Trade limbo is quietly taking a heavy economic toll

Open this photo in gallery:

There’s a sense of relief setting in that the Canadian economy has stepped back from the brink of recession. Growth has resumed, albeit modestly. “Resilience” is the mantra of the moment. We are bent but not broken by the trade war.

That’s not the whole story. There is no such resilience in the manufacturing sector, which is being quietly smothered by the hostile trade environment.

Canada is in its third year of a “manufacturing recession,” during which real manufacturing GDP and company counts have been steadily shrinking. A KPMG survey released last week showed that more than four in 10 Canadian firms have either moved production to the U.S. or are considering it. The sector is in survival mode and running out of time.

This is, of course, exactly what the Trump administration wants.

When the North American free-trade agreement was first being renegotiated back in 2018, U.S. President Donald Trump spoke of the advantages of undermining a trading partner. “Nobody is moving into Mexico. As long as NAFTA is in flux, no company is going to spend a billion dollars to build an automobile plant.”

It’s the kind of strategic uncertainty Mr. Trump is famous for and is our unhappy lot to live with, for the next two and a half years, at least.

The Canadian approach has been that it won’t be rushed into anything after the U.S. opted not to renew the United States-Mexico-Canada trade deal in July. The guiding principle under Prime Minister Mark Carney is that no deal is better than a bad deal.

Side deal to share Gordie Howe toll profits with U.S. doesn’t include provision for debt repayment

Perfectly reasonable. But the state of indefinite trade limbo has a cost as well, and it’s measured in the damage being done to the country’s industrial base.

“Time is not on the side of Canadians,” said Stéfane Marion, chief economist and strategist at National Bank of Canada. “We can’t let our manufacturing atrophy continue the way it is right now.”

He added, “Getting USMCA renegotiation across the finish line is paramount.”

This is the dilemma – how to hold firm against American hostility while the costs mount by the day. Surprisingly, the Gordie Howe Bridge fiasco may offer a path forward.

Open this photo in gallery:

When Washington blocked the opening of the new bridge between Windsor, Ont., and Detroit, to extract concessions on toll revenue, the emotionally satisfying response would have been to tell Mr. Trump to get bent. But the economic benefits of the bridge, which is expected to handle tens of billions of dollars in two-way trade a year, are too great.

Is it fair? Of course not. Getting shaken down over a bridge Canadian taxpayers financed in its entirety is a bloody outrage.

Opinion: Globalization gutted Canada’s manufacturing. Here’s how we make things ourselves again

Still, the pragmatic approach was in Canada’s best interest. By Mr. Carney’s account of the terms, Canada retained the essence of the original deal, including the repayment of construction costs before any revenue-sharing occurs. If so, Mr. Trump may have secured a symbolic victory, but little else.

That’s just the kind of balance Canada needs to strike on the trade file. There is too much at stake to take a hard line.

Don’t be fooled by the fact that the domestic economy has held up surprisingly well these last couple of years. That’s largely because of the USMCA itself, which has shielded Canadian exporters from the bulk of Mr. Trump’s general tariffs.

Plus, look at the industries propping up the Canadian economy lately – finance, and oil and gas extraction. Boom times for both, but largely because of cyclical factors, such as the red-hot stock market and energy prices.

Defence services and non-residential construction are also doing well, but are relatively small components of the national economy.

Manufacturing represents more than 10 per cent of Canadian GDP and 70 per cent of the country’s goods exports. It is also critical to Canada’s global ambitions. “Manufacturing relevance is middle power leverage,” Mr. Marion said. Countries such as Canada need to be essential to global supply chains, he said, citing Taiwan, whose dominance in semiconductor manufacturing lets it punch well above its weight.

Canada appears to be ceding its leverage in a variety of measurable ways. Consider two:

• Canadian factories now contribute less to global manufacturing value added than Ireland’s, which has about one-eighth the population and little of Canada’s energy resources.
• The Canadian manufacturing sector is running a deficit of more than 7 per cent, meaning the country is exporting raw resources, and importing them back after being manufactured by others, Mr. Marion said.

Firms in the sector are calling for lower taxes, fewer regulations and better access to cheap energy. While there is renewed policy momentum on such things, a trade deal is needed to stop the bleeding in manufacturing.

Thankfully, the U.S. needs a trade deal as well, for the same reason it needs the Gordie Howe Bridge. Because border economies, such as Michigan’s, are just as dependent on trade with Canada as Canada is with the U.S. And the cross-border auto sector can’t be disentangled, not without great cost at least.

Mr. Trump will be claiming the exact opposite in a variety of infuriating ways before this all inevitably wraps up with signatures and handshakes. Don’t listen to him. No good can come of it.