| || ||Craig Alexander |
Senior Vice-President and Chief Economist
The Conference Board of Canada
The election of Donald Trump has yet to change the trajectory of Canada’s economic outlook. However, it has greatly increased the risks to the four-year forecast.
The U.S. economy is faring relatively well at the moment, and Trump’s stated platform—which promised to lower business taxes, reduce and simplify personal taxes, and invest in infrastructure—could further stimulate the economy. This expectation helps to explain why financial markets have improved since the election. For Canada, there are upside risks if the new administration can boost growth and create more jobs in the U.S., thereby stimulating demand for Canadian exports. But, the Trump administration also presents large downside risks.
For starters, the economic impact of the tax cuts and infrastructure investment may be less than anticipated. The extreme tax measures outlined in Trump’s platform, such as cutting the corporate tax rate from 35 per cent to 15 per cent, will be costly to the U.S. Treasury. While the Republican-controlled Congress may indeed want to cut rates, the fiscal pressures facing the federal government may limit the amount that taxes can be reduced.
Furthermore, the U.S. economy may already be operating at close to full capacity. If the U.S. undertakes large-scale fiscal stimulus, the Federal Reserve might have to tighten monetary policy by even more than it has already planned in 2017 to control inflation. Higher interest rates could rock global capital markets, as higher U.S. yields would raise global bond yields and send the U.S. dollar rising (Trump’s recent comments on the value of the greenback being too high notwithstanding).
Trade policy represents another high-profile, downside risk. Trump’s view of trade as a zero-sum game, in which the U.S. loses when investment is made abroad, is troubling. It misses the fact that U.S. consumers benefit from low prices on imported goods. Higher prices on consumer goods could fuel inflation in the U.S., which would also dampen consumer spending. Trump is also strong-arming companies to invest more stateside, and some of this could come at the expense of investment that might have otherwise been made in Canada.
Trump’s protectionist sentiment raises the distinct possibility of trade wars at a time of a weak global economy. If the U.S. slaps duties on imports from Mexico and overseas, the global economy would be weakened, which could lead to lower commodity prices. Because Canada is a small, open economy, it imports weakness from abroad.
Trump has been highly critical of investment in low-wage economies, citing countries such as Mexico and China. Canada is not the primary target of Trump’s trade complaints, as it is not a low-cost-labour economy. Moreover, he has spoken favourably about the Keystone XL pipeline expansion. Nevertheless, Canada could be directly and indirectly hurt by the rise of U.S. protectionism. In a worst-case scenario, U.S. tariffs on Canadian exports would be devastating.
Canada must be prepared for, and open to, changes to the terms of the North American Free Trade Agreement. Mexico remains the primary target for U.S. demands, but Canada’s interests would be affected by changes to country of origin rules (which require how much content comes from the U.S.) and tripartite dispute panels.
The appropriate Canadian response to these risks is to engage the new administration in a constructive dialogue on how to keep the border open, thereby maintaining the flow of goods, services, and people. Canada can make a strong case that it is not the source of the decline in U.S. manufacturing. Indeed, the experience of Canadian manufacturing has paralleled that of the U.S. manufacturing sector. Canada can also help the U.S. when it comes to key objectives, such as energy security.
At this point, we simply do not know what the new administration will deliver, nor what the time frame will be. However, Canada must be prepared for multiple possibilities.
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The Conference Board of Canada, March 9, 2017 at 02:00 PM EST