I had to rub my eyes after reading this headline – Stocks Get Lift From Trade Deal. How does that even make sense?
We have a U.S. trade team that is bent on disrupting supply chains, adding to complexity and pursuing a policy that is actually going to open up the door for auto suppliers out of Europe and parts of Asia (Japan, South Korea) who will gladly pay the 2.5 per cent NAFTA duty. I have no clue why anyone in the United States would be rejoicing, unless the same folks driving equity prices higher don’t also own a car, because what the government is really doing in this protectionist move is inflating auto prices for consumers. It did this earlier with the lumber tariffs, which have driven U.S. home prices higher.
So the base-case from the plethora of Bay Street analysis is that NAFTA ends up being saved, even if revised and changed to another acronym – since, according to President Donald Trump, even the mere mention of the name conjures up images of how the United States has been just totally abused by the North American free-trade agreement. What I find interesting is the rush to get this deal through, because God forbid that the new government about to take over in Mexico or the fresh faces we will see in Congress following the November midterm elections should have an opportunity to weigh in on this trade file.
All that said, if we get a deal signed in time, and we will at least know by tomorrow’s “deadline,” the markets will likely fully price in an October Bank of Canada rate hike (now 80 per cent priced in). Though the worry that will come from the Bank playing tit-for-tat with the Fed will be on the implications for the domestic housing market. Not just that, but also the mountains of household debt that will then have to serviced at much higher rates. Let’s not forget the uncompetitive tax gap that has yet to be resolved – trade uncertainty has not been the only factor undermining the loonie for most of this year. And oil, as well as industrial commodity prices, looks to have peaked for the cycle and there are downside risks as the Chinese economy continues to cool off. So once the short squeeze is done and the Canadian dollar performs its technical tests of the moving averages, it likely then will retain a “sell” signal – this is a currency rally you can rent, but not own.
As an aside, it is very clear after the way Canada was ordered to stay home and not partake in the agreement just inked, that the United States, under this Trump administration, is no friend at all. And the Mexicans (of course with a lame-duck government) did a very good job of stabbing Canada in the back as well – backtracking on issues that it had previously agreed with Canada were non-negotiable (not to mention that our amigo to the south had earlier pledged to engage only in tripartite talks … what happened to that?). Gracias for nothing.
What is truly bothersome is that the average tariff rate in the United States is 3.4 per cent and in Canada it is 4 per cent – a trivial gap – and yet in Mexico it is 6.9 per cent. Yet Canada has emerged as the odd man out in this latest rush to get a deal done. I’m starting to think that Canada should build a wall of its own – would be a great way to employ the wave of new immigration coming into the country – or maybe Justin Trudeau should just stick to his guns and not get pushed around.
The bottom line is that for all the Canadians hoping against the federal government signing onto something, anything, the deal that was struck this week did one thing and one thing only and that was to weaken Canada’s bargaining position. One reason why I treat this Canadian dollar rally with a dose of skepticism.
If there is a glimmer of hope, it is that Canada still has plenty of friends in Congress. But the real issue is that most Republican senators and members of the House Representatives are scared of the President and his base – all the more so ahead of the midterm elections. But there are some signposts that Congress will not ratify any new trade deal that does not have Canada included, and the reality is that it is Congress that has final say over whether NAFTA is scrapped or not. This seems to be lost on a whole lot of talking heads – that NAFTA was an act of Congress and legally it likely takes an act of Congress to make any changes to the agreement (the question, of course, is whether Congress has the backbone to exercise its prerogative on this trade issue).
As an aside, I have a great moniker for this new North American trade deal, should it pass: AFCM2 – which stands for American First, Canada/Mexico Second.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.