Trade’s Fall Hotlist

If you followed the ‘sell in May and go away’ adage, you were likely shocked when you powered up this week. As summers go, this one has been a pretty eventful one for country issues. We were barely into the lazy, hazy days before they indeed got a bit crazy. The Brexit vote on June 23 rattled markets. Just three weeks later, heading home for the weekend the airwaves were buzzing with news about an attempted military coup in Turkey. This came only days after Canada signed a free trade agreement with Turkey’s troubled neighbour to the north, Ukraine. With these events as a backdrop, what international trade issues are on the hotlist for the fall season?

Right up there on the chart is Canada’s trade performance. Exports entered the year at a blistering pace, but faltered during the winter and languished in the summer months. The weakness appears to have been due to temporary factors in the US economy, as fundamentals remain favourable to growth, and recent data are promising. However, recovery is far from a slam-dunk; Canada’s exporters will have to watch orders vigilantly.

At the same time, all eyes will be on the US election. The rancorous rhetoric on the hustings has put trade issues under the microscope, in the worst of ways. Globalization has been portrayed as a key cause of secular stagnation, and ‘fortress America’ proposals from both key candidates are at the very least, alarming. When it comes to elections, rhetoric and reality can be almost mutually exclusive, but the blunt clarity of current trade talk will make post-election backtracking particularly difficult. The US attitude toward the Trans-Pacific Partnership (TPP) has soured considerably, and although concluded almost a year ago, is now – at least in its current state – at great risk.

If that weren’t enough to worry about, there’s the fallout from the Brexit vote. The UK economy, Canada’s third-largest export market, is in a tailspin that has required emergency monetary policy measures. The instant drop in the pound sterling on June 24 has been more-or-less sustained, and once currency hedges and contractual fixed prices play out, imports stand to take a hit. Imports of precious metals – Canada’s dominant export to the UK – may prove to have some immunity, but even in that segment, nothing can be taken for granted. What is more, the state of investment limbo that the post-referendum stasis has served up is not helpful. Even so, with the natural reaction of business to wait it out or even flee, there is opportunity in the resulting commercial vacuum that’s at least worth exploring.

Zapping back across the pond, another big issue is US interest rate policy. In stark contrast to election negativism, the US economy has relentlessly created jobs at a pace that’s the envy of the planet. This and other strong signals have kept the likelihood of an in-year interest rate hike alive, both inside and outside the walls of the Fed. So much for the popular perception that everything is broken. Stronger growth this fall may come as a surprise to most, but it’s more likely than not. Canadian exporters don’t need to be caught unawares.

Closely related to policy stateside is the Canadian dollar. Weakened by soft commodity prices, it has meandered in the mid-70-cent range this year. The mere mention of possible US rate hikes in the face of Canada’s softer monetary stance puts downward pressure on the loonie that isn’t likely to dissipate soon. This will continue to be offset by the upward pressure of Canada’s ‘safe-haven’ status. All told, exporters should see a stable currency situation through to the end of the year.

Recent events have raised serious questions concerning Canada’s trade agenda. Anti-NAFTA sentiment has swirled around US election process, and certain pronouncements and proposals on the Agreement are downright unnerving. We can only hope that they are just banter. At the same time, though, there are more tangible developments. CETA is somewhat less certain, pending resolution of the Brexit impasse and its effects on Continental unity. And TPP will have to wait for November 8 or later, to see what the new US administration will really do, and what bearing it will have on other possible trade initiatives.

The bottom line? There’s a lot for Canadian exporters to watch this fall, and there’s more besides. Much of it looks daunting; risk is clearly rising. At the same time, realize that it’s happening in a context of growth – albeit modest – with attendant opportunities.

This was written by Peter G. Hall, EDC Vice-President and Chief Economist.