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Briefing highlights

  • TD warns of trade war threat
  • Trump won’t turn ‘blind eye’ on trade
  • Markets at a glance
  • Canada’s annual inflation rate dips
  • U.S. economic growth slows

Donald Trump's actions may speak louder than Steven Mnuchin's words.

As for actions, we'll see what the U.S. International Trade Commission decides today on Bombardier Inc. And as for words, Mr. Trump took centre stage at the World Economic Forum in Davos amid his "America First" push.

These come as fears of a calamitous global trade war mount, amid fractious negotiations to redo the North American free-trade agreement, stiff duties against Canada's Bombardier, and, most recently, the Trump administration's move against washing machines and solar panels.

"Trump trade wars on the horizon" is how TD securities put it this week.

"We believe that the market is waking up to the idea that trade policy is next on the Trump's administration's agenda following Monday's announcement of tariffs and quotas on solar panels and washing machines," said TD macro strategist Brittany Baumann and Mark McCormick, North American head of foreign exchange strategy.

"Indeed, the introduction of tariffs on marginal sectors of the economy misses the point that a pivot to trade is likely a big theme for the year ahead," they added.

"Recall that the list of Trump's seven campaign promises declared to take action on China's allegedly unfair trade pratices. With tax reform seemingly out of the way, we suspect the next move over the coming months is to pivot toward trade, as a means of touting campaign promises into the mid-term."

Which is not to suggest that the administration has just been sitting on its hands, particularly where Canada's concerned. Consider the actions to date against Bombardier and softwood lumber exports, along with the acrimony so evident in NAFTA negotiations, the sixth round of which are now under way in Montreal.

There's more in the pipeline, too, from Mr. Trump's state of the union address next week through to the November mid-term elections, with trade decisions and further NAFTA negotiations in between.

Like TD's Ms. Baumann and Mr. McCormick, Deutsche Bank also cited the other trade probes that "could result in an escalation" of trade tensions, notably with China.

There's one under way into Chinese technology transfers, known as a Section 301 investigation, and another into whether alumimum and steel imports are a threat to nationsl security, the former being much more serious.

"It is too early to say whether these disputes will result in a more serious escalation of tensions," Deutsche Bank said in its report.

"In our view, the Section 301 investigation presents a substantial risk of escalating trade tensions with China."

Some observers expect no trade war, and many believe NAFTA will be settled peacefully, though in a different form. Others, though, are ringing alarm bells over the risks.

"Global safeguard tariffs announced by President Trump this week alone are unlikely to spark a global trade war," Ms. Baumann and Mr. McCormick said.

"But when viewed as a part of a queue of potential trade actions to come, Trump's actions cannot be overlooked and may imply a broader pivot on U.S. trade policy."

As The Globe and Mail's Nicolas Van Praet reports, the ITC is scheduled to vote this afternoon on Boeing Co.'s complaint against the Bombardier C Series plane. If it finds no harm, Bombardier will be unfettered to sell the airline in the U.S. without penalty. A decision the other way means overall import duties of almost 300 per cent will stand, making the C Series too expensive. Bombardier would appeal that one.

Like some observers, Nikita Shah of Capital Economics sees no all-out trade war on the horizon, and, indeed, suggests that Mr. Trump's actions may in fact "continue to fall a long way short" of his words.

President Donald Trump waves as he walks to a dinner with European business leaders at the World Economic Forum, Thursday, Jan. 25, 2018, in Davos

"If he talks about trade in Davos [today], Trump is sure to stick to his 'America First' script," Ms. Shah, the group's global economist, said prior to the president's speech.

Mr. Trump didn't disappoint on that score, warning of a fight on trade.

"We will enforce our trade laws and restore integrity to the trading system," he told the forum.

"Only by insisting on fair and reciprocal trade can we create a system that works not just for the United States but for all nations," he added.

"The United States will no longer turn a blind eye to unfair trade practices. We cannot have free and open trade if some countries exploit the system at the expense of others. We support free trade but it needs to be fair and it needs to be reciprocal."

No matter what happens, Ms. Shah said, any retaliation against the U.S. appears "remote" because its trading partners want the status quo.

"A year after Trump announced the withdrawal of the U.S. from the Trans-Pacific Partnership, the remaining 11 members agreed a deal this week which will be signed in March. In some respects, Trump's protectionist views have helped to unite countries such as China, Germany and Japan in defence of free trade."

Having said that, of course, Canada has launched a wide-ranging complaint against U.S. at the World Trade Organization, even as NAFTA talks continue.

Like Ms. Shah, Cesar Rojas and Ebrahim Rahbari of the Citigroup economics team rejects the idea of a global trade battle.

"We expect the U.S. to impose sector-specific restrictions, particularly on China, in coming months in pursuit of its 'America First' agenda, but we do not expect full-scale trade wars or the death of NAFTA," they said. "Other economies may inch towards more open trade rather than more protectionism, and the global trade growth rebound looks likely to continue, as global investment continues to recover."

Ms. Shah, too, noted that global trade "is, ironically, enjoying something of a renaissance," citing recent numbers that show world trade climbed 4.5 per cent in the three months to November, year over year, a far faster rate than the corresponding period in 2016.

Note, of course, the ironically.

Citigroup's Mr. Rojas and Mr. Rahbari, while expecting no trade war, believe 2018 could, at least, believe the year of living uncomfortably.

This year "could well be the year when the new U.S. approach to trade policy really takes shape, as tax reform isout of the way, while several administration officials (including the president) remain focused on rebalancing U.S. trade relations," they said.

"In our view, sector-specific measures aimed at China are probably the most significant on the table, but the U.S. will likely renegotiate NAFTA and KORUS (its free-trade agreement with South Korea), while it may also push for changes at the WTO."

As for NAFTA, the "escalation" of tensions between the U.S. and Canada represents the main threat to a deal, given the actions against Bombardier and softwood and Canada's bid at the WTO.

There are only two U.S. states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output, according to University of Calgary economist Trevor Tombe.

As Deutsche Bank economists see it, there's a greater risk of "negative headlines and a breakdown" in the current NAFTA round, though they, too, believe it will all end with a revamped trade deal.

And, certainly, tensions are running high.

"Recent moves by the Trump administration to impose tariffs on solar panels and washing machines, while largely anticipated, have elevated the risk of retaliatory measures," the Deutsche Bank group said.

"The solar tariffs are largely aimed at China, but the administration has not exempted Canada and Mexico. President Trump also determined that Mexico is not exempt from the washing machine tariffs, adding further pressure to this round of NAFTA negotiations."

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Markets at a glance

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Inflation eases

If you strip out the cost of filling up your tank, consumer prices are now up 1.5 per cent from a year ago.

Add in those costs, and prices are up 1.9 per cent.

That latter number marks the annual inflation rate in Canada in December, easing from November's 2.1 per cent, Statistics Canada said today.

On a 12-month basis, gas prices rose 12.2 per cent from a year earlier, but thank your lucky stars that that marked a slower pace than November's 19.6 per cent.

"December is usually a weak month for inflation, and 2017 was no different," said CIBC World Markets economist Nick Exarhos, noting prices dipped 0.4 per cent on a monthly basis.

"We're hardly chalking this up as a negative inflation report," Mr. Exarhos added.

"Indeed, much of the weakness in December was tied to gasoline (-3.3 per cent), something we know will more than reverse in the months ahead given the performance of crude prices."

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U.S. growth slows

The pace of economic growth in the United States is slowing, the latest numbers coming as Mr. Trump was singing America's praises in his Davos speech.

The economy expanded in the fourth quarter at an annual pace of 2.6 per cent, compared to the 3.2 per cent of the third quarter, according to the Commerce Department today.

"The U.S. economy undershot expectations, but still ended the year on solid footing," said CIBC's Royce Mendex.

"Household spending was again the most important contributor to growth, growing 3.8 per cent during the quarter," he added.

"Private fixed investment also showed signs of strength, given the recent pickup in capital formation and the rebound in the housing sector following hurricane disruptions. That said, both inventories and net trade weighed on the headline advance more than expected. … Over all, while the data did miss on the headline, the report still showed solid economic momentum heading into the new year."

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