MNI: Trade Tensions Threaten Canadian Growth Performance

By Yali N'Diaye

     OTTAWA (MNI) - With the Mexican elections behind, and the president-elect

having signaled the current negotiating team will continue negotiations, the

clouds over NAFTA could have partly dissipated, as well as the uncertainty with

them, but the confusion remains.

     As U.S. President Donald Trump keeps the threat of auto tariffs, the

specter of a marked slowdown for the Canadian economy is becoming more real, as

well as risks to global growth more broadly.

     The fact that Trump followed through on steel and aluminum tariffs makes

the prospects of auto tariffs more likely, and the extent to which the

U.S.-China dispute escalates could also provide some light as to how far the

Trump administration is ready to go: withdrawing from NAFTA, with or without

bilateral deals, imposing auto tariffs, trigger a global trade war, or

combinations of such scenarios.

     Given the variety of possible outcomes and the unpredictability of Trump's

decisions, the Canadian economy could end up being mildly slower than currently

expected or plunge into a recession, under what most experts still consider as

the least likely, which would be a full blown trade war with blanket tariffs.

     --BILATERAL DEAL UNLIKELY

     Trump's push for bilateral deals has been resisted by Canada and Mexico.

The latter continues to favor a three-country agreement even with a new

president.

     While it will come down to the U.S. decision, for Laura Dawson, Director at

the Wilson Center Canada Institute in Washington, DC, a bilateral deal is

"unlikely."

     Brian Kingston, a vice president at the Business Council of Canada, in

charge of fiscal and international policy, agreed.

     Not only have Canada and Mexico been clear about their preference for a

trilateral deal, but many Republicans in the U.S. Congress also support a

modernized NAFTA rather than bilateral deals, he told MNI.

     He added that such disruptions to NAFTA would mean companies have to comply

with different regimes and rules, which is "a drag on the economy" as it would

be reducing the efficiency of the supply chain. He also pointed out that a large

majority of the auto industry is using the NAFTA rates.

     Should NAFTA fail, World Trade Organization tariffs would likely apply

under the Most Favored Nation (MFN) regime, rather than US-Canada trade

defaulting to the Free Trade Agreement that pre-dated NAFTA.

     --FURTHER NAFTA DELAY

     Despite his threat to withdraw from NAFTA, Trump has said he won't seek a

deal until after the U.S. mid-term elections, which suggests he is still

contemplating a deal and wants to know which Congress he will work with.

     However, Canada Foreign Affairs Minister Chrystia Freeland has said

negotiations will intensify during the summer.

     Kingston pointed out that there has been progress on most NAFTA chapters

and more progress can be made on technical issues without political decisions.

That would allow talks to continue over the summer.

     A U.S. withdrawal remains a possibility, but a Democratic win at the

mid-term elections would reduce such possibility, even though Republican members

of Congress also generally oppose the termination of NAFTA.

     --AUTOS, THE WEAK LINK

     Instead, tariffs on autos imported from Canada remain "a more immediate

threat, frankly, and extremely concerning" said Kingston, who believes this

outcome is more likely than not, despite overwhelming evidence it would damage

the U.S. as well.

     Trump's administration is investigating whether national security concerns

justify such auto tariffs, with the outcome expected in August.

     While the Canadian economy can weather steel and aluminum tariffs, and

business investment intentions currently remain solid, according to the BOC's

Business Outlook Survey, the investment and overall economic outlook would be

more downbeat should the U.S. determine tariffs on auto imports from Canada were

warranted.

     In 2017, the U.S. imported C$7.2 billion in steel products from Canada

-representing 1.3% of total Canadian exports - and another C$9.2 billion in

aluminum products - representing 1.7% of the value of exports. So overall, steel

and aluminum exports to the U.S. represented 3.0% of the total value of Canadian

exports, on a customs basis, according to Statistics Canada.

     The auto sector, however, is another story. Autos and parts represent about

15% of total Canadian exports, behind energy products, which represented 20% in

April.

     But the degree of integration between the U.S. and Canadian supply chains

is particularly high in the auto industry, which increases the possibility that

tariffs would backfire for the U.S.

     --RECESSION RISK

     While tariffs on auto imports would damage Canada's economic performance,

estimates currently see a more pronounced slowdown than an actual recession.

     At Scotiabank, for instance, a U.S. withdrawal without bilateral deal,

where 3.8% WTO tariffs are applied across the board, would trim Canadian growth

by 0.2 percentage points in 2019 and twice as much in 2010, while the impact on

U.S. growth would be limited.

     If NAFTA talks extend but the U.S. imposed tariffs of 25% on autos imports,

the impact on Canadian growth would be similar.

     Moody's agreed that a termination of NAFTA and the application of WTO

tariffs would lead to a "weakened" Canadian economy. But there is no talk of

recession in their commentary.

     Yet, the recession risk is here, and would materialize under a scenario

where the U.S. would impose 20% tariffs across the board for all countries,

according to Scotiabank.

     However, most experts see a full-blown global trade war as unlikely, even

as escalating tensions are adding risks to global growth, as Fitch ratings said

in a commentary.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]