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The Great Rethink: If Canada wants to stay a trading nation it needs to up its game


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The Great Rethink: If Canada wants to stay a trading nation it needs to up its game

At home and abroad, there is a building consensus that Canada’s trade prospects are languishingAuthor of the article:Gabriel FriedmanPublishing date:Sep 14, 2020  •   •  7 minute readCanada, which sees itself as a “trading nation,” finds itself in the untenable position of being at the mercy of U.S. attitudes about imports. Photo by File PhotoArticle contentThe…

The Great Rethink: If Canada wants to stay a trading nation it needs to up its game

At home and abroad, there is a building consensus that Canada’s trade prospects are languishing

Author of the article:

Gabriel Friedman

Publishing date:

Sep 14, 2020  •   •  7 minute read

Canada, which sees itself as a “trading nation,” finds itself in the untenable position of being at the mercy of U.S. attitudes about imports. Photo by File Photo

Article content

The policy consensus that has guided economic decision-making for decades is being challenged like never before. In a new series, the Financial Post explores the opportunities and unknown costs of the Great Rethink.

During a week in August when the United States was recording around 50,000 new cases of COVID-19 per day, President Donald Trump interrupted the macabre realities of life during the pandemic to stage a press conference about another threat to national security: Canada’s aluminum sector.

Chrystia Freeland, the deputy prime minister, called the suggestion “absurd.” The American and Canadian metal industries are so integrated that a single aluminum part may regularly cross the border multiple times before being put into a car, building materials or some other product.

Nevertheless, Trump announced he was imposing a 10-per-cent tariff on Canadian aluminum imports for the second time since 2017. The White House charged that Canada’s aluminum producers had flooded the market with P1020, a basic, tradable form of the metal. Trump said imposing tariffs would lift aluminum prices and keep jobs in the U.S.

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When you’re a neighbour to the U.S. market, you stick to the U.S. market.

The constant harassment invites a rational response: go elsewhere. But that’s not happening because of what economists describe as the gravitational pull of the U.S. market — located next door, with a familiar culture, language and legal system, even with tariffs in place, it’s simply too big, too lucrative and too convenient for Canadian entrepreneurs to bypass.

“You don’t switch markets in 24 hours, two years or something like that,” said Jean Simard, chief executive of the Aluminum Association of Canada. “When you’re a neighbour to the U.S. market, you stick to the U.S. market.”

The aluminum sector’s predicament is symbolic of the trade quandary that Canada faces writ large. Protectionism is on the rise everywhere, and even the U.S., with which Canada signed a landmark trade agreement in the late 1980s, is becoming less and less reliable.

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Aluminum imports were attacked just weeks after a new trade agreement called the Canada-United States-Mexico Agreement (CUSMA) took effect, which was supposed to promote hassle-free commerce. Instead, at least one early analysis suggests the new agreement will actually diminish trade on the continent.

Canada, which sees itself as a “trading nation,” finds itself in the untenable position of being at the mercy of U.S. attitudes about imports.

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“Some other foreign markets are growing more quickly than the U.S., but it’s highly unlikely that any of those markets are going to supplant the U.S. in dominance,” said Avery Shenfeld, chief economist at CIBC World Markets.

Donald Trump announced in August he was imposing a 10-per-cent tariff on Canadian aluminum imports for the second time since 2017. Photo by Alex Kraus/Bloomberg

Experts say Canada’s approach to trade in the future will have to be a mix of learning to deal with a more protectionist U.S., while finding new opportunities on the margin. Trump’s focus has been steel and aluminum, but that could easily expand to other sectors, and indeed may already touch other sectors.

Simard, the head of the Canadian aluminum lobby, said that any changes in aluminum exports to the U.S. were the result of COVID-19 lockdowns. As the economy gradually returns to prior conditions, trade is getting back to normal, he said.

But Trump’s tariffs will continue to disrupt the North American manufacturing industry. Bernard Wolf, a professor of economics at York University’s Schulich School of Business in Toronto, said the automotive industries in both countries were already in decline, as production has moved to jurisdictions with cheaper labour.

“I think we’re losing it, but it’s been a slow burn kind of thing,” he said. “Protectionism would certainly accelerate it.”

Canada is looking at diminishing economic prospects for the next decade because of CUSMA

Dan Ciuriak, an economist and senior fellow at the Centre for International Governance Innovation, said Canada is looking at diminishing economic prospects for the next decade because of CUSMA.

In a paper published this summer by the C.D. Howe Institute, Ciuriak found that the agreement would reduce annual gross domestic product in the U.S. by 0.12 per cent, in Canada by 0.4 per cent and in Mexico by 0.79 per cent.

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By contrast, analysts for Global Affairs Canada found the trade agreement would increase annual GDP in Canada by 0.249 per cent. But its analysis assumed the original North American Free Trade Agreement would be nullified and Canada’s trade relationship would instead be governed by a series of tariffs.

Under those assumptions, Ciuriak reaches a similar conclusion. But in comparison to NAFTA, he reckons the new framework, with its insistence on “reciprocal trade,” essentially the idea that each country should have balanced trade with the other, more strict rules of origin, and other non-tariff barriers will reduce the efficiency of the overall North American market.

“If you look at the next 10 years, Canada is looking at diminished prospects,” Ciuriak said.

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A spokesperson for Deputy Prime Minister Chrystia Freeland referred all questions to the office of Mary Ng, Minister of Small Business, Export Promotion and International Trade.

Eleanore Catenaro, director of communications for Ng’s Office, said CUSMA “puts behind years of economic uncertainty” and ensures privileged access to the U.S. market. But she added that her office is also focused on trade diversification to ensure “Canadian businesses and exporter can access new opportunities in key diverse markets around the world, such as across Europe and Asia-Pacific.”

Already, Ciuriak believes the tariffs are discouraging international investment in Canada because it no longer can be viewed as a location from which to safely ship to the U.S. market.

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That suggests Canadian leaders will have to reconsider their approach to attracting international investors, now that Canada’s major selling point has been neutralized.

Somewhat counterintuitively, Ciuriak thinks Canada could benefit by becoming more discerning. He said not all foreign investment in Canada is beneficial, and the governments should apply new, more restrictive tests to foreign technology companies opening research offices in Canada.

In the past few years, technology has been a major growth area for Canada. For example, Toronto came third in commercial real estate firm CBRE’s 2019 ranking of North American tech centres behind San Francisco and Seattle.

The MaRS Discovery District in Toronto, one of the world’s largest urban innovation hubs. Photo by Postmedia

There’s a debate about whether allowing a giant tech company, such as Alphabet Inc. or Microsoft Corp., or a large pharmaceutical company, to open an office in Canada is smart.

Ciuriak said he believes it’s problematic because those companies harness talented workers here to create intellectual property — say, algorithms or patents — but any revenue derived from that work flows back to the company’s foreign headquarters.

“If all of the intangible asset outflow is out of the country, then that’s a bad deal for Canada,” he said, adding that the review strategy for foreign investment and acquisitions of domestic companies needs modification to recognize the value of intangible assets such as intellectual property.

“It’s not protectionist because we’re not stopping the company from coming; we’re saying if there’s a net loss for Canada from that investment, then we want to stop that investment from happening because we’re going to lose,” Ciuriak said.

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But it’s an issue that divides experts.

Daniel Schwanen, an economist at C.D. Howe, said he’s skeptical that restricting foreign technology companies from investing would help the economy.

“It’s not like the talent is going to be here and waiting to be employed for cheap,” he said. “If they can’t be employed here, then they might move elsewhere. ”

But he agrees that Canada is “unique in terms of having so much brain power, and the big export of the actual research, and yet has a big deficit in what it earns from that actual IP.”

Rather than new restrictions, Schwanen said the best way to counter that problem could be to encourage Canadians to be more entrepreneurial. He cited the federal government’s $950-billion investment in five innovation “superclusters” as a positive development.

While the pandemic drags on, and the economy stutters forward, there may indeed be opportunities for Canada’s government leaders to rethink what opportunities exist for a trade reset.

It’s also possible that Ottawa will wait until after the pandemic, or at least after the November presidential election, to make any bold moves on trade strategy.

Still, whether at home or abroad, there is a building consensus that the country’s trade prospects are languishing and need to be revitalized somehow.

The U.S. is unlikely to recede as Canada’s dominant trading partner, but economists say there is room for change around the margins of this country’s trade strategy, whether that’s changing the strategic review of foreign investment or more government programs to help Canadians export their products into new markets.

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A strategy reset may not even be necessary, said Eric Miller, a fellow at the Canadian Global Affairs Institute who advises companies on trade. He believes the Canadian government just needs to be more involved in promoting homegrown businesses abroad.

“My analogy is how do you get old people to travel abroad?” Miller said. “Well, that’s why you have those tours, and you have a tour guide who speaks English and drives the bus. They show up, get handed their hotel room keys and that’s that.”

All the best trading nations, he said, from Japan to Germany to Korea, allow their governments to play a more robust role in business, whether that means bidding on actual projects then doling out the work to domestic companies or just schmoozing more with decision-makers.

“The core takeaway is, if you want to become a great trading nation, let’s look at what other great trading nations do,” Miller said.

• Email: gfriedman@postmedia.com | Twitter: GabeFriedz

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