By Alan M. Field
Almost none of the leading U.S. political and economic pundits predicted the victory of Donald Trump in the presidential election on November 8. The same experts are now challenged with thinking long and hard about the impact of Trump’s victory on the all-important relationship between the U.S. and Canada, and the economies of both countries.
Defying initial gloom among investors in both New York and Toronto, the stock exchanges in both countries recovered, based on speculation that the new President, a builder of hotels, casinos and other concrete properties, would win Congressional approval for large infrastructure expansion plans to fuel growth in infrastructure-related industries and raw materials. On stock and commodities exchanges, commodities quickly climbed over 4 per cent as December copper contracts surged to a 15-month high of US$2.46 a pound. Energy companies climbed as well, as Canadian investors interpreted Trump’s energy policy as much friendlier to fossil fuel producers than those of the Obama Administration. However, forestry and manufacturing companies, including several B.C.-based lumber producers and Ontario-based auto parts manufacturers, faced significant headwinds as a result of Trump’s eagerness to amend or even repeal the North American Free Trade Agreement. The Canadian dollar pared some losses after hitting an eight-month low against its U.S. counterpart on Wednesday after Donald Trump’s election to the White House raised fears about the outlook for Canada’s trade-intensive economy.
A week later, as many markets remained at least a bit more optimistic about a Trump presidency than before the election, uncertainties swirled around key areas of coming change in the U.S.-Canada relationship. Some key areas:
Trade relations: In his presidential campaign, Trump promised he would force Mexico and Canada to renegotiate NAFTA, or possibly revoke the 1994 trade agreement. Such a demand caused concern in Canada, which ships three-quarters of its exports to its two NAFTA partners, the U.S. and Mexico. “I think any agreement can be improved,” said David MacNaughton, Canada’s ambassador to Washington, of Trump’s trade team. “If they want to have a discussion about improving NAFTA, then we’re ready to come to the table.”
However, Peter Hall, Chief Economist with Export Development Canada, said he expects U.S. corporations with major investments in Canada to recoil at making big changes to NAFTA, which could harm U.S. consumers by hiking tariffs, thus raising prices in the U.S. On the other hand, some argued, Trump’s unhappiness with NAFTA has not really been about Canada, but has largely centered around U.S. trade with Mexico. “I don’t think at this point we’ve seen anything in his public statements that indicate that he is going to take a hard line against a country like Canada,” said Royce Mendes, Senior Economist at CIBC Capital Markets. On the other hand, Laura Dawson, head of the Wilson Center’s Canada Institute, said that if the Republican-run U.S. Congress does vote to leave NAFTA, U.S. industry groups that remained silent about Trump during the election would suddenly begin to complain about Trump: “All of those folks are going to be lined up saying, ‘Are you kidding me? Do you know how much of our livelihood is dependent on open borders and trade between these three countries?’”
Some observers fear that Canada could react to Trump’s efforts to punish Mexico by strengthening ties between Ottawa and Washington at the expense of Mexico. Even in the absence of NAFTA, the U.S. and Canada might revert to their old bilateral trade pact signed in 1988. As CI Banco analyst Jorge Gordillo told Reuters in Mexico City, “The possibility that Canada would take the U.S. side to the exclusion of Mexico added to weakness in the [Mexican] peso during the first days after the election.” The precipitous drop in the peso scared people “because it means the Canadian government is worried [about that] and so the market reacts.”
In addition to the uncertainty around NAFTA, Trump has created considerable doubt about the eventual adoption of the Trans-Pacific Partnership, a trade agreement that Canada would stand to benefit from.
The auto industry: Closely related to the general issue of trade relations, the auto industry is unlikely to escape the consequences of Trump’s election promises to repatriate jobs to the United States. At the present time, Ford Motor Co., after initial discussion with Trump’s transition team, is pondering whether its Mexican assembly operations should be redirected to the Mexican domestic automobile market, as Trump has threatened to impose punitive import duties on products made by Ford in Mexico. Can Canada escape similar treatment? It’s impossible to tell at this time.
The Keystone XL Pipeline: Officials at TransCanada Corp. say they are hopeful about discussing the pipeline with Trump, who says he favours construction of the 830,000 barrel a day pipeline from Alberta to the United States, which was killed by President Barack Obama. In his campaign literature, Trump had suggested that he would invite TransCanada to reapply for a permit, while demanding a larger share of the pipeline’s profits for the United States. Former Prime Minister Stephen Harper reacted to Trump’s victory by sending this tweet: “Congratulations to Donald Trump on his impressive victory. Canada/U.S. partnership is strong. There is much to do, including moving ahead with KXL.”
Trump and the Republican-led Congress both strongly support Keystone and will likely approve it fairly soon after Trump becomes President in January — a month after the Trudeau cabinet’s deadline to decide on whether to expand Kinder Morgan’s Trans Mountain. In operation since 1953, the Trans Mountain pipeline system (TMPL) is the only pipeline system in North America that transports both crude oil and refined products to the West coast. TMPL moves product from Edmonton, Alberta, to marketing terminals and refineries in the central British Columbia region, the Greater Vancouver area, and the Puget Sound area in Washington state, as well as to other markets such as California.
The expansion of Trans Mountain would increase the nominal capacity of the system from 300,000 barrels per day to 890,000 barrels, according to Kinder Morgan. On May 19, 2016, following a 29-month review, the National Energy Board recommended that the Federal Governor in Council approve the proposed expansion, subject to 157 conditions. The federal government will make its decision on the Project by December 19, 2016, nearly a month before Trump is inaugurated.
The latest National Energy Board forecasts for increases in oil sands production through 2025 roughly add up to the combined output that Keystone and the existing Trans Mountain could handle, according to Trevor Tome, assistant professor of economics at the University of Calgary. Thus, Tombe tweeted recently, “Does a Keystone XL approval mean Trans Mountain Expansion isn’t necessary? No.”
Immigration policy: Trump’s opposition to immigration from moslem countries has caused an enormous stir worldwide, but it’s not clear whether he intends to go ahead with his pledge to impose a total ban on such a flow to the U.S. Shortly after taking office in 2015, Prime Minister Justin Trudeau’s government responded to the Syrian refugee crisis by welcoming nearly 30,000 refugees between November 2015 and August 2016, and thousands of additional applications are continuing to be processed by the Canadian government. It seems unlikely that a Trump Administration will look favourably on Trudeau’s plans to bring an additional volume of refugees into Canada, from which they could enter the United States more easily by crossing the border legally or even illegally. Might Trump pressure Canada to restrict the flow of such immigrants by threatening to retaliate in other ways against the Trudeau government?
Binational Canada-U.S. energy development projects: Trump has promised to withdraw the U.S. from international climate agreements, such as the 2015 Paris Agreement, in which more than 190 countries have come together to adopt the most ambitious climate change agreement in history. The Trudeau government has welcomed the Paris Agreement, which laid the foundation for countries to work together to put the world on a path to keeping global temperature rise below 2 degrees Celsius. But Trump’s rejection of climate-change initiatives as pernicious to job growth could lead to the scuttling of such Canada-U.S. initiatives as last June’s North American Climate, Energy, and Environment Partnership, in which the three NAFTA partners worked to develop cross-border transmission projects, including for renewable electricity. Several transmission lines have been proposed or are in permitting review, such as the Great Northern Transmission Line, the New England Clean Power Link, and the Nogales Interconnection, which would add approximately 5,000 megawatts (MW) of new cross-border transmission capacity. All of these programs could soon find themselves in limbo under the new Administration.
The good news?: The good news is that President Trump will make every effort to make good on his promise to “Make America great again”. Like most economic issues, there is a good side to this for Canada, as well as negative implications. The good news is that increasing economic activity in the U.S. will undoubtedly have positive spin-off effects in Canada. The negative implications of such activity will be higher interest rates in the U.S. sooner rather than later, which will cause rates in Canada to rise as well, whether we like it or not. The latter will tend to have a negative impact on housing, and general commercial activities. On balance, though, increased economic activity in the U.S. will be good for Canada.