Chapter 3 – What does it all mean for Canada?

Chapter 3 – What does it all mean for Canada?
Michael Ras, Senior Counsel

 "Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt."Pierre Trudeau, Speaking to the Press Club in Washington, 1969

We’ve examined the “How” and the “Why” behind Donald Trump’s rise to the Presidency and I’m quite sure that our analysis is lacking in many ways which history and closer examination of the facts will correct and modify over time.  But the most important question for Canadians and Canadian business is what the impact of a Trump presidency will be on us.  Because, as Pierre Trudeau noted in 1969, when we sleep in the same bed as an elephant, we’re going to feel his every twitch and grunt. 

As Donald Rumsfeld once said, let’s start with the “known, knowns” – the stuff Donald Trump has promised.

 

You have to look for it, but Donald’s campaign did say a few things. 

And some of it might sound simple, on the surface at least.

His Seven Actions to Protect American Workers, for example, include his promise to:

1)    Renegotiate NAFTA

2)    Withdraw from the Trans-Pacific Partnership

3)    Direct his Secretary of the Treasury to label China as a Currency Manipulator

4)    Direct the Secretary of Commerce and Trade Representative to identify all foreign trading abuses and use every legal mechanism to end those abuses

5)    Left restrictions on $50 trillion worth of energy reserves including shale, oil, gas and clean coal

6)    Lift the restrictions on key energy infrastructure such as the Keystone XL Pipeline (shout out to Canada on that one!)

7)    Cancel payments to the U.N. climate change programs and use the money to fix American water and environmental infrastructure

So that’s some of what we know … the “known, knowns”.  The “known unknowns” are where the dangerous game of prediction begins. 

The first comment is that the lack of specifics in Donald Trump’s Platform creates huge uncertainty.  There’s a lot of blanks to fill.  And that uncertainty is further exacerbated by Trump’s often erratic behaviour that seems to be driven more by his personality than by careful consideration of the issues.  He is the antithesis of another great Marshall McLuhan quote:   A point of view can be a dangerous luxury when substituted for insight and understanding.

Second, is to pick up on comments made by many other commentators that Donald Trump is America’s first “independent” President.  He owes nothing to the Republican party and probably has no interest in doing much to build that party.  Some of his key advisors like Steve Bannon, his Chief Strategist, want to use the shell of the old party to build a new one in their own image, but the traditional infrastructure and historical positions of the party is something he doesn’t care about.  This means that a lot of the experts that have been around for the past 30 years might not be given positions in the new administration.  In the short-term, that lack of institutional know-how could be a big problem as Donald and his team – whoever he gets to work for him – stumble around trying to get a handle on the levers of government.  The first few months of the Trump Administration are going to be like teenagers dating … lots of groping around and awkward moments that don’t really lead to much being accomplished.  In the long-term, the rifts in the Republican Party will become even more acute and could lead to open civil war.

On a related front, the other thing to consider when predicting policy is to point out that even though Trump has a Republican Senate and House to work with, those two bodies are not necessarily aligned with him.  A lot of that congress – and especially the Senate – despise him on a personal level.  Can you imagine John McCain doing a legislative deal with Trump?  Trump once belittled McCain’s war record saying he favoured soldiers who weren’t captured and held as prisoners of war.  Ted Cruz is a leading conservative Senator and Donald Trump once stated publicly that Cruz’s father was involved in the assassination of President Kennedy.  Senator Rubio from Florida was called “Little Marco” (and worse) by Donald Trump.  Those wounds won’t be healed quickly. 

And what happens when Donald does one of his veers left on a policy?  We saw a hint of that within days of the election Trump all but conceded that the key provisions of ObamaCare would remain in place, but just have its name changed.  The Republican Congress voted to “scrap” Obamacare; not to tinker with it.  And what happens when some of the blue-collar unions in Pennsylvania or Ohio come looking for policies that favour them? Is Trump likely to do a deal there?  How will the traditional Republican establishment react?  How will the “establishment” of the Republican party react to another “grab her by the (blank)” incident?  … and you know it’s coming!  There are tapes out there!

 

Fiscal Policy Impacts on Canada

There are two main fiscal policies in the Trump plan that Canada should be looking at closely.  The first is his promise to spend $100 billion and leverage that to $1 trillion on shovel-ready infrastructure over the next ten years. His proposal is to leverage private capital through tax breaks for capital invested in infrastructure and the development of an infrastructure bank, similar to the one being proposed in Canada and in Asia. 

I think it’s safe to assume that Trump won’t be backing the pet projects of Democratic politicians like high-speed rail in California, but interstate highways through ruralMontana, you bet!  They are going to be some of the smoothest roads ever paved!  New highways around the suburbs of congested cities like Philadelphia and Charlotte?  For sure!  Rebuilding water infrastructure in “rust-belt” cities like Flint.  Absolutely. 

This policy and spending priority is generally aligned with the Republican congress, and most Democrats, so they are likely to get some of this moving quickly, though the Republican leadership in the House of Representatives have already expressed skepticism about the idea of an infrastructure bank and the notion of running up deficit financing.  This is where two competing economic ideologies within the Republican administration will be clashing. On the one hand, traditional, small-c fiscal conservatives will be calling for restraint while Trump will be looking to apply the principles of leverage and take advantage of low interest rates to build and build quickly.  What could go wrong?  Trump’s investments in Atlantic City were financed on cheap credit and they did well, didn’t they?  Didn’t they … Oh right, never mind …

On the subject of tax cuts, the Republican congress is aligned and ready to act.  But his tax plan is going to be expensive.   Some estimate that his tax plan will cost between $4  and $5 trillion over 10+ years, which could be troublesome to long-term bond yields, and therefore interest rates, if the market makers determine that it will be too expensive for the U.S. Treasury to sustain high debt and deficits.  Nevertheless, the short-term tax-cut stimulus provided by the new consumer money flowing into the economy should have a short-term stimulative impact. Some economists are already revising their projections saying that the impact of Trump on the U.S. economy will be 2/10th of a point upward in 2017 and probably more in 2018.  Every little bit of growth should be good for Canada. 

These tax cuts do present a short-term political and potentially a fiscal problem for Canada, however, in that both the government of Canada and the Province of Ontario have recently raised the corporate tax rate. If the U.S. corporate tax rate suddenly drops, a competitive advantage of Ontario and Canada will be removed.  This presents a political challenge for Prime Minister Trudeau and Premier Wynne, especially if a few high-profile companies relocate plants and investment to the U.S. 

 

Trade Policy Impacts on Canada

In the area of trade policy, we have the most “known knowns” and the most “known unknowns” at the same time. 

Undoubtedly, certain provisions of NAFTA will be renegotiated.  Both Canada and Mexico have already acquiesced on this front.  (By the way, President Obama and Jean Chretien in their respective elections once promised to renegotiate NAFTA too, but this time, I think the threat is more real and more likely to be followed through on.)

Without doubt, the biggest danger to Canada will be to the auto sector, and particularly auto-parts as Trump fulfills obligations to Ohio, Michigan, Indiana, etc.  Unresolved matters like the softwood lumber dispute … good luck!  Trump’s team has also signalled that an early target will be the agriculture sector. 

That said, the hysteria over “scrapping” NAFTA is overblown.  There is little threat, in my opinion, of a retrenchment back to pre-NAFTA days.   The integration of our two economies is so strong that I don’t think a single President can undo it completely.  He can damage it, for sure, but he can’t undo it.  And  that’s another thing:  Trump is talking about NAFTA.  His beef is mostly with jobs leaving for Mexico. Those are (mostly) the low-paying, lower-value jobs that Canada wasn’t getting anyway.  We lost those jobs to Indiana decades ago and now Indiana is losing them to Escobedo, Pueblo and Mexico City. 

The second major point to make is that TPP (Trans Pacific Partnership) is dead.  Of that there is little doubt, despite the efforts of the outgoing U.S. President and other Asia-Pacific leaders in the last few days.  Into the breach is already stepping China which is eager to extend its economic and political influence into the Asia-Pacific region.  Whether Canada decides to take that risk of a bi-lateral trade relationship with China and risk the ire of the U.S. elephant in so doing remains to be seen, but all indications are that this is the direction we’re headed. A very big “known unknown”. 

In summary, I think there will be short-term, minimal but real impacts.  Thicker borders have a cost, but the exact impact will take some time to figure out. 

In the medium term, I think the bigger impacts will be on where investment is made.  Plants will get built in Flint, Michigan instead of Sarnia, Ontario.  More customers for raw material minerals will be in the U.S. and the mineral producers here in Canada will have to figure out how to get that product across the border. 

Further, much will depend on our ability, as a nation, to negotiate bi-lateral trade deals with other nations in Asia and emerging markets.  These bi-laterals will be critical hedges for Canada in the long-term against any twitches and snorts from the U.S. beast.  It won’t be perfect, but I don’t think it will be catastrophic.

Energy & Environment Policy Impacts

On this file, I see the biggest threats to Canada’s economy because of the spread that will (or could) exist between our two countries.  The impact, however, all depends on which side of the energy equation you stand.  Are you an energy producer or an energy consumer? 

If the restrictions on coal and shale are lifted in the U.S. (and this aligns with the wishes of a Republican Congress) then the spread between Ontario electricity prices and Ohio/Pennsylvania/New York/Michigan will grow even more and this puts even more pressure on Ontario manufacturing.  That spread, which is already large and the cause of the number one political headache for the Ontario government, could lead to a further flight of manufacturing industry.  Simply put, the metal bashing industries will have a distinct competitive advantage in the U.S. because their energy input costs, tax on capital investment and labour cost will all be lower.  Over our shared history, Ontario has been able to compete relatively well when it could overcome the cost spread on one or two fronts and occasionally take advantage of currency differences as well.  Looking forward, can Ontario compete when the dollar, higher energy inputs and lower taxes on capital all exist to advantage the U.S. side? 

Second, Canada and Ontario will no doubt be out of step with the U.S. on carbon pricing, whether through a carbon tax or a carbon market, and this will undoubtedly further exacerbate the cost spread for energy production.  The governments of Ontario and Canada will simply have to determine whether they want to be competitive in these areas or whether they want to be competitive betting on green industry and advanced technologies to drive the economy.  Another thing to watch for is whether the government of Canada uses some of its political capital to delay policies and play a longer-game hoping that Trump is a one-term President or that the congress flips in 2 years.

Third, I think Trump and the Republican Congress’ push forward on the Keystone XL pipeline will actually make it harder for the Canadian pipelines (Kinder Morgan, Trans Mountain, Energy East, et. al.) to receive the “social license” that they need to move forward.  On the one hand, there will be even greater economic pressure to get the pipelines to the Canadian coasts so that we can serve new customers in Asia.  On the other hand, environmental and social activists and average citizens who are skeptical will be energized by the focus on the U.S.  If Canadian’s see Trump supporting a pipeline, do they reflexively oppose pipelines?  I think that’s a real possibility and threat. 

Looking for Silver Linings

When looking for silver linings in all of this, I see two big opportunities for Canada. 

First, is the global effort to attract the best talent.   Canadian Colleges and Universities are already predicting spikes in foreign enrolments.   Foreign students are simply not going to study in the U.S. in the current environment.  On a related note, can a Canadian company compete against a U.S. company for that top-flight engineer from India, Mexico, UAE or Egypt?  If that engineer thinks they are going to be harassed on the street for wearing an abaya or hijab, bet on Canada! 

Second, the global effort to attract foreign capital is intense and notwithstanding the likely tax advantages in the U.S., the relative stability and inclusiveness of Canada should be an advantage in efforts to attract capital.  Foreign capital, particularly if the investor is looking to move with their money, should see Toronto, Vancouver, Montreal or Mississauga as a better place to settle than much of the U.S.  If a foreign investor is looking for stability, a welcoming culture and a good school to send their kids, does Chicago or Charlotte look like that destination today?

My conclusions:

First, we as Canadians should take a deep breath and R E L A X …

The election of Donald Trump is most certainly a bad thing if you are an African American, a Muslim, a woman ... Your rights as an equal citizen in the U.S. are certainly under threat.  And that’s ugly and cannot be diminished.  But we’re not in America … we’re in Canada, and for that we can be thankful. 

The election of Donald Trump is most certainly going to be disquieting to the economy.  He will shake things up and when the elephant stirs, Canada feels it.  The election of Donald Trump will have a profound impact on trade policy … but most likely only at the margins.  The core of our trading relationship is far too intertwined and integrated to go back.  It might retreat a bit – and that’s a bad thing – but we’re not heading for 200% tariffs and trade wars. 

The election of Donald Trump could force Canada to look back to Europe and increasingly to Asia for trade and cultural ties, but this was a trend we’ve been seeing for years already.  If anything, this election may be accelerating that trend and that’s not necessarily a bad thing.  My investment advisor has always advised me to diversify.  It’s good advice for a country too.  

And finally, lets make sure that we as Canadians – as leaders in business and politics and media and culture – take a hard look at the lessons that Donald Trump’s election teaches us as we seek to avoid making the same mistakes.  Let’s work harder to ensure that the modernization of our economy doesn’t leave people in the hard-working middle-class behind.  Let’s make sure our population has the educational and economic opportunities to deal with a changing world.  Let’s make sure our domestic policies don’t inadvertently disadvantage our own economy just to make a principled stand and allow our leaders to say they are better than Donald Trump. 

It won’t be easy and the relationship between Canada and the U.S. will never be the same, but Canada could – and I emphasize could - even benefit in the long-run from a Trump presidency … and after all the gnashing of teeth and wringing of hands in the last two weeks, that’s a pretty extraordinary conclusion to reach!