Briefing highlights
- A trade war primer
- CN chief leaves amid ‘challenges’
- Markets at a glance
- What to expect from Poloz this week
- What to watch for in jobs reports
- What else to watch for this week
General Donald Trump may soon learn what President Donald Trump seemingly fails to grasp: There is no glory in a trade war.
No medals. No victory parade. Indeed, no victors.
"There are rarely any winners from trade wars," Andrew Kenningham, chief global economist at Capital Economics, warned after Mr. Trump tweeted Friday that such battles are good and easy to win.
U.S. President Donald Trump announces that the United States will impose tariffs of 25 per cent on steel imports and 10 per cent on imported aluminum during a meeting at the White House in Washington, U.S., March 1, 2018.
KEVIN LAMARQUE/REUTERS
That followed his declaration of war a day earlier, when he said he would unveil levies on steel and aluminum imports this week.
And today, he tweeted that Canada would not be exempt unless a new North American free-trade agreement is struck.
The U.S. has "large trade deficits" with Canada and Mexico, and the tariffs will apply, he warned.
"NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A.," the president said.
"Massive relocation of companies & jobs. Tarifffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed."
He added in a second tweet that Canada must "treat our farmers much better."
Already having hit Canadian softwood lumber, and having launched an unsuccessful attack on Bombardier Inc., a move on steel and aluminum would hit Canada hard. And remember, we're already at war with the the U.S. at the World Trade Organization, having filed a wide-ranging complaint.
Not only that, observers such as the International Monetary Fund are concerned because Mr. Trump is using national security as a reason.
"We are concerned that the measures proposed by the U.S. will, de facto, expand the circumstances where countries use the national-security rationale to justify broad-based import restrictions," the IMF warned, adding tariffs would hurt not only American trading partners, but the U.S. itself.
As The Globe and Mail's Adrian Morrow and Sean Silcoff report, both Peter Navarro, Mr. Trump's trade adviser, and Commerce Secretary Wilbur Ross said over the weekend that no countries would be exempt, and thus Canada would not be spared.
Mr. Trump reiterated that today.
And, as The Globe and Mail's Campbell Clark writes, Mr. Trump is aiming at China but potentially hitting Canada, amid a separate investigation of Beijing.
"The lack of any exemption could reflect American concerns that China is dumping certain goods onto the U.S. market, using Canada as a back door, or simply the loss of the special status that the U.S. previously accorded its northern neighbour.," said Royce Mendes and Avery Shenfeld of CIBC World Markets.
Here, then, is a sitrep for the general:
The skirmish
Mr. Trump promised to unveil 25-per-cent tariffs on steel and 10-per-cent levies on aluminum this week, raising the spectre of an all-out trade war.
Canada warned it would respond, Europe condemned the move, and China called it stupid.
"A key question is whether Trump's decision is an isolated one, justified under a flimsy pretext of national security, or whether it is in fact an opening salvo, reflecting a view that more protectionism in general is desirable," said John Higgins, chief markets economist and Mr. Kenningham's colleague at Capital Economics.
"Hopefully, it is not the latter, although we have warned that a shift towards protectionism would become more likely as the mid-term and next presidential elections approach."
The battleground
Several countries could find themselves at war.
US Steel Imports, top ten countries
$US billion (left scale)
Per cent of exporting country's GDP (right scale)
5
0.5
4
0.4
3
0.3
2
0.2
1
0.1
0
0.0
Canada
Brazil
Korea
Mexico
Russia
Turkey
Japan
Taiwan
Germany
India
SOURCE: CAPITAL ECONOMICS
US Steel Imports, top ten countries
$US billion (left scale)
Per cent of exporting country's GDP (right scale)
5
0.5
4
0.4
3
0.3
2
0.2
1
0.1
0
0.0
Canada
Brazil
Korea
Mexico
Russia
Turkey
Japan
Taiwan
Germany
India
SOURCE: CAPITAL ECONOMICS
US Steel Imports, top ten countries
$US billion (left scale)
Per cent of exporting country's GDP (right scale)
$5
0.5%
4
0.4
3
0.3
2
0.2
1
0.1
0
0.0
Canada
Brazil
Korea
Mexico
Russia
Turkey
Japan
Taiwan
Germany
India
SOURCE: CAPITAL ECONOMICS
But there's much more at stake.
And where Canada is concerned, of course, there's a potential ripple effect as any tariffs promise to further sour talks to overhaul NAFTA, the latest round of which are now under way in Mexico.
The levies themselves would have a "limited" direct effect on trade flows, said Daniel Hui of JPMorgan Chase, because the products in question account for less than 3 per cent of imports to the U.S.
"The bigger issue for markets is that this signals a material escalation in Trump's aggressiveness on trade, especially given market complacency that had come to expect lots of bark but little bite," Mr. Hui said.
"This Section 232 tariff announcement is concerning as it is unprecedented to use a non-WTO consistent national security rationale, because of the depth and robustness of the policy argument, and because it signals a likely shift in the factional balance within the White House," he added.
"Follow-through formalization of the tariffs [this] week, trade-partner retaliation, a spillover into NAFTA, and potential for a more concerning Section 301 Chinese IP investigation finding, are all indicators to watch for a ratcheting up towards full-blown trade war."
Rules of engagement
Mr. Kenningham believes such tariffs would be legal under the WTO regime.
They would "break the spirit" of the WTO system, but probably not the rules themselves, given that such moves are allowed for national security reasons.
"Governments appear to be able to decide for themselves what constitutes such an interest, although this has been contested," Mr. Kenningham said.
"The clause has been invoked for genuine security reasons in the past, particularly during the Cold War, and occasionally it has been used on more dubious grounds: Sweden used it in 1975 to justify tariffs on shoes. However, it has not been used by the major advanced economies for many years."
A key question for Ottawa and the Canadian industry last week had been whether Canada would be exempt, but Mr. Navarro and Mr. Ross appear to have put an end to any such hope.
"Every early indication is that Canada will not be exempt from the steel and aluminum tariffs," said Bank of Montreal chief economist Douglas Porter.
"It's little consolation that Canada is a net steel importer, given that it also shipped a grand total of $24-billion of raw and processed steel and aluminum products to the U.S. in 2017, or 1.1 per cent of domestic GDP," he added.
"Suffice it to say that it is a very negative signal indeed from the country's largest trading partner, for growth, inflation and the currency."
H-hour
Governments and markets are obviously watching to see if Mr. Trump indeed launches the assault this week. Will he?
"Not necessarily: After all, we are talking about Trump!" Mr. Kenningham said.
"He said he will sign the executive order [this] week, but there will doubtless be opposition from Congressional Republicans, U.S. corporations and U.S. allies," he added.
"This, and the dip in the stock market, may cause Trump to change his mind. And it is possible that when the order is written it will allow exceptions for allies, such as Canada and Germany, who (unlike China!) are big sources of U.S steel imports."
Retaliation
Canada isn't alone.
"Canada has said it would 'take measures to protect its domestic trade interests and workers;' Brazil has said the same; and the EU has reportedly discussed possible targets for retaliation," said Mr. Kenningham.
"Other governments may also move to protect their own steel industries, which would be legal under WTO terms. That said, we suspect that any retaliation, from these countries and China, would be targeted and proportionate in order to try to prevent the problem escalating."
This threatens to play out across financial markets for some time yet.
"Global markets are expected to remain highly sensitive to the possibility of a trade war sparked by Donald Trump's decision to impose steel and aluminium tariffs last week," said IG market analyst Joshua Mahony.
"Trump's threat that he will tax European cars in the event of an EU backlash has heightened the risk to German stocks, with the likes of BMW, Daimler, and Volkswagen all losing ground today," he added.
"With Canada and the EU both warning of retaliatory responses in wake of the U.S. tariffs, there is a real risk that we will see a significant escalation of this issue moving into a tit-for-tat trade war."
It's uncertain whether America's trading partners can challenge the tariffs at the WTO because of the national security issue, said Bipan Rai, executive director of macro strategy at CIBC.
"Given that challenges can take months or years, these countries may not elect to wait until the WTO adjudicates to launch retaliatory tariffs," he said. "This would mark the next salvo in a trade war."
Canada in the trenches
Ottawa could, as noted, hit back with tariffs of its own, though Mr. Shenfeld, CIBC's chief economist, wonders if Canada has that right under the WTO system given the justification Mr. Trump is using.
Also, "we can buy our military equipment elsewhere, get tough on U.S. exports to Canada that have implicit subsidies, and say no the next time America asks Canada to support a military project, as we did in Afghanistan," Mr. Shenfeld said.
"None of these will do that much for the Canadian economy," he added. "Many of the items we import from the U.S. don't have competing products made at home, and are used as inputs into our own exports."
The Bank of Canada, which meets this week, would be in the trenches, as well.
"It can, and should, ease back on the timetable for additional rate hikes given the impending threat to both exports and capital spending," Mr. Shenfeld said.
"As markets factor in that outcome, they will, as we've seen, take the Canadian dollar weaker, helping other exporters in the process. Look for the central bank to leave rates unchanged, and mention trade uncertainties as they stall for time in the week ahead's interest rate announcement."
Canada as casualty
Well, that depends on your viewpoint.
The impact "could be more biting for the Canadian economy than previous moves by the administration," as Mr. Mendes and Mr. Shenfeld see it, citing statistics that indicate Canada could face tariffs on products that account for almost 10 per cent of its exports to the U.S. given these and other levies.
"The direct impact of these tariffs would be inflationary for the US and, by opening up some economic slack, deflationary for Canada," they said.
And, of course, the Canadian dollar would get caught in the crossfire, as BMO senior economist Sal Guatieri put it.
And, already, investment levels are low.
"The only group seemingly eager to invest is the government," Mr. Guatieri said.
"Foreign direct investment in Canada plunged in 2017 to seven-year lows, while investment outflows surged and ran about three times faster than inflows. Barring a shift in policies, Canadian firms will need a cheaper loonie just to maintain competitiveness."
JPMorgan's Mr. Hui believes the direct impact on Canada would be modest, but the signals would be harsher.
Steel and aluminum shipments to the U.S. account for 3.3 per cent of total Canadian exports, he noted. Add in softwood and dairy, and you're looking at 4.8 per cent.
"And so rather than these potential tariffs specifically, the risk to [the Canadian dollar] and Canada macro are more related to the implications of a more aggressive turn in U.S. trade policy: to the extent that this portends poorly for how the NAFTA renegotiation might go, how the broader global growth and trade environment might evolve if U.S. policy does potentially trigger a round of retaliatory tariffs either with Canada or with other major trading countries like China."
Friendly fire
Mr. Trump seems to be ignoring the potential fallout on his own economy: Trade wars are not necessarily good for the home front.
"In isolation, the net effect of U.S. tariffs will likely be sharply higher domestic metals prices, and mostly hit the U.S. consumer; our initial estimate is that [inflation] will be bumped 0.2 percentage points by the tariffs," said BMO's Mr. Porter.
"Beyond consumers, of course, any U.S. manufacturer that uses steel and/or aluminum has just been handed a competitive punch to the gut, as their input costs rise in comparison to global competitors - e.g. auto makers," he added.
This could also affect U.S. monetary policy as inflation aspects filter through to the Federal Reserve.
"While nothing has been signed yet, should these tariffs be introduced, they will lead to higher input prices for many manufacturing and construction industries which rely heavily on steel and aluminum inputs and ultimately result in higher prices for U.S. consumers, thus posing an upside risk to the Fed's inflation outlook," said Toronto-Dominion Bank economist Ksenia Bushmeneva.
"The Fed may look through a one-time change in prices as a result of tariffs, but will be cautious on the impact on inflation expectations and potential economic growth - trade wars are not typically good for productivity growth."
The impact could be even more far-reaching, said Mr. Higgins of Capital Economics, when you consider inflation and other factors.
Hotter inflation "would necessitate even tighter monetary policy, increasing the risk of a recession down the line," he said.
"Imposing tariffs on more imports in an attempt to boost demand at home would also be very short-sighted. Increased trade and globalization have led to greater prosperity around the world, including in the U.S. itself."
Collateral damage
Mr. Trump likes to take credit for the gains in the stock market since his election, but his latest threat has already resulted in a drop, and could prove more worrisome for investors, still.
Just look at what happened last week.
"Admittedly, the share prices of companies that produce these metals did well," said Mr. Higgins.
"But the share prices of many more firms in other industries fell, as their profits stand to be squeezed by higher costs of production," he added.
Look, too, at the Toronto stock market.
"Keep in mind that Canada is the largest foreign supplier of U.S. steel, accounting for 18 per cent of total imports in 2017 – the TSX materials sector, of course, did not respond well," said BMO senior economist Robert Kavcic.
The "closest parallel" would be would be the tariffs on steel imports under George W. Bush, which led to countermeasures from Europe, noted Mr. Hui.
And here's what happened then:
BUSH’S 2002 STEEL TARIFFS
S&P 500 index
USD index
U.S 10-year treasury yield (right scale)
USD index and S&P, tariff announcement = 100 (left scale)
105
6%
STEEL TARIFFS IN PLACE
100
5
95
4
90
3
85
2
80
1
75
70
0
Sept.
2001
March
2002
Sept
2002
March
2003
Sept.
2003
March
2004
SOURCE: JPMORGAN
BUSH’S 2002 STEEL TARIFFS
S&P 500 index
USD index
U.S 10-year treasury yield (right scale)
USD index and S&P, tariff announcement = 100 (left scale)
6%
105
STEEL TARIFFS IN PLACE
100
5
95
4
90
3
85
2
80
1
75
0
70
Sept.
2001
March
2002
Sept
2002
March
2003
Sept.
2003
March
2004
SOURCE: JPMORGAN
BUSH’S 2002 STEEL TARIFFS
S&P 500 index
USD index
U.S 10-year treasury yield (right scale)
USD index and S&P, tariff announcement = 100 (left scale)
6%
105
STEEL TARIFFS IN PLACE
100
5
95
4
90
3
85
2
80
1
75
0
70
Sept.
2001
March
2002
Sept.
2002
March
2003
Sept.
2003
March
2004
SOURCE: JPMORGAN
Consider ongoing market issues, as well, as prices fall despite what David Rosenberg noted were a raft of share buybacks in the wake of U.S. tax reform.
"Yes, yes, market interest rates have risen moderately, but the story is much bigger than that – it would seem to me to be a reasonable premise that investors are building in a 'Trump risk premium,'" said the chief economist at Gluskin Sheff + Associates.
"Tariffs may well protect jobs, but with classic cost-push inflation, which is bad news for real spending and profit margins," he added.
"Tack on bloated deficit financing at this late stage of the cycle. Also tack on trade frictions, the seeming implosion at the White House and rates backing up. There absolutely is no reason why this stock market deserves a premium multiple any longer."
Read more
- Adrian Morrow: No break for Canada on tariffs unless ‘fair’ NAFTA struck, Trump warns
- Adrian Morrow, Sean Silcoff: Canada waging full-court press against U.S. steel, aluminum tariffs
- David Shribman: Trump’s tariff gambit to face first political test in heart of steel country
- World hurtling toward all-out trade war over Trump tariffs, threats of retaliation
- Campbell Clark: With tariffs, Trump aims at China but hits Canada
- U.S. unveils steep tariffs, raising peril of trade war
- Nathan VanderKlippe: China shrugs off ‘stupid trade protection measure’ by U.S.
- EU warns of retaliation against any U.S. steel, aluminum tariffs
- Trump tweets: ‘Trade wars are good, and easy to win’
CN CEO leaves amid 'challenges'
Canadian National Railway Co. is shuffling its top ranks, with chief executive officer Luc Jobin leaving immediately amid "operational and customer challenges."
"The board believes the company needs a leader who will energize the team, realize CN's corporate vision and take the company forward with the speed and determination CN is known for," chairman Robert Pace said in a statement as the railway named Jean-Jacques Ruest interim chief while it searches for a new leader.
"The board believes that in an increasingly competitive marketplace, CN must respond with speed and innovation to retain its leadership position," the railway said.
"The board also recognizes the immediate operational and customer service challenges the company has been facing since fall, 2017 - led by high demand and insufficient network resilience, coupled with severe winter weather conditions."
Read more
Markets at a glance
Read more
Poloz's complicated life: The week ahead
Stephen Poloz's life just got a lot more complicated.
Not that the Bank of Canada governor was going to tinker with interest rates this week – he wasn't – but an uncertain economic outlook just got a lot more uncertain.
Mr. Poloz, senior deputy governor Carolyn Wilkins and their colleagues were heading into Wednesday's policy announcement already concerned about the potential outcome of talks to renegotiate the North American free-trade agreement.
Now they've got the added threat of U.S. tariffs on steel and aluminum import duties to worry about in the wake of President Donald Trump's pledge to hit those products with levies of 25 and 10 per cent, respectively, this week.
Those would hit the Canadian economy hard, among other things forcing the Bank of Canada to respond.
You can add to all this, too, the fact that the economy has downshifted from its earlier surge, growing at an annual pace of 1.5 and 1.7 per cent in the third and fourth quarters of 2017, that the central bank is still watching to see how consumers are handling the last rate hike, and how the country is adjusting to new mortgage qualification rules.
"The softer-than-expected recent trend in Canadian economic growth observed in late 2017 and the intensifying risk of a trade war are good reasons for the BoC to stay cautious, even though the January [consumer price index] report showed further acceleration in consumer inflation," said Laurentian Bank Securities chief economist Sébastien Lavoie and analyst Hugo Lacasse.
"Following the mid-January hike, we have been expecting only one more 25-basis-point policy rate increase this year," they added in a lookahead to Wednesday's decision.
"Given these new disappointing developments for the Canadian outlook, we remain comfortable with our call."
Others expect more than one increase this year from the Bank of Canada, whose key overnight rate stands at 1.25 per cent.
Bank of Canada Senior Deputy Governor Carolyn Wilkins and Bank of Canada Governor Stephen Poloz listen to a question during a news conference in Ottawa, on Wednesday, Jan. 17, 2018.
Adrian Wyld/THE CANADIAN PRESS
Regardless, don't expect many hints from Mr. Poloz and Ms. Wilkins on Wednesday.
"A distaste for forward guidance will keep the BoC from delivering any clear-cut signals of what lies ahead," said CIBC's Mr. Shenfeld.
"They will retain the view that rates will eventually be higher, but will have enough cautionary words about the outlook to justify a stand-pat stance this month."
It's a busy week even without the Bank of Canada. The rest of the calendar:
Monday: 'Nerves of Steel'
There's not much on the economic or earnings fronts, but watch for how the markets open in the wake of last week's turmoil.
"Equity markets slumped [last] week on growing risk of a U.S.-led global trade spat," BMO's Mr. Kavcic said in a report titled "Nerves of Steel," referring to Mr. Trump's tariff announcement and noting the S&P 500's loss of 2 per cent.
"After amped-up volatility in recent weeks, that leaves the index roughly flat on the year, while most major global indices are looking at single-digit declines," Mr. Kavcic added.
"The TSX gave back 1.6 per cent, with tariff concerns overshadowing a solid run of bank earnings, including a wave of dividend increases. The banks dipped 1.1 per cent on the week, but are the second-best performing (or least-bad) sector on the Canadian landscape this year, down 2.1 per cent."
Tuesday: Watch our mates
It's always worth watching what happens in Australia given the similarities in our economies.
The Reserve Bank of Australia is expected to hold its key rate at 1.5 per cent today, while Capital Economics projects Wednesday's report on gross domestic product to show fourth-quarter growth of 0.5 per cent.
Watch South Africa, too, given the recent political turmoil. Capital Economics expects its economic reading to show fourth-quarter GDP expanded at an annual pace of 2.3 per cent.
Also on tap is the U.S. measure of factory orders in January, projected to show a drop of 1.2 per cent, and a handful of corporate results, including Aecon Group, Clearwater Seafoods Inc., Great Canadian Gaming Corp., Roots Corp. and Wajax Corp.
Wednesday: Trump's tirades
A busy day, starting with Mr. Trump's focus on trade deficits.
The U.S. trade gap is expected to come in at US$55-billion or more for January, thus wider than December's US$53.1-billion.
"The data releases [this] week are only likely to harden Trump's protectionist views, with January's trade figures (Wednesday) expected to show a further widening in the deficit," said Paul Ashworth of Capital Economics.
Statistics Canada releases its monthly trade report at the same time, and economists expect a narrower $2-billion from December's $3.2-billion. (Yes, Mr. Trump, blame Canada.)
"Current account data showed a narrower goods trade deficit than monthly readings indicated for the fourth quarter," said CIBC's Mr. Mendes.
"So, despite offsetting moves in crude export volumes and prices, and little change in U.S. import demand, the trade deficit could still benefit from that more favourable starting point."
The federal agency also reports fourth-quarter labour productivity, an important, if boring, measure.
Besides the Bank of Canada's 10 a.m. ET decision, there's also the Federal Reserve's Beige Book of regional economic conditions in the afternoon, and a handful of corporate results, including from Athabasca Oil Corp., Brookfield Real Estate Services Inc. and Linamar Corp.
Thursday: An easy act to follow
Given that Mr. Poloz is expected to have done nothing the day before, the European Central Bank has an easy act to follow when it releases its decision.
European Central Bank (ECB) President Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, Dec. 7, 2017.
RALPH ORLOWSKI/REUTERS
"It was just in December that the ECB released its 'substantial upward revisions to GDP' growth forecasts," said BMO senior economist Jennifer Lee.
"Although inflation had yet to show convincing signs of an upturn (still the case), the governing council believed that the 'language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year,'" she added.
"So when's 'early'? Given the improved outlook, we believe that the March 8 meeting should be that meeting. A rate hike is not even on the radar this year, but the ECB can take one baby step toward ending its [quantitative easing] program that began in March, 2015."
We'll also get to see the latest on the real estate market as Canada Mortgage and Housing Corp. reports what BMO expects will be a rise in construction starts to an annual pace of about 218,000 in February.
That will be followed 15 minutes later by a Statistics Canada report forecast to show a 2-per-cent decline in building permits in January.
Canadian Western Bank, Dorel Industries Inc. and Paramount Resources Ltd. are among companies releasing quarterly results.
Friday: Roll the dice
Go ahead, roll the dice on what you expect Statistics Canada's monthly jobs report to show.
It's always a craps shoot, but, for the record, economists expect the February results to show net job gains of between 2,000 and 20,000, and unemployment holding at 5.9 per cent.
That would follow what was reported to be a loss of 88,000 jobs in January.
"The full/part time split will be watched after part-time employment fell by a record 137,000 in January," RBC economists said in a lookahead, noting, too, the focus on wage increases after the last report showed an annual rise of 3.3 per cent in average hourly earnings, the fastest in almost two years.
"Part of that increase was due to a minimum wage hike in Ontario, although there appeared to be some acceleration in other parts of the country, as well," RBC said.
"Further signs of wage growth beyond a minimum wage impact would provide confirmation to the Bank of Canada that labour markets are operating at least close to, if not somewhat beyond, long-run capacity limits."
There's more for Mr. Trump, as well. Observers expect the U.S. February jobs report to show about 200,000 positions created, and possibly many more, with unemployment dipping to just 4 per cent.
"February's employment report (Friday) might also convince Trump that he knows best, with our econometric model suggesting that non-farm payrolls increased by a sizeable 250,000," said Mr. Ashworth of Capital Economics.
Read more
- Barrie McKenna: Poloz summons his inner Mark Carney, speaks out on public policy
- Eric Reguly: Draghi learns from Italy that no good deed goes unpunished