Canada is caught in the crossfire of the trade war between the U.S. and China, and the impact on the Canadian economy is starting to show. It’s sometimes good, mostly bad, though for now, the stock market remains largely unruffled. But this is probably temporary.
Even without the “Huawei affair”, Canada would still be impacted by the ongoing trade war. Canada’s problems with China flared up last December, when Huawei’s chief financial officer Meng Wanzhou was arrested by the Royal Canadian Mounted Police at the request of the U.S., based on the extradition treaty between the U.S. and Canada. This resulted in a direct hit to Canada’s commerce with China.
Merchandise trade with China has been the fastest growing segment of Canada’s overall trade. It has doubled in the past 10 years and reached $100 billion at the end of 2018, representing about 8% of Canada’s total trade, reports Benoît Carrière, economist at Statistics Canada. As can be expected, the balance strongly tips in favor or China: Canada exports only $27 billion.
In the wake of the Huawei incident, a few sectors have suffered, mostly Canadian canola exports, causing a year-to-date 5% decrease in total exports to China compared to the same period of 2018. “China has imposed all sorts of restrictions,” notes Pedro Antunes, chief economist at the Conference Board of Canada. “It claims that our canola has bugs, that our meat contains forbidden chemicals.” Retaliatory measures? China has not said so, but observers pick up a strong retaliatory scent. “We’re getting hit hard, and I think it is retribution,” Antunes claims.
The hit from the U.S.
It’s not just China, Canada’s trade with the U.S. has also been hit. “It’s not the friendliest market for Canada. Even before the ongoing war, our link to the U.S. has been shaky following the NAFTA talks. The new agreement (CUSMA) is not signed yet. We need that agreement to settle nerves and investments,” Antunes continues
Add to the uncertainty on trade the U.S. tax deal of late 2017 “which gave the U.S. an almost 10 percentage point fiscal advantage over Canada,” says Drummond Brodeur, global strategist at CI Investments. “It left Canada as a less attractive country to invest in. We will probably see a weaker dollar going forward. That’s how a country offsets its loss of competitiveness.”
Brodeur fears that foreign direct investment (FDI) coming into Canada from the U.S. could suffer, and recent numbers give substance to his fears.
Since 2013, yearly foreign flows into Canada steadily increased from $59 billion to $103.5 billion at the end of 2017, with 2018 witnessing a sharp fall to $64.2 billion. During that period, the share of FDI coming from the U.S. steadily increased, from 43.4% to 79.6% in 2017. For 2018, the U.S. share fell to 51.2%, and though global numbers look good for 2019, with FDI totalling $54.5 billion at the end of the second quarter, the U.S. share is still falling, at 44.5%.
Some bright spots
There are bright sides for Canada to the ongoing trade war. For example, at the end of 2018, in retaliation to U.S. tariffs, China stopped importing soya beans from the U.S. and turned to Canada for supplies. “Where monthly soya exports to China were on average of $62 million, in the last months of 2018 they shot up to $186 million,” notes Carrière. More recently, even as canola was being banned, China was slightly increasing imports in fish and sea products. Still, the net result for 2019 is that trade with China will decline, though the shock remains weak. “Just a small increase in oil exports could compensate that loss with China,” comments Carrière.
Fine weather on the markets
The stock market witnesses a few bumps in relation to the ongoing trade wars, but the general climate remains upbeat. “We can point to a few companies where we perceive an impact,” says Les Stelmach, senior vice-president and portfolio manager at Franklin Templeton. He gives the example of orders at agricultural supplier Nutrien (NTR), that are down as the company is cutting production in an attempt to keep prices up.
Another case concerns Inter Pipeline (IPL) which has seen an undisclosed purchase offer cancelled. “I think the source of that bid had been confirmed as Husky, largely controlled by (business magnate) Li Ka-shing, who is influenced by the Chinese government,” Stelmach points out. “The suspicion is that the offer has been pulled because of the uncertainty surrounding investment in Canada and could be related to the Huawei confrontation.” But, all in all, the U.S./China trade war “does not make my job any more difficult,” he says, adding that at present, the Canadian market as a whole is good, and close to a new high.
Brodeur doesn’t think it will stay that way. According to him, the world is undergoing a structural shift toward a more protectionist stance, and he predicts a recession in 2020 as a result. The ongoing trade war is just another chapter in this transfer from globalisation to protectionism, with a growing number of populist administrations taking control, starting in the U.S., but also in other countries.
Also, a contest for global hegemony between China and the U.S. propels the present trade war. Even if the present war relents, tensions between the two powers will persist. “Nothing of this is good for a small global economy like Canada,” Brodeur says. “It has nothing to do with what Canada does or doesn’t do; the country is simply caught in the crossfire.”
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