mr. Lascelles looks at it when you put it all together:

“We now assign a 60-per-cent chance of a new NAFTA deal (though split between a 15-per-cent chance of the U.S. ‘winning’ via additional embedded protectionism versus a 45-per-cent chance of a more mixed compromise deal), against a 15-per-cent chance of the trade zone being torn apart, and a 25-per-cent chance that the existing NAFTA ultimately survives. If this last scenario seems odd given recent progress, recall that ultimately the U.S. Congress must approve any new deal. One conceivable sub-scenario involves Canada being excluded and Congress refusing to ratify a bilateral deal. Another sub-scenario involves Canadian negotiations taking sufficiently long that a vote doesn’t occur until 2019 when a new (and likely Democrat-led) Congress is much less favourably disposed toward a Trump trade win, regardless of the specifics.”

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Which reminds me of ...

The Herman’s Hermits 1966 hit “No Milk Today”:

No milk today, my love has gone away

The bottle stands forlorn, a symbol of the dawn

No milk today, it seems a common site

But people passing by, don't know the reason why

How could they know just what this message means?

The end of my hopes, the end of all my dreams

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Court quashes Trans Mountain approval

The Federal Court of Appeal has quashed Ottawa’s approval of the Trans Mountain pipeline expansion, The Globe and Mail’s Shawn McCarthy reports.

In a unanimous decision Thursday, the court sent the project back to the National Energy Board for further environmental review.

The court also said the federal government must conduct additional consultations with First Nations whose rights are impacted by the project.

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Markets at a glance

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Economy expands 2.9%

Canada’s economy expanded in the second quarter at an annual pace of 2.9 per cent.

Which isn’t bad, but for the fact that economists were generally expecting 3 per cent or better. The Canadian dollar dipped on the numbers.

Notable in today’s Statistics Canada report was a 2.9-per-cent push in export volumes, the best showing in four years and the big driver behind the quarter’s overall growth.

Consumer spending also gained, up 0.6 per cent and a better showing than the first three months of the year.

The export gains were “due in part to notable increases in energy products (+5.6 per cent) and consumer goods (+6.3 per cent), particularly pharmaceutical products,” the federal agency said.

“Exports of aircraft, aircraft engines and aircraft parts (+13.4 per cent) increased sharply on higher shipments of business jets to both the United States and non-U.S. countries.)

Note this, too: Housing investment rose 0.3 per cent, having slumped 2.7 per cent in the first quarter.

“The in-line GDP figures, and flat June, are enough reason for the Bank of Canada to wait until October to hike again, particularly if we don’t get a clear and favourable outcome to NAFTA and the tariffs on steel/aluminum are left in place,” said CIBC World Markets chief economist Avery Shenfeld.

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TD profit rises

Toronto-Dominion Bank capped bank earnings season with a jump in third-quarter profit, warning of “market uncertainty” but solid Canadian and U.S. economic growth.

TD profit rose to $3.1-billion, or $1.65 a share, diluted, from $2.8-billion or $1.46 a year earlier.

Adjusted, earnings per share rose to $1.66 from $1.51.

“While we continue to see pockets of market uncertainty stemming from the geopolitical climate, both the Canadian and U.S. economies continue to perform well and support a positive outlook for our diversified businesses across the bank as we head into the final stretch of the year,” chief executive officer Bharat Masrani said in releasing the numbers.

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Actually, cry for me

Argentina’s central bank has boosted its key interest rate to a stunning 60 per cent, pledging to keep it there until at least December.

The Central Bank of the Argentine Republic said today it took the action because its peso is plunging and it fears the impact on inflation.

This came as the peso tumbled by almost 16 per cent to its lowest ever, and as the government asked the International Monetary Fund for more money.

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