As negotiators shook hands on the revised North American free trade agreement, they couldn’t have foreseen the fundamental upheaval their countries would soon be facing thanks to the COVID-19 pandemic.
If the Trudeau government is looking to celebrate something this Canada Day, it may be the relative security of the status quo that was more or less preserved in the talks.
“Bullet dodged” — that’s how Brett House, Scotiabank’s deputy chief economist, summed things up for CBC News last weekend.
“Sometimes,” he said, “the biggest victories are the bad things prevented, rather than new things built.”
Unlike Canada’s original trade deals with the U.S. and the other major trade deals the Trudeau government has implemented with European and Pacific Rim partners, the new NAFTA doesn’t substantially liberalize more trade. Most North American tariffs had been eliminated already.
The new automotive chapter, in contrast, adds more protectionism by requiring manufacturers to use more local components and higher labour standards to avoid tariffs.
When Global Affairs released its economic impact study for the new agreement last winter, it was criticized for basing its comparisons not on the terms of the original NAFTA but a hypothetically devastating scenario in which President Donald Trump completely pulled the plug on preferential trade with Canada.
How likely was that? Opinions still vary as to whether the Trudeau government had any real alternative to going along with the renegotiation.
As last week’s threat to reimpose aluminum tariffs suggests, this White House remains unpredictable and, sometimes, unthinkable, even in the face of strong economic arguments about the value of free trade with one’s neighbours.
‘Negative on balance’
In attempting to modernize NAFTA for the 21st century, did negotiators meet the standard of “first, do no harm”?
In a paper released Tuesday by the C.D. Howe Institute, consultant trade economist Dan Ciuriak revisited the economic modelling done by the International Monetary Fund, the U.S. International Trade Commission and Global Affairs Canada, as well as his own figures, and tried to make sense of how things look now — amid the chaos of a pandemic that’s disrupted international supply chains, shut down all but essential cross-border travel and introduced a new public health rationale for constricting trade on national security grounds.
“There are many sources of uncertainty that at present do not lend themselves to a robust quantification,” his summary concludes. “The known knowns promise to be negative on balance; as for the known unknowns, time will tell.”
“Just as companies were starting to prepare and think about [NAFTA implementation], COVID came,” said Brian Kingston, outgoing vice-president responsible for trade issues at the Business Council of Canada.
“Their focus is turned 100 per cent to survival and making sure that they can get through this pandemic intact.”
Despite the pandemic (or perhaps to distract from it), Trump demanded a June 1 implementation date. When he couldn’t get that, he insisted on a July 1 implementation, to make sure a done deal was ready to campaign on this fall.
Rather than risk more punishment and political grief by stalling, Canada and Mexico agreed, paving the way for the Canada Day starting line.
For Canada, starting in July instead of August is very expensive for its dairy sector — and perhaps for the taxpayers who ultimately will compensate farmers for it. The dairy fiscal year begins in August, and since NAFTA concessions ramp up at the start of each new dairy year, that ramp is steeper with this timing.
One innovation in the original NAFTA now begins to vanish from the corporate toolkit: the investor-state dispute system (ISDS), which let companies bypass regular courts and challenge the regulatory decisions of Canadian governments directly through NAFTA arbitration (ISDS is also referred to by its location in the original text: “Chapter 11”).
The ability of multinationals to seek millions in damages in such lawsuits “was always something that critics of the original NAFTA deal hated,” said cross-border trade lawyer Mark Warner. “So that’s a pretty big change.”
Other changes businesses need to adapt to, like the copyright changes in the intellectual property chapter, are “largely a wash,” Warner said.
Bumpy road for carmakers
The new NAFTA’s uniform regulations for automotive manufacturing have only been out for a couple of weeks — during a time when carmakers have been preoccupied with reviving their supply chains and factories from the relative coma of this spring’s lockdown.
“Without COVID, this would have been the most important issue facing that most important industry, and now this is probably a distant second,” said Warner.
“I don’t think anyone in auto … has really had time to concentrate the mind on [the new NAFTA] coming into effect. I think we’re going to see a delayed reaction that plays out over time.”
Will the revised agreement eventually fulfil Trump’s pledge of returning more automotive jobs and investment to the U.S. (and Canada)? Or will manufacturers opt to comply by paying Mexican workers more, as some Japanese facilities are already signalling? Could some skip NAFTA compliance altogether?
Trade law professor Elizabeth Trujillo from the University of Houston said that while the new labour provisions are consistent with the populist values of Mexico’s current president, complete compliance with new labour standards on the Mexican side is “unlikely.”
“Will that be enforced? If it is, what does that mean? More tariffs?” she said.
It’s now possible for claims of labour violations to be pursued against Mexico under NAFTA’s now-revised state-to-state dispute resolution process.
“The more likely scenario is that a lot of these manufacturers will just not use the new NAFTA … they’ll work outside of it,” Trujillo said. “Just pay what they have to pay [in tariffs] and not have to adjust their way of doing things to the new rules.”
As it reworks its supply chain strategy, Mexico may collaborate with other countries — especially other Latin American countries that also have free trade agreements with the U.S., like Colombia, she said.
Trade professor Meredith Lilly of Carleton University, a former adviser to Stephen Harper’s government, predicts “real bumps” ahead as this sector transitions to the new rules while trying to remain globally competitive.
“Over the long term, eventually the price of cars is going to go up,” she said, pointing out that North American components and labour will be more expensive.
De minimis, dairy changes kick in
Not every sector faces as many new rules as the automotive industry. For regular consumers, changes attributable to NAFTA may be almost undetectable.
“The biggest win is that Canadians won’t see a lot of change,” Kingston said. “The less that we see is actually a sign that the agreement is working as planned.”
There are a few small consumer gains.
With online shopping and shipping more popular than ever, goods shipped from by U.S. by courier services no longer face customs duties if they’re valued under $150, and won’t incur sales taxes if they’re worth less than $40. If purchases are shipped by mail, however, the previous threshold of $20 will still apply.
While the market access conceded to the U.S. for supply-managed agricultural products like dairy, eggs and poultry should, in theory, spur more competitive pricing and add more choice to store shelves, it’s not a given that will happen.
The pandemic has dramatically disrupted food supplies and prices, which might make any concurrent NAFTA changes hard to spot.
The new licences to import American products will also be given mostly to Canadian processors, not retailers — something the Americans have threatened to fight because they don’t trust Canada’s domestic industry to deliver the market share promised to U.S. farmers.
While the implementation of the new NAFTA could have been an opportunity to relaunch Canada-U.S. trade relations with a more positive attitude, Lilly said she fears this opportunity has been lost. Instead, the pandemic has left Canadians with a bad taste in their mouths about their neighbours.
The Trump administration’s attempt to prevent 3M from shipping N95 masks to Canada is an example of how there’s “no loyalty and no love lost” between the partners in the North American trading bloc right now, she said.
“It’s caused Canadians to reflect a great deal,” she said, adding she worries the Trudeau government’s ambitions for diversified trade aren’t shared by the general public.
Hassan Yussuff, the president of the Canadian Labour Council who also served on Canada’s NAFTA advisory council during the negotiations, said he hopes the deal brings positive changes to the lives of working people in Mexico. He said he also hopes the new NAFTA regulations, in turn, will make employers think twice about leaving Canada in the first place — easing the resentment workers felt about the original NAFTA deal.
COVID-19 is prompting countries to re-examine how far they have pushed the envelope on international trade, and to revisit the idea of making certain things at home, he said.
“We cannot be this vulnerable,” Yussuff said. And even if there is a new president in the White House after November, he added, domestic political pressures will remain.
“Americans always act in their own self-interest. We should not think we’re special. We have to be vigilant, and get used to this.”
G7 nations to boost climate finance
G7 leaders agreed on Sunday to raise their contributions to meet an overdue spending pledge of $100 billion a year by rich countries to help poorer countries cut carbon emissions and cope with global warming, but only two nations offered firm promises of more cash.
Alongside plans billed as helping speed infrastructure funding in developing countries and a shift to renewable and sustainable technology, the world’s seven largest advanced economies again pledged to meet the climate finance target.
But climate groups said the promise made in the summit’s final communique lacked detail and the developed nations should be more ambitious in their financial commitments.
In the communique, the seven nations – the United States, Britain, Canada, France, Germany, Italy and Japan – reaffirmed their commitment to “jointly mobilise $100 billion per year from public and private sources, through to 2025”.
“Towards this end, we commit to each increase and improve our overall international public climate finance contributions for this period and call on other developed countries to join and enhance their contributions to this effort.”
After the summit concluded, Canada said it would double its climate finance pledge to C$5.3 billion ($4.4 billion) over the next five years and Germany would increase its by 2 billion to 6 billion euros ($7.26 billion) a year by 2025 at the latest.
There was a clear push by leaders at the summit in southwest England to try to counter China’s increasing influence in the world, particularly among developing nations. The leaders signalled their desire to build a rival to Beijing’s multi-trillion-dollar Belt and Road initiative but the details were few and far between.
Johnson, host of the gathering in Carbis Bay, told a news conference that developed nations had to move further, faster.
“G7 countries account for 20% of global carbon emissions, and we were clear this weekend that action has to start with us,” he said as the summit concluded.
“And while it’s fantastic that every one of the G7 countries has pledged to wipe out our contributions to climate change, we need to make sure we’re achieving that as fast as we can and helping developing countries at the same time.”
Some green groups were unimpressed with the climate pledges.
Catherine Pettengell, director at Climate Action Network, an umbrella group for advocacy organisations, said the G7 had failed to rise to the challenge of agreeing on concrete commitments on climate finance.
“We had hoped that the leaders of the world’s richest nations would come away from this week having put their money their mouth is,” she said.
Developed countries agreed at the United Nations in 2009 to together contribute $100 billion each year by 2020 in climate finance to poorer countries, many of whom are grappling with rising seas, storms and droughts made worse by climate change.
That target was not met, derailed in part by the coronavirus pandemic that also forced Britain to postpone the U.N. Climate Change Conference (COP26) until later this year.
The G7 also said 2021 should be a “turning point for our planet” and to accelerate efforts to cut greenhouse gas emissions and keep the 1.5 Celsius global warming threshold within reach.
European Commission President Ursula von der Leyen said the G7 leaders had agreed to phase out coal.
The communique seemed less clear, saying: “We have committed to rapidly scale-up technologies and policies that further accelerate the transition away from unabated coal capacity, consistent with our 2030 NDCs and net zero commitment.”
The also pledged to work together to tackle so-called carbon leakage – the risk that tough climate policies could cause companies to relocate to regions where they can continue to pollute cheaply.
But there were few details on how they would manage to cut emissions, with an absence of specific measures on everything from the phasing out of coal to moving to electric vehicles.
Pettengell said it was encouraging that leaders were recognising the importance of climate change but their words had to be backed up by specific action on cutting subsidies for fossil fuel development and ending investment in projects such as new oil and gas fields, as well as on climate finance.
British environmentalist David Attenborough appealed to politicians to take action.
“We know in detail what is happening to our planet, and we know many of the things we need to do during this decade,” he said in a recorded video address to the meeting.
“Tackling climate change is now as much a political and communications challenge as it is a scientific or technological one. We have the skills to address it in time, all we need is the global will to do so.”
($1 = 1.2153 Canadian dollars)
(Reporting by Elizabeth PiperAdditional reporting by William James and Kate Abnett in Brussels and Andreas Rinke in BerlinEditing by William Maclean, Raissa Kasolowsky and Frances Kerry)
Canadian dollar goes up from Friday’s 4-week low
The Canadian dollar edged higher against its U.S. counterpart on Monday as oil prices climbed and investors looked past domestic data showing factory sales falling in April, with the loonie clawing back some of Friday’s decline.
“Zooming out from the disruptions seen in the auto industry, the outlook for manufacturing sales is not all that bad,” Omar Abdelrahman, an economist at TD Economics, said in a note.
“The reopening of provincial economies and strength in Canada‘s largest export market (the U.S.) should provide a lift to demand,” Abdelrahman added.
The price of oil, one of Canada‘s major exports, was supported by economic recovery.
U.S. crude prices rose 0.9% to $71.56 a barrel, while the Canadian dollar was trading 0.2% higher at 1.2143 to the greenback, or 82.35 U.S. cents. On Friday, it fell to its weakest since May 14 at 1.2177.
Speculators have cut their bullish bets on the Canadian dollar, the strongest G10 currency this year, data from the U.S. Commodity Futures Trading Commission showed on Friday. As of June 8, net long positions had fallen to 45,281 contracts from 48,772 in the prior week.
A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.
Investors were awaiting a Federal Reserve policy announcement on Wednesday. Expectations that the Fed would stick to its dovish course have helped cap U.S. and Canadian bond yields.
Canada‘s 10-year yield touched its lowest level since March 3 at 1.365% before recovering to 1.381%, up 1.3 basis points on the day.
(Reporting by Fergal Smith; Editing by Bernadette Baum)
Toronto stock exchange dips as losses in miners
Toronto stock exchange index edged lower on Monday, as losses in mining stocks and dismal domestic manufacturing data overshadowed gains in energy stocks.
* The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.7% as gold futures fell 1.6% to $1,848.2 an ounce. [GOL/]
* Canadian factory sales slipped by 2.1% in April from March on lower sales of transportation equipment, as well as subdued petroleum and coal products sector, Statistics Canada said.
* At 9:43 a.m. ET (13:43 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 14.52 points, or 0.07%, at 20,123.83.
* The energy sector climbed 1.4% as U.S. crude prices were up 1% a barrel, while Brent crude rose 0.9%. [O/R]
* Financials slipped 0.3%, while industrials fell 0.1%.
* On the TSX, 120 issues were higher, while 107 issues declined for a 1.12-to-1 ratio favouring gainers, with a trading volume of 22.35 million shares.
* TSX’s top gainers were paper and packaging company Cascades Inc <CAS.TO> and IT firm Kinaxis Inc <KXS.TO>, jumping 4.1% and 4.0%, respectively.
* Biggest decliners were uranium producers Nexgen Energy Ltd <NXE.TO>, down 5.9%, followed by Cameco Corp falling 5.5%.
* The most heavily traded shares by volume were Canadian Natural Resources Limited <CNQ.TO>, BCE Inc <BCE.TO>, and Hut 8 Mining Corp <HUT.TO>
* Twenty-two stocks hit fresh 52-week highs on the TSX, while there were no new lows.
* Across all Canadian issues, there were 95 new 52-week highs and four new lows, with total volume of 43.57 million shares.
(Reporting by Amal S in Bengaluru; Editing by Rashmi Aich)
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