Briefing highlights
- ‘Initial volley’ in possible trade war
- What's at stake as Trump readies for office
- How 4-nation battle could play out
- OPEC production cap now in doubt
- Pay for corporate directors surges
- Fears mount over Italy's banks
“All-out trade war would ... batter Canada”
Sal Guatieri
‘Initial volley’
Economists are drawing up scenarios for a potentially nasty trade war that would pit the U.S. against Canada, Mexico and China.
And while Donald Trump’s clear targets are the latter two, Canada would not escape his wrath, economists warn.
Even a smaller skirmish could hurt Canada badly, they say.
We’re already hearing the death rattle of the Trans-Pacific Partnership deal, of which Canada is a part, and soon we’ll get a better sense of the fate of the North American free-trade agreement, which the U.S. president-elect wants to renegotiate or tear up.
“As Canadian lumber producers gird for another costly trade skirmish with the U.S. (and American home buyers gird to pay higher prices), it’s worth keeping in mind that the softwood lumber dispute is likely just the initial volley in what could be a lengthy trade battle between Canada, Mexico and China on the one side and the U.S. on the other,” warned Bank of Montreal senior economist Sal Guatieri.
“In all likelihood, an all-out trade war would hammer Mexico, batter Canada, and badly wound the United States,” he added.
“China would be less affected, though not unscarred. Just like a real war, no one would win in a protracted trade conflict.”
The stakes
20 per cent
Canadian exports to U.S. as share of GDP
In a recent report, Mr. Guatieri laid out just what’s at stake as to the “possible collateral damage” to the four economies:
Canada would be “hit hard” as its exports to the U.S. represent 20 per cent of our gross domestic product. American imports to Canada account for 18 per cent, and “the large import share means retaliatory tariffs would result in higher inflation and less purchasing power for Canadians.”
Mexico has the most at stake, with its exports to the U.S. worth 28 per cent of GDP: “Just a 10-per-cent reduction in exports to the U.S., say in response to a 35-per-cent tariff on some goods as threatened, would lop nearly 3 per cent from GDP. Retaliating with a 35-per-cent tariff would reduce the spending power of Mexican households and businesses, lopping off several more percentage points from growth.”
For China, America represents a large 45 per cent of its trade surplus but its exports to the U.S. are worth just 3.5 per cent of its GDP: “China would have the least to lose in a trade war – which might embolden its government to play hardball.”
The U.S. is also at threat, given that imports from China make up 21 per cent of the total, compared with 14 per cent from Mexico and 13 per cent from Canada: “Slapping tariffs on China would have the biggest inflationary impact on the U.S., resulting in the largest loss of purchasing power for Americans.”
Canada, in turn, buys 19 per cent of U.S exports, affecting 1.6 per cent of the American economy, while China buys 8 per cent: “So, American exporters would be hurt more in a trade war with Canada than with China.”
How it could play out
$600-billion
China's trade surplus
Observers don’t believe Mr. Trump will pull out of NAFTA or even opt for full-scale renegotiation, the latter needing backing from Congress.
“But President Trump will have broad powers to impose a range of trade restrictions from moderate tariffs to even a complete withdrawal of NAFTA without having to go through Congress,” said Neil Shearing of Capital Economics.
“Given that Congressional Republicans are generally supportive of free trade, it is questionable whether President Trump would want to waste valuable political capital pushing a wholesale renegotiation of NAFTA with Congress,” added Mr. Shearing, the group’s chief emerging markets economist.
Where Mexico’s concerned, there’s a hard option and a soft one, he said.
The more “draconian” move would be to pull out of NAFTA, which Mr. Shearing said would see Mexico and the U.S. operating under World Trade Organization rules, and could see America’s southern neighbour facing average export levies of about 3.5 per cent.
The softer side of Mr. Trump, if there is such a thing, would see him slap additional duties on Mexico, which he’s allowed to do under NAFTA’s Section 201. He would have to consult with Congress, but wouldn’t need a vote.
Canada does not at this point have a big bull’s-eye on its back, though, as The Globe and Mail’s Steven Chase has reported, the Trump team is eyeing our lumber and livestock.
And on Friday, U.S. lumber producers formally asked their government for duties on imports of Canadian softwood.
“Even if the assumption is that the ultimate impact to the U.S.-Canada trade relationship is minimal, the potential impact of any marginal disruption from a trade regime shift, not to mention the uncertainty on cross-border and export sector investment decisions, are very significant, simply given the huge footprint of Canada-U.S. in Canada’s economy,” Daniel Hui and Niall O’Connor of JPMorgan Chase said in a recent report.
Should NAFTA die, they said, Canada and the U.S. could always revert to their old free-trade pact, though that would mean negotiations again.
“Absent an agreement on what replaces NAFTA to regulate U.S.-Canada trade, presumably bilateral tariffs revert to (still modest) WTO [most favoured nation] rates.”
As for China, Mr. Trump has vowed to label Beijing a currency manipulator.
It’s a particularly interesting time for that given that the yuan is now at its weakest in more than eight years, noted BMO chief economist Douglas Porter.
“This depreciation comes at a time when China stands accused of manipulating its currency – i.e., keeping it artificially low to juice exports – and when its trade surplus has bulged to nearly $600-billion,” Mr. Porter said.
“In fact, China has been aggressively intervening to keep its currency from weakening even more rapidly amid heavy-duty capital outflows. But that subtle fact may well be lost amid the reality that China now alone accounts for half of the U.S. trade deficit and yet its currency has weakened in the past year.”
Laurence Chandy and Brina Seidel of the Brookings Institution say the Trump trade agenda could play out in different ways.
Other countries could forge their own path without the U.S., or take a traditional route and retaliate.
“The threat has already been made explicit by the state-sponsored Chinese tabloid, Global Times, which proposed that China respond to aggressive trade policies by cancelling contracts with U.S. suppliers, imposing tariffs on U.S. imports, and limiting the number of Chinese students studying in American universities,” they said.
The other scenario could see a move to “repudiate” world conventions, and institutions like the WTO, if they believe that “the U.S. is no longer committed to upholding the liberal economic order,” they added.
“There is already some evidence of this kind of realignment, as members of the TPP seek to patch together the deal without the U.S., and China makes the case for its alternative regional trade deals.”
OPEC: Deal or no deal?
Speculation is growing that there will be no OPEC deal this week to cut production.
Crude prices have moved up and down since the Organization of the Petroleum Exporting Countries agreed to a cap, the specifics of which were to have been decided on at a meeting in Vienna Wednesday.
An initial meeting between OPEC and non-OPEC producers such as Russia was supposed to be held today. But that was cancelled when Saudi Arabia said it wouldn’t attend because, reports say, there are still no agreements.
So OPEC officials are meeting to draw up recommendations for production caps in advance of the higher-level gathering Wednesday.
“As per usual it’s all about who will have to do the business of cutting or capping output, with both Iran and Iraq reluctant to cut or cap too much, while Russia has paid lip service to a production freeze only,” said CMC Markets analyst Michael Hewson.
“Without an agreement from these three, any prospect of a deal is dead in the water, and while no one will want to do Saudi Arabia any favours, if there is no deal oil prices could fall further, and back below the July lows just above $40 a barrel,” he added.
“All this uncertainty is likely to mean that oil markets are likely to remain choppy as OPEC and non-OPEC oil ministers toy with the oil markets.”
Above my pay grade
30 per cent
Rise in median directors pay, 2010-15
Rise in median pay for directors, 2010-15
As The Globe and Mail’s Janet McFarland writes, “there has never been a more lucrative time to be corporate director in Canada.”
Median pay for directors at 300 public companies measured, Ms. McFarland reports, climbed 30 per cent between 2010 and 2015, according to new data from Korn Ferry Canada and Patrick O’Callaghan and Associates.
Read our definitive annual Board Games special report.
Italian banks in focus
Fears are mounting over the state of Italy’s banks in the run-up to next weekend’s referendum.
The Financial Times is quoting officials and senior bankers who suggest up to eight of the country’s ailing banks are under threat if Prime Minister Matteo Renzi loses the vote.
That’s because Mr. Renzi has a plan to rescue the financial system, but has vowed to resign if loses on the weekend.
The “huge amount of nervousness” comes even though one of the Italian banks, Monte de Paschi di Siena, won shareholder approval to raise extra capital last week, said CMC’s Mr. Hewson.
“While Italian officials are hoping that this will draw a line under the bank’s problems, the bank has already been bailed out three times previously,” Mr. Hewson said.
“It is going to be increasingly difficult to generate any confidence in a rescue plan ahead of this week’s referendum vote, and while the bank continues to bear the crushing burden of its non-performing loan book,” he added.
“There is the added concern, if, as expected, the vote does go against the Italian prime minister, the resulting market uncertainty will make any sort of resolution that much more difficult, at a time when investors and traders start to step back as the year comes to a close.”