A New Deal for North America

Monday was a very good day for Canada. Following months of tense negotiations, exporters woke up to the news that a new deal for North American trade was finally inked: the US-Mexico-Canada Agreement (USMCA). Suddenly, the number one concern for Canada’s exporting community was taken off the table, adding badly-needed clarity to the economic future. So, what exactly does the new deal mean for Canada?

Here’s one thing it doesn’t mean: an immediate surge of exports. Despite tariffs - actual and threatened – and the general shroud of uncertainty, exports have been rolling along very nicely. They are currently up by 8 per cent this year, besting our bullish forecast. Amid the turmoil of the talks, global growth has churned away and exporters have continued to meet orders.

The stakes were high

That’s admirable, because there was a lot at stake. At times it looked like the deal would be torn up. That wouldn’t have single-handedly thrown us into recession, but it would have taken a huge bite out of the auto, electronics and food product industries, and caused a nasty spate of indirect impacts. Steel and aluminium tariffs raised input costs in the price-sensitive auto, aerospace and construction industries. Threats from the US Administration of a punishing tariff hike, far beyond the no-NAFTA MFN rates, transfixed the auto sector.

Investment: the bigger risk

If exports didn’t blink, investment sure did. In conversations across the country I personally heard tales of investment hesitation. Some were sidelining their ventures, unsure of where to create new capacity, or whether to do that next refit of existing facilities. Others were under pressure from suppliers to relocate to a ‘safer’ place. Survey results said the same: 28 per cent said that NAFTA talks were having a negative impact on their business, while 6 per cent of respondents declared that they were uncertain enough to delay their investments. That wasn’t an easy decision; new investments were badly needed, as many firms were running out of spare capacity, and there were also ample sources of funding.

With the greater certainty of a deal, this pent-up investment could soon begin to cascade into the economy. And with many plans already formulated, it could happen more quickly than usual. But will it happen in Canada, or has the fear-factor permanently impacted intentions? On that point, rising costs for labour, plant and equipment in both the US and Western Europe should work to Canada’s advantage. Companies are expected to optimize much as they did prior to trade turmoil, so with negotiations now behind us, much unleashed investment is expected to find a home here.

Globalization ain’t dead

Getting to this stage is a huge relief that extends far beyond the immediate situation. Until this point, the bluster has posed a credible threat to the process of globalization, feeding on the discontent of millions who believe that the concept itself is wrong-headed. Before this week, momentum seemed to be singularly in the protectionist camp. Instead, what is emerging is a hard-edged approach to brokering better deals – upgrading and modernizing them to address today’s business realities.

If true, then exporters’ greatest uncertainty has been dealt with. But it also means that the process isn’t over. It seems this is just the first of a number of deals that will follow the same playbook. Tariffs have been promised as a means of getting the attention of the ‘other side’, and, as in the case of steel and aluminium, will not necessarily be annulled on completion of a deal. Consequently, Canada’s exporters can expect further bump and grind, and may even be able to capitalize on some of this. One consolation is that whether the effects are positive or negative, they will affect a much smaller share of overall trade.

The bottom line?

Uncertainty has been a huge hindrance to the global economy since the Great Recession. Doubts about trade in general, and the North American trade contract in particular, made things worse. With Sunday night’s achievement, we are finally on the way to a more certain trade world – Canada has a green light to get on with growth.

This was written by Peter Hall, Vice-President and Chief Economist, Export Development Canada.