Part of an ongoing series that looks at changes one year after the global trade wars ignited.
For the next few months or so, some of us here at the Financial Post will be filing dispatches from the trade wars, which arrived in Canada on the last day of May 2018, when Prime Minister Justin Trudeau returned U.S. President Donald Trump’s fire with a volley of retaliatory tariffs on imports worth about $17 billion.
Combined, these stories describe a loss of innocence.
Central bankers, executives, politicians, trade negotiators, and the rest of us have had to come to terms with a world that is very different from the one we had come to take for granted.
To get started, let’s go back to Whitby, Ont., circa 1970. The town’s population had grown to about 25,000, a 70-per-cent increase from a decade earlier. The Canadian automotive industry, based in nearby Oshawa is on its way, thanks in large part to a managed trade agreement with the United States that Prime Minister Lester Pearson signed in 1965. The Auto Pact guaranteed that a percentage of the cars and trucks sold in Canada would also be built in Canada. These were good times.
At the curling club, the guy who spun records on the weekends knew exactly how to get this crowd to put down its beer and get up on the dance floor. “Something familiar and mid-tempo,” he’d say decades later. Raindrops Keep Fallin’ On My Head was his killer track. “I’m never going to stop the rain by complaining. Because I’m free. Nothing’s worrying me.” It worked every time.
That guy was Stephen Poloz, who was confident that Canada’s economy had rediscovered a familiar, mid-tempo groove when he took over as Bank of Canada governor some four decades later.
The financial crisis and the Great Recession had upended everything, but fiscal stimulus and near-zero interest rates had kept domestic demand buoyant. Now, a few years clear of a near depression, there was reason to think things were getting back to normal.
Governor of the Bank of Canada Stephen Poloz at his first public appearance in his role on June 19, 2013.
“The sequence we can anticipate is the following: foreign demand will recover; our exports will strengthen further; confidence will improve; companies will invest to increase capacity; existing companies will expand and new ones will be created,” Poloz told the House of Commons Finance Committee on June 6, 2013, during his first public comments as governor.
“This sequence may already by underway,” he said. “The bank expects that the gathering momentum in foreign demand should help lift the confidence of Canada’s exporters. This is critical for Canadian firms to boost their investment to expand their productive capacity.”
The recovery didn’t go quite that smoothly. The value of exports had peaked at around $590 billion in the second quarter of 2007, and then plunged to about $470 billion over the two years that followed. It would take exporters until the first half of 2014 to get back to where they were on the eve of the crisis.
Poloz had an explanation for the slow recovery. A new Statistics Canada database indicated that the Great Recession had crushed the country’s entrepreneurial spirit.
From the start of 2004 to the end of 2008, the quarter-over-quarter annual growth rate of firm creation averaged 2.3 per cent; in 2009, growth essentially stalled. Poloz theorized that exports were slow to relaunch because there weren’t enough exporters left to take full advantage of the rebound in global demand. The collapse of oil prices at the end of 2014 and beginning of 2015 made things worse.
But the former DJ-booth maestro from Whitby knew how to deal with these sorts of issues. The Bank of Canada had seen commodity-price crashes before. It cut the benchmark interest rate twice in 2015, dropping it back to a crisis-level setting of 0.5 per cent.
That seemed to do the job. By the spring of 2017, gross domestic product was growing at an annual rate in excess of four per cent. Recession averted, if only barely, Poloz and his deputies on the Governing Council raised interest rates at back-to-back policy meetings in July and September.
And then Donald Trump was elected president of the United States of America.
For Poloz, it was like following B.J. Thomas with Black Sabbath. There might have been some hardcore Sabbath fans at the curling club, but Iron Man would have chased most people back to their seats. “Tariff Man” had exactly that effect on Canada’s beaten down exporters.
U.S. President-elect Donald Trump arrives on the West Front of the U.S. Capitol on Jan. 20, 2017 in Washington, D.C. as part of his inauguration ceremony.
Since at least the 1960s, economic growth had followed a fairly consistent pattern: exports pick up, business investment follows as companies scramble to keep pace with demand, and the country prospers.
After the crisis, something odd happened: investment spiked as commodity prices soared, but non-energy export growth was muted.
Investment reversed course when oil prices plunged, and then Trump began sowing seeds of doubt: new tariffs on Canadian lumber imports; the assault on Bombardier Inc. that forced the company to effectively give its CSeries program to Airbus SE; the overhaul of the North American Free Trade Agreement; specious border levies on steel and aluminum; the threat of tariffs on automobiles and uranium; his apparent willingness to blow up global supply chains by picking a commercial and strategic fight with China.
It was all too much for some executives and entrepreneurs. In effect, Trump sabotaged the creative disruption that typically helps an economy regenerate after a downturn. The rotation that Poloz promised in 2013 was delayed, and when it finally arrived, it lacked the force required to generate broad-based momentum. Since the start of 2010, Canada has been creating new firms at a quarter-over-quarter annual rate of only 0.8 per cent, on average, according to StatCan’s most recent data.
“The duty has a direct impact on our Canadian production,” Gerrie Kotze, chief financial officer at Teal-Jones Group, British Columbia’s biggest privately owned timber company, told the Financial Post in an interview recently.
“It impacts the competitiveness of the region, and Canada in general,” he said.
“The view is that the tariffs will be with us for the foreseeable future, and I don’t know what that means, 2020, 2021, but we certainly don’t expect them to be lifted this year.”
Logs sit in a lumber processing yard along the Fraser River in Delta, British Columbia.
Uncertainty is a killer in business, especially when demand is only so-so. We tell stories of swashbuckling entrepreneurs and executives who mortgage their houses, max out their credit cards, and make acquisitions with money they don’t have. That type of capitalist is actually rare. Most executives spend their time figuring out how to make a decent profit while taking as little risk as possible. There’s a reason Trump’s unpredictable trade policy has coincided with a surge in publicly traded companies using profits to buy back their own shares.
“I understand the need to make sure there’s not unfair trade practices, and I would support that, but we need stability because we invest billions of dollars,” Don Walker, chief executive of Aurora, Ont.-based Magna International Inc., North America’s biggest maker of automotive parts, said at an event in Washington in June. “Those are long-term assets, we need to know we’re going to get a return on them.”
I flicked at Canada’s history of managed trade in automobiles earlier for a reason. Trump is now forcing that model on a world that looks very different than it did in the 1970s.
Canada and Mexico were given a choice: higher import tariffs or convoluted rules via trade agreements and Buy America provisions that effectively require automobile companies and others to build more stuff in the United States. The junior partners in NAFTA chose the latter, although they still are waiting for Congress to sign off on the armistice.
We need stability because we invest billions of dollars
Don Walker, Magna International CEO
The positive interpretation of the new North American free-trade agreement is that it will create a continental powerhouse in manufacturing. “It has to be competitive versus Europe as a region, versus China as a region and versus the rest of Asia as a region,” Walker said at that event in Washington.
It’s fair to wonder what role Canada will play on Team North America, however.
A couple of months after the three partners said they had agreed on an updated set of rules, General Motors Co. said it would close a bunch of factories, including the one in Oshawa, which employed some 3,000 people.
Walker emphasized in Washington that Magna spends far more money on research and development, engineering, and people in the United States than it does back home.
Winnipeg-based NFI Group Inc., North America’s biggest maker of buses, apologized to shareholders in its latest quarterly report for losses related to the construction of a new, 315,000-square-foot parts factory in Shepherdsville, Ky., while justifying the $30-million expense as a “strategic long-term investment intended to meet increased U.S. content requirements which take effect in October 2019.”
NFI Group, formerly known as New Flyer Industries, declined a request to talk to us about how it’s adjusting to U.S. trade policy.
So did many other well-known Canadian exporters, including Magna, Mississauga, Ont.-based Maple Leaf Foods Inc., Montreal-based Dorel Industries Inc., and Bedford, Nova Scotia-based Clearwater Seafoods Inc. That’s not unusual, as the leaders of large companies tend to avoid the press.
The share prices of all those companies suggest executives such as Walker have enjoyed happier days. Values have tumbled over the past year, suggesting the trade wars are taking a toll. NFI’s stock price has plunged almost 50 per cent since cresting at about $59 in January 2018.
All of this will change the makeup of the Canadian economy.
The value of exports of services, which includes the money that tourists leave behind, has been growing faster than what we earn from the international shipments of oil, auto parts and other goods since the second half of 2017. They now represent about 17 per cent of total exports, the most since the early 1980s, excluding a brief period during the Great Recession.
A tank car carrying crude oil. The value of exports of services has been growing faster than what we earn from the international shipments of oil, auto parts and other goods.
The brash entrepreneurs who are leading the transition to the digital economy are relatively unconcerned by the trade wars, as Trump and his antagonists focus most of their attention on tangible goods. “We sell air,” Eric Boyko, chief executive officer of Montreal-based Stingray Group Inc., which broadcasts curated music over cable television, told me in an interview earlier this month, insisting that the national obsession over the NAFTA renegotiation had no effect on him at all.
The trade wars also will force Canadian executives to recognize that the U.S. — the only international market most of them care about — is an unreliable business partner.
For the first time in decades, there is obvious interest in seeking out markets in Asia and Europe. But that desire is forcing many of us to accept a hard truth: our “trading nation” is populated by an embarrassingly small number of companies that do business in places that don’t speak English. The Canadian Press reported this week that a survey commissioned by Global Affairs found that only seven per cent of smaller companies were familiar with the details Canada’s new trade agreement with the European Union and more than half said they hadn’t even heard of it.
The trade wars have hurt so much because Trump caught us sleeping. Time to wake up.
Financial Post
• Email: kcarmichael@nationalpost.com | Twitter: carmichaelkevin
