CANADA ECONOMICS

INDUSTRY

StatCan. 2017-09-19. Monthly Survey of Manufacturing, July 2017

Manufacturing sales
$52.5 billion
July 2017
-2.6% decrease
(monthly change)

Inventories
$73.7 billion
July 2017
-0.2% decrease
(monthly change)

Inventory-to-sales ratio
1.40
July 2017
0.03 pts increase
(monthly change)

Unfilled orders
$86.2 billion
July 2017
-1.7% decrease
(monthly change)

Source(s): CANSIM table 304-0014.

Manufacturing sales decreased 2.6% to $52.5 billion in July, following a 1.9% decline in June. The decrease was primarily the result of lower sales of motor vehicles and motor vehicle parts. Excluding motor vehicles and motor vehicle parts, manufacturing sales increased 0.2%.

Sales were down in 9 of 21 industries, representing 57% of the manufacturing sector. Sales of durable goods decreased 4.6%, while sales of non-durable goods declined 0.2%.

In constant dollars, sales were down 1.4% in July, indicating a decline in the volume of manufactured goods sold.

Chart 1   Chart 1: Manufacturing sales decline

Manufacturing sales decline

Transportation equipment drops as a result of lower motor vehicle and parts sales

Sales in the transportation equipment industry fell 13.8% to $9.6 billion in July, for a second consecutive monthly decline. This is the largest monthly decrease since May 2009. The decrease was the result of declines in the motor vehicle (-19.9%) and the motor vehicle parts (-11.3%) industries. Motor vehicle assembly plants have annual shut downs during the summer months. This year, the shutdowns were longer and more concentrated in the month of July compared with previous years. Changes to vehicle models being manufactured in Canada also contributed to the decline. Sales of motor vehicle parts closely track production at the motor vehicle assembly plants. In constant dollars, motor vehicle sales were down 17.5%, while motor vehicle parts decreased 9.3%.

Decreases were also seen in the food industry (-0.9%), particularly in the meat product and seafood product and packaging sub-industries. In real terms, sales in the food industry declined 0.6%, reflecting a decrease in the volume of goods sold.

These declines were partially offset by increases in wood products (+2.3%), primary metals (+1.9%) and non-metallic mineral products (+4.4%). Sales in constant dollars for these industries increased 2.1%, 4.9% and 4.5%, respectively, indicating that higher volumes of goods sold were responsible for the gains.

Sales fall in Ontario

Sales decreased in seven provinces in July, led by Ontario and Alberta.

Sales in Ontario decreased 6.1% to $24.1 billion in July, the largest decrease since January 2009. The decrease in July was attributable to motor vehicles (-20.8%) and motor vehicle parts (-11.5%).

The sales decline of 3.4% in Alberta was driven by decreases in chemicals (-6.5%), fabricated metal products (-8.3%), petroleum and coal products (-3.0%) and food (-2.1%). Year over year, both food and fabricated metal products were up 4.4% and 13.2%, respectively. The decrease in food comes after five consecutive monthly increases.

In Quebec, sales rose 4.3% to $13.0 billion with 16 of 21 industries posting an increase. The growth was partly attributable to the primary metals industry (+9.1%). Sales also increased in the transportation equipment (+5.2%), wood product (+7.3%) and food (+2.4%) industries.

Inventories edge down

Inventories for the manufacturing sector edged down 0.2% to $73.7 billion in July. This was the third consecutive monthly decline.

The majority of the decreases came from aerospace product and parts (-2.4%), followed by primary metals (-0.9%), food (-0.7%) and chemicals (-0.6%).

Chart 2   Chart 2: Inventory levels edge down

Inventory levels edge down

The inventory-to-sales ratio increased from 1.37 in June to 1.40 in July. The increase in the ratio reflects the fact that the decline in sales was larger than the decline in inventories. The inventory-to-sales ratio measures the time, in months, that would be required to exhaust inventories if sales were to remain at their current level.

Chart 3   Chart 3: The inventory-to-sales ratio increases

The inventory-to-sales ratio increases

Unfilled orders decline

Unfilled orders fell 1.7% to $86.2 billion in July, the third consecutive monthly decline. Most of the decrease was due to a drop in unfilled orders in the aerospace product and parts (-3.9%) industry.

These declines were partially offset by an increase in unfilled orders in machinery (+2.9%) and fabricated metal products (+1.9%).

Chart 4   Chart 4: Unfilled orders decline

Unfilled orders decline

New orders declined 1.7% to $51.1 billion in July. The decrease mostly reflected lower new orders in motor vehicles, and in aerospace product and parts. These declines in July were partially offset by higher new orders in fabricated metal products, and in computer and electronic products.

FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/170919/dq170919a-eng.pdf

StatCan. REUTERS. SEPTEMBER 19, 2017. Canadian July manufacturing sales sink as auto plants shut down

OTTAWA (Reuters) - Canadian manufacturing sales dropped by 2.6 percent in July, the most in more than a year, as annual auto plant shutdowns cut sales of cars and motor vehicle parts, Statistics Canada said on Tuesday.

The decline was the biggest retreat since the 4.2 percent plunge seen in February 2016. Analysts in a Reuters poll had predicted a 1.6 percent dip.

Sales fell in nine of 21 industries, representing 57 percent of the manufacturing sector and in volume terms fell by 1.4 percent.

The transportation equipment industry posted a 13.8 percent decline, the largest since May 2009. Statscan said the auto plant shutdowns were longer and more concentrated in July compared with previous years.

Food industry sales dipped 0.9 percent.

The wood products and primary metals sectors showed strength, gaining by 2.3 percent and 1.9 percent respectively.

Reporting by David Ljunggren; Editing by W Simon

FINANCE

Department of Finance Canada. September 19, 2017. Jobs, Strong Economic Growth and Smart Investments Lead to Better Results

 Ottawa, Ontario – The Government of Canada is making investments that are creating jobs, growing the economy, and providing more opportunities for the middle class and those working hard to join it.

The Government's ambitious plan is working: 400,000 jobs have been created over the last year—the majority of them full-time. With the strongest real gross domestic product (GDP) growth seen in a decade, Canada now has the fastest-growing economy in the G7 countries.

The Department of Finance Canada today released the Annual Financial Report of the Government of Canada for 2016–17. The Government posted a budgetary deficit of $17.8 billion for the fiscal year that ended on March 31, 2017—markedly less than the $23.0 billion projected in Budget 2017, and $11.6 billion less than originally projected in Budget 2016.

The Government is committed to sound fiscal management as it continues to make investments to support long-term economic growth and a strong middle class, while preserving Canada's low-debt advantage for current and future generations.

Quick Facts

• Revenues decreased by $2.0 billion, or 0.7 per cent, from 2015–16. Program expenses increased by $16.2 billion, or 6.0 per cent, reflecting increases in major transfers to persons, major transfers to other levels of government and other transfer payments. Public debt charges were down $1.3 billion, or 5.2 per cent, reflecting a lower average effective interest rate on the stock of interest-bearing debt.
• The federal debt (the difference between total liabilities and total assets) stood at $631.9 billion at March 31, 2017. The federal debt-to-GDP ratio was 31.2 per cent—0.3 percentage points lower than projected in Budget 2017, and a full percentage point lower than originally projected in Budget 2016.
• As reported by the International Monetary Fund (IMF), Canada's total government net debt-to-GDP ratio, which includes the net debt of the federal, provincial/territorial and local governments, as well as the net assets held in the Canada Pension Plan and Québec Pension Plan, stood at 27.6 per cent in 2016. This is the lowest level among G7 countries, which the IMF expects will record an average net debt of 83.0 per cent of GDP for the same year.
• For the 19th consecutive year, the Government has received an unmodified audit opinion from the Auditor General of Canada on the consolidated financial statements.

Related Products

• Annual Financial Report of the Government of Canada—2016–2017: http://www.fin.gc.ca/afr-rfa/2017/afr-rfa-2016-2017-eng.pdf
• Fiscal Reference Tables—September 2017: http://www.fin.gc.ca/frt-trf/2017/frt-trf-17-eng.pdf

Department of Finance Canada. THE GLOBE AND MAIL. THE CANADIAN PRESS. SEPTEMBER 19, 2017. Federal deficit comes in at $17.8-billion for 2016-17
FRED CHARTRAND, THE CANADIAN PRESS
BILL CURRY

OTTAWA - The federal government's final deficit figure for last year came in at $17.8-billion, the Finance Department announced Wednesday.

The figure for the 2016-17 fiscal year represents an improvement over the $23-billion projection in the March 2017 budget, but is still at odds with the Liberal campaign promise to keep the size of annual deficits under $10-billion.

Wednesday's report indicates that $16-billion of the $17.8-billion shortfall can be attributed to a year-over-year increase in program spending.

Shortly after forming government, the federal Liberals jettisoned their initial spending plans by claiming that weaker-than-expected economic growth had significantly worsened the assumptions for federal revenues and spending.

In December 2016, the Finance Department released a long-term forecast showing that federal finances were on track to remain in deficit until the 2050s. The Liberal campaign promise was to eliminate the deficit in 2019.

Economic forecasts over the past year have been moving in a positive direction however, which should help Ottawa's bottom line. The report released on Wednesday looks at the last fiscal year. It does not contain forecasts for future years.

Finance Minister Bill Morneau is expected to provide a fall fiscal update that will show how the recent string of good economic news will affect federal deficit projections. The Finance Department is also expected to update its long-term fiscal projections at some point before the end of the year.

For the 2016-17 fiscal year as a whole, Wednesday's report shows that revenues decreased by $2-billion, or 0.7 per cent, from the previous year. Program expenses increased by $16.2-billion, or six per cent.

Mr. Morneau has not announced a clear target date for eliminating the federal deficit. Instead, the government has said its so-called "fiscal anchor" is to keep the size of the federal debt on a stable and declining trend when measured as a percentage of the economy.

By that measure, the federal debt grew slightly. It now stands at 31.2 per cent of GDP, up from 31 per cent in 2015-16.

"Going forward, there remain important uncertainties and risks in the global and domestic economies," the department said in the report. "For Canada, principally, there remains uncertainty around key elements of U.S. economic, fiscal and trade policy. Further, elevated levels of household debt could pose a risk in the event of a negative economic shock, while oil prices could disappoint in the near term, should supply continue to increase."

The report said the reason the final revenue numbers were $1.4-billion better than projected in the March budget was largely due to higher GST revenues linked to stronger-than-expected economic growth in the last few months of the fiscal year.

On the spending side, program expenses came in $3.7-billion lower than expected, partly due to lower-than-expected payments for infrastructure and debt.

Department of Finance Canada. REUTERS. SEPTEMBER 19, 2017. Canada posts C$17.8 billion deficit in 2016-2017

OTTAWA (Reuters) - Canada posted a budget deficit of C$17.8 billion ($14.5 billion) for the 2016-17 fiscal year, the Finance Department said on Tuesday, below the preliminary deficit of C$21.85 billion reported in May and well above the C$1.0 billion deficit the year before.

The deficit for 2016-2017 was smaller than the C$23.0 billion gap the government projected in its annual budget.

Program expenses increased from the 2015-2016 fiscal year by C$16.2 billion, or 6 percent, to C$287.2 billion, partly due to a revamped children’s benefit, while revenues decreased by C$2.0 billion, or 0.7 percent, to C$293.5 billion.

The federal debt rose to C$631.9 billion from C$616.0 billion the prior year, taking the debt-to-GDP ratio to 31.2 percent in the 2016-2017 fiscal year, which ends in March.

Prime Minister Justin Trudeau’s ruling Liberals ran a successful 2015 election campaign on a pledge to run deficits in order to boost spending and stimulate the economy.

Reporting by Andrea Hopkins; Editing by Jeffrey Benkoe

INTERNATIONAL TRADE

BANK OF CANADA. 18 September 2017. How Canada’s International Trade is Changing with the Times. Remarks. Timothy Lane - Deputy Governor. Saskatoon Regional Economic Development Authority. Saskatoon, Saskatchewan

Introduction

My theme today is international trade, which is the lifeblood of the Canadian economy. Throughout our history, we have successfully relied on our exports and imports, particularly during the vast expansion of global trade in the decades following the Second World War, to support our rising standard of living. Today, exports and imports represent about 65 per cent of our output, one of the highest ratios among the G7 countries.

Few places in Canada illustrate the importance of trade and innovation as vividly as Saskatchewan. Historically, people living on the Prairies relied on exporting grain—and, more recently, potash and oil—to markets outside Canada’s borders. They imported many of the products they consumed and the tools they used, from T-shirts to tractors. In the first several decades of Confederation, they often chafed at the trade barriers that were put in place to protect and nurture the growth of the manufacturing industries of central Canada. What is remarkable is how nimble businesses in this province have been. They have adapted and innovated not only to grow market share but also to develop new products and markets for them.

In recent years, the pattern and drivers of trade both nationally and in Saskatchewan have evolved dramatically in response to forces that have been acting at the global level. Innovations in many areas, notably information and communications technologies (ICTs) and logistics, have given rise to the development of new products and new ways of producing and trading them. A particularly important trend has been the emergence of global value chains (GVCs), with various stages of production located in different countries.

In this context, the progressive lowering of trade barriers worldwide has had outsized effects. Trade agreements have enabled much closer economic integration, and trade flows have burgeoned, leading to increases in productivity and living standards.

These trading relationships are now being called into question. Populist movements in some of our major trading partners are demanding new trade barriers. However, such protectionist measures would undoubtedly mean less trade, which would reduce economic growth. While I can’t comment on the specifics of any particular agreement, we have certainly been assessing this shift toward protectionism, how it might affect the outlook for growth in Canada and its trading partners and ultimately what it would mean for the conduct of our monetary policy.

In my presentation today, I’ll review the changing nature of international trade, the factors, such as innovation, that are propelling it and the benefits to Canada. I’ll discuss the challenges Canada faces in its international trade and how they affect our economic outlook. I’ll conclude with what this means for monetary policy.

The Great Unbundling

We used to think that the greatest benefits of trade accrued to countries with market dominance in specific industries. Think of Switzerland and watches or France and wine. Historically, Canada exported what we had in abundance—raw materials such as fur, fish and timber—and imported manufactured goods. Of course, this is still the case for much of our trade. But the biggest increase in world trade in recent decades has been intra-industry—that is, two-way trade within a given industry (Chart 1). Some of that simply reflects product differentiation: Canada exports rye whisky and imports scotch and bourbon. But, even more importantly, the expansion of intra-industry trade has been enabled by the unbundling of different stages of the production process.1

Consider the automobile industry: Canada both exports and imports auto parts at different stages of production as well as the finished product. The potential for this kind of unbundling was unleashed by technological innovations, particularly advances in ICT, which enabled the logistics needed to manage a supply chain that criss-crosses international borders. Bank of Canada research has shown that the separation of production into stages significantly increases the economic gains from trade.2

In a world of GVCs, easing trade restrictions can also have outsized, positive effects on the economy and on trade flows. This has been described as “leveraging” because every unit of the final product—say, every car—incorporates a great deal of trade in the intermediate products and any reduction in costs imposed on trade can have cascading effects. Lower trade barriers also make it less expensive for firms to allocate different stages of production to countries where they are most efficiently produced.3

What are the benefits to Canada of barrier-free, intra-industry trade within GVCs? Within any given industry, lowering trade barriers enables more efficient producers to expand to supply a wider market. That further lowers their costs as they move to a larger scale. Other, less efficient producers or plants may shrink or fail.

Canada’s experience with the 1965 Auto Pact, the 1988 Free Trade Agreement with the United States and the 1994 North American Free Trade Agreement (NAFTA) are good examples of the economic impact of lowering trade barriers.4 The North American market opened in the wake of the agreements (Chart 2). Employment in manufacturing declined in the short term, but productivity rose and, in the longer term, the number of jobs in the economy increased. Efficient plants were able to expand to a scale that allowed them to capture even greater efficiencies. The improvement in productivity supported the growth in the overall earnings of workers.5

Exports and imports are a two-way street—and both help deliver the benefits of barrier-free trade. Canadian firms can compete in foreign markets partly by making use of lower-cost imported inputs, which raises their productivity.6 And their exports of intermediate products are linked to their trading partner’s trade performance. For example, when we export machinery to the United States, it is an efficiency-enhancing input into their exports.

Benefits from opening trade may also come from increased competition.7 This is the result of both opening one’s home market to imports and gaining access to foreign markets.

Creative Destruction

More generally, innovation drives changes in trade patterns. This is economist Joseph Schumpeter’s idea of creative destruction.8 The new replaces the old. Firms inventing new products may expand their exports by penetrating new markets. They can also develop new production processes that enable them to produce at lower cost.

There are many such examples throughout the economy—in the high-tech industry as well as in many other sectors. For example, 45 years ago here in Saskatchewan, pulses such as lentils and peas were a small part of the province’s farm economy.9 In the 1970s, however, researchers at the University of Saskatchewan began searching for a protein crop to complement wheat, which was suffering from an oversupply and low prices. They saw the opportunities in lentils and developed new varieties suitable to the climate and soils of Saskatchewan. Today, the province is the world’s largest exporter of green lentils and the world’s second largest producer (Chart 3). In 2016, exports of the crop generated more than $2 billion in sales.10

Innovations in the production process can also drive export growth. Historically, this has been a major part of the history of Saskatchewan. New technologies, such as farm machinery and seed varieties, drove the consolidation of Prairie farms to take advantage of the greater ability to cultivate and harvest crops on a larger scale. Saskatchewan’s farm production and exports expanded massively, even while its population steadily declined. That freed up workers to move into job opportunities opening up elsewhere in the economy, while increasing the productivity and incomes of those who remained (Charts 4a and b). This is a story that has a personal connection for me: half of my great-grandparents were farmers in the Prairies, but none of their descendants is still farming.

I’ve been talking about how innovation drives trade, but the reverse is also true: trade openness drives innovation, too. This happens for two reasons. First, access to foreign markets exposes firms to new technologies and provides incentives for them to invest in producing more efficiently.11 And second, competition from trade encourages firms to innovate and invent new products to maintain market share. Trade is also an important channel for knowledge to spill over across borders: an operation in one country can become competitive by combining its home advantages with the best techniques developed elsewhere.12

While trade and innovation have always been interconnected, the nature of these interconnections is changing rapidly with recent advances in digital technology, touching virtually all sectors of the economy. We are only beginning to appreciate how new fields, such as artificial intelligence, cloud computing, additive manufacturing and big data, may play out in new trade patterns. Even calculating their economic impact is challenging. Returns from patented intellectual property (IP), such as software, are an increasing part of value added in electronic products, and these are hard to measure. That’s also true of trade in IP services, which is becoming increasingly important. Google Chrome and Dropbox—distributed worldwide across the Internet—are good examples. Since they do not physically cross the border, there is no customs paper trail, and they are difficult to track. They are also provided free to many users, so it’s hard to place a value on them.

This whole process of expanding two-way trade and technological advancement is playing out in myriad industries. It is one of the most important drivers of Canada’s growth potential, which, in turn, underpins rising living standards for Canadians. While these are basically positive developments, they do pose important challenges for society and for policy-makers.

Both trade expansion and innovation are by their nature disruptive for firms and individuals. They spur growth by enabling more advanced and efficient activities and encouraging producers to expand, displacing less efficient activities and producers. This is an integral part of the whole process. Improved productivity is essential to compete internationally; without increases in productivity, the business itself and all of the associated jobs can be lost.

Historically, these changes have created many more job opportunities than they have eliminated. In particular, Canada’s service sector, which has become an increasingly important source of exports, has created many new jobs paying above-average wages.13 But still, some workers have been left behind. Moreover, the rewards for innovation, particularly in the digital economy, often accrue to the few who own the related IP.

Can public policy help smooth the transition? I should make it clear that this is not part of the Bank of Canada’s monetary-policy remit, which is to keep inflation low, stable and predictable, allowing Canadians to make spending and investment decisions with confidence. But the disruptive effects of trade and innovation have been major topics of discussion internationally. These are very challenging issues that do not offer easy solutions. Clearly, we can’t turn back the clock on technological innovation; nor is the answer to try to limit its scope by closing our borders. What we can try to do is focus on supporting workers as they adapt to changing economic realities. That requires investments in retraining and lifelong learning as well as social safety nets. Another priority is to make sure that profits, including those derived from IP, can’t be shifted to avoid taxation. This includes stronger international co-operation—an area where the G20 has made meaningful progress.

Trade and Canada’s Current Economic Situation

Now let me discuss the part international trade plays in Canada’s current economic situation.

The period since the early 2000s has been challenging for Canadian exporters. The commodity supercycle not only created opportunities for resource exporters but also put upward pressure on the Canadian dollar, undermining the competitiveness of Canada’s non-commodity exports. Then, during the Great Recession of 2007–09, foreign demand for our products collapsed, and our exports plunged by about 20 per cent. They rebounded quickly but then hit a long stretch of lacklustre growth. This was part of the broader global pattern: before the crisis, global trade had been expanding by more than 7 per cent a year—about twice as fast as the world economy. Since then it has been growing at a much more modest pace, closer to the rate of GDP growth.14

Because Canada’s relatively weak export performance has been a central aspect of our economic situation, the Bank of Canada has examined it in increasing detail. New measures of external demand for Canadian exports have been constructed, which better take into account how Canadian industries are positioned in GVCs.15 Our staff have also constructed new measures of Canada’s effective exchange rate that better capture Canada’s competitiveness, not just relative to our export markets but also relative to third countries (Chart 5).16 This analysis contributes to a better diagnosis of Canada’s loss of competitiveness.

Moreover, in keeping with the new concepts in international trade that I have been describing, our researchers have been examining Canada’s exports at an increasingly disaggregated level, down to the individual firms involved. During the recession and its aftermath, many Canadian exporters went out of business. With those firms went many of their supply-chain linkages.

Another complex set of adjustments have been playing out during the past three years, with the plunge in prices of oil and other commodities. The economic and human costs to the resource-producing regions were huge. For Canada’s economy to continue growing, the non-resource sectors—manufacturing and services—needed to grow faster and export more. Increasing foreign demand and the 25 per cent decline in the value of the Canadian dollar were forces supporting this adjustment. While this expansion of non-commodity exports did take place—exports of services were especially robust—the expansion was smaller than expected based on previous experience. Regaining market share was not just a matter of getting foreign customers to switch to a Canadian product. It often depended on a reassessment of where to locate production within a GVC—decisions that are typically not made often. To support the continuing growth of our international trade, many new linkages may need to be constructed as both new and existing firms emerge with new ideas and expand their activities to a sufficient scale. This process inevitably takes time and is still not complete.

The prolonged weakness of Canadian exports has meant that Canada’s economy has needed to rely on other sources of demand to drive its growth. In particular, we have depended heavily on household spending, supported by very low interest rates.

Now, economic data show that growth in Canada is becoming more broadly based and self-sustaining. We are seeing widespread strength in business investment and exports, in conjunction with a global economic expansion that is becoming more synchronous (Chart 6). Imports are also expanding; the increases we are seeing in imports of machinery and equipment and of various intermediate products are early signals of rising business investment. It was in this context that the Bank of Canada decided, in July and again earlier this month, to raise our policy rate. We will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar.

Looking ahead, Canada’s openness to international trade is an important determinant of Canada’s economic growth potential—that is, of how fast the Canadian economy can grow without giving rise to inflationary pressures. That growth potential could be greater than we think—if businesses find new ways to engage with GVCs and develop new products and processes to make them more productive and competitive. As in the past, further expanding Canadian firms’ access to markets and to imported inputs could unlock more opportunities. An example is the Canada–European Union Comprehensive Economic and Trade Agreement, most of which will be implemented in the next few days.

But some other developments are more concerning. With the rise in protectionist sentiment in some parts of the world, we have been entering a time of heightened uncertainty about the rules of the game on international trade. The possibility of a material protectionist shift—particularly regarding the outcome of negotiations on possible changes to NAFTA—is a key source of uncertainty for Canada’s economic outlook.

Given the nature of international trade in the 21st century, the stakes are very high. As I discussed, the economic benefits we have experienced from trade liberalization were not only in expanding the markets for Canadian exports. We also benefit from the greater efficiencies that can be achieved by those exporters that do expand, the heightened competition and better access to imported inputs that come with greater openness to imports, and the resulting spur to innovation throughout the GVCs. If trading rules are changed in a way that undermines these benefits, the result would be both lost external demand for exports and lower potential growth for Canada as well as for the United States and other trading partners.

Conclusion

As an open economy, Canada’s fortunes will continue to rise or fall with trade, as they have throughout our history. Global economic forces—the sharp movement of commodity prices; the Great Recession and the lacklustre global economy in its aftermath; and, for much of the past decade, a strong Canadian dollar—battered many of our export industries and splintered their supply chains. Rebuilding them requires the emergence of brand-new industries and the development of new linkages to international trade networks. While it will take time for many of these adjustments to play out, we are now seeing encouraging signs that exports and business investment are broadening and strengthening.  

At the Bank of Canada, we have made a lot of progress in understanding the changing nature of world trade and especially why it has taken so long for our exports to recover. But as the dynamics of trade continue to evolve with technology and other forces, we will closely monitor and analyze these developments. This is essential, given the importance of trade to the economic well-being of Canadians.

I would like to thank Patrick Alexander and Karyne Charbonneau for their help in preparing this speech.

Notes

1. R. Baldwin, “Trade and Industrialization after Globalization’s Second Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters,” National Bureau of Economic Research Working Paper no. 17716, 2011. 
2. P. Alexander, “Vertical Specialization and Gains from Trade,” Bank of Canada Staff Working Paper No. 2017-17 (April 2017). 
3. K. M. Yi, “Can Vertical Specialization Explain the Growth of World Trade?” Federal Reserve Bank of New York, Staff Report no. 96, January 2000.
4. D. Trefler, “The Long and Short of the Canada–U.S. Free Trade Agreement,” American Economic Review, American Economic Association 94, no. 4 (September 2004): 870–895. 
5. Ibid.
6. P. Goldberg, A. Khandelwal, N. Pavcnik and P. Topalova, “Imported Intermediate Inputs and Domestic Product Growth: Evidence from India,” Quarterly Journal of Economics 125, no. 4 (2010): 1727–1767. 
7. A. Atkeson and A. T. Burnstein, “Innovation, Firm Dynamics, and International Trade,” Journal of Political Economy 118, no. 3 (2010): 433–484. 
8. J. Schumpeter, Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process (New York, Toronto, London: McGraw-Hill Book Company, 1939). 
9. University of Saskatchewan, “Leading the world in lentils.” 
10. Government of Saskatchewan, “Agriculture Fact Sheet. 
11. P. Bustos, “Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms,” American Economic Review 101, no. 1 (2011): 304–340. 
12. R. Piermartini and S. Rubínová, “Knowledge Spillovers Through International Supply Chains,” 
13. S. S. Poloz, “From Hewers of Wood to Hewers of Code: Canada’s Expanding Service Economy” (speech to the C.D. Howe Institute, Toronto, Ontario, November 28, 2016). 
14. S. S. Poloz, “A New Balance Point: Global Trade, Productivity and Economic Growth” (speech to the Investment Industry Association of Canada and Securities Industry and Financial Markets Association, New York, New York, April 26, 2016). 
15. A. Binette, T. Chernis and D. de Munnik, “Global Real Activity for Canadian Exports: GRACE,” Bank of Canada Staff Discussion Paper No. 2017-2 (January 2017). 
16. R. Barnett, K. Charbonneau and G. Poulin-Bellisle, “A New Measure of the Canadian Effective Exchange Rate,” Bank of Canada Staff Discussion Paper No. 2016-1 (January 2016). For details on the new measure, see Canadian Effective Exchange Rates. 

FULL DOCUMENT: http://www.bankofcanada.ca/wp-content/uploads/2017/09/remarks-180917.pdf
VIDEO: http://www.bankofcanada.ca/multimedia/saskatoon-regional-economic-development-authority-sreda-speech-webcasts-18-september-2017/

INNOVATION

Innovation, Science and Economic Development Canada. September 19, 2017. Canadians benefit from new jobs, skills and business opportunities through innovation. Government of Canada’s Innovation and Skills Plan creates the middle-class jobs of today and tomorrow

Ottawa – Canadians will benefit from new jobs, skills and business opportunities as a result of the Government of Canada’s Innovation and Skills Plan, a multi-year strategy to turn more promising ideas into market-ready innovations.

That was the message delivered by the Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development, at The ONE National Conference—a gathering of chartered professional accountants and senior financial leaders from across the country to discuss issues of importance to the profession and to the public, presented by CPA Canada and CPA Ontario.

Through the Innovation and Skills Plan, the Government is supporting the growth of Canadian companies by encouraging the public and private sectors to collaborate in bringing more early-stage research to market. Specifically, the Government is:

• investing $1.4 billion in new financing for clean technology providers;
• investing $1.2 billion in the Strategic Innovation Fund and $950 million in the Innovation Superclusters Initiative to increase business investment in research and development, which accelerates innovation and creates highly skilled jobs;
• providing Canadian companies with faster access to top talent from all around the world, under the Global Skills Strategy, to support the scale up of high-growth companies and keep the jobs they create in this country;
• investing $125 million to launch the Pan-Canadian Artificial Intelligence Strategy; and
• creating the conditions for big-data analytics to drive innovation and job creation.

By providing more direct support for business innovation, the Government plays a key role in creating entirely new industries as well as companies that have the potential to become global brands. And as these companies grow, they will create more middle-class jobs for Canadians.

Quotes

“Where innovation happens is where the middle-class jobs of today and tomorrow are created. Our government is making smart and responsible investments in innovation that will result in better jobs and opportunities for all Canadians and help equip Canadians with the in-demand skills for the jobs of today and into the future. That’s how innovation leads to a better Canada.”

– The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development

“Innovation and skills development play key roles in building a strong and resilient economy, one that values sustainability and social development. Collaborating with employers and other stakeholders, including governments, allows us to adapt and evolve our education programs and professional development offerings to ensure that the knowledge and skills of our members continually meet the needs of the marketplace. Change is rapid. As new technologies and issues emerge, our profession is playing an active role in helping organizations stay ahead of the curve and achieve long-term success.”

– Joy Thomas, President and CEO, Chartered Professional Accountants of Canada

AVIATION

BOMBARDIER. BOEING. The Globe and Mail. 19 Sep 2017. PM threatens to block Boeing from federal contracts. Prime Minister Justin Trudeau has raised the stakes in Ottawa’s dispute with Boeing Co., vowing to freeze out the U.S.-based aerospace giant from any federal contract as long as it pursues its trade dispute against Canada’s Bombardier Inc.
DANIEL LEBLANC

The Prime Minister’s threat was clearly related to a $6.4-billion deal for 18 new Super Hornet fighter jets from Boeing that is already in the works. Still, the Prime Minister’s words could eventually apply to a much bigger prize, namely Ottawa’s plans to buy 88 new fighter jets to replace Canada’s CF-18 fleet in the next decade at a cost of nearly $20-billion.
“We won’t do business with a company that is busy trying to sue us and put our aerospace workers out of business,” Mr. Trudeau said on Monday, before repeating his comments in French to maximize their impact across the country.
This was the Liberal government’s strongest rhetoric to date in the dispute that started with Boeing’s complaint to the U.S. Department of Commerce against the Bombardier C Series aircraft in April. According to Boeing, Bombardier is dumping its newly designed aircraft in the American market at “predatory” prices because of illegal federal and provincial subsidies. Ottawa has called on the U.S. government to intervene with Boeing and get it to drop its complaint. »
However, the U.S. government has indicated that there is little that can be done until a first ruling by the U.S. International Trade Commission on Sept. 25, a federal official said. Boeing quickly rejected Mr. Trudeau’s line of attack on Monday, pointing out that the company “is not suing Canada.”
“This is a commercial dispute with Bombardier, which has sold its C Series airplane in the United States at absurdly low prices, in violation of U.S. and global trade laws,” Boeing said in a statement. “We like competition. It makes us better. And Bombardier can sell its aircraft anywhere in the world. But competition and sales must respect globally accepted trade law.”
Boeing has been working in recent weeks to stop the federal government from making a link between the trade dispute and the Super Hornet contract, pointing repeatedly to the potential spinoffs of the deal in Canada. Earlier this month, 10 companies that are part of the “Boeing team in Canada” sent a letter to Mr. Trudeau urging him to approve the Super Hornet deal.
However, Mr. Trudeau said Boeing’s case against the Bombardier C Series airplane is designed to stifle the growth of an innovative rival.
“The action that Boeing has taken is very much in their narrow, economic interest to harm a potential competitor and is frankly not in keeping with the kind of openness to trade that we know benefits citizens in all countries around the world,” he said.
Mr. Trudeau made his comments on the dispute at a joint news conference with British Prime Minister Theresa May, who is also siding with Bombardier in the dispute. The Montreal-based company has large facilities in Northern Ireland, where C Series wings are manufactured and assembled.
“We have discussed today how we can work together and see a resolution of this issue,” Ms. May said. “From my point of view, I want to see a resolution that protects those jobs in Northern Ireland.”
Both Ms. May and Mr. Trudeau promised to raise the matter with the U.S. President in the near future, hoping that Donald Trump will put additional pressure on Boeing to drop its trade complaints against Bombardier.
Ms. May and Mr. Trudeau also discussed the consequences of Brexit on trade between the two countries, with both Prime Ministers vowing to ensure a smooth transition if and when Britain leaves the European Union. They both agreed that the Canada-EU trade deal, known as the Comprehensive Economic and Trade Agreement (CETA), could be used as a framework for a Canada-Britain deal.
“We want to ensure that when we leave the European Union, for businesses and people, that change is as smooth and orderly as possible. And working on CETA as becoming the first of the bilateral trade relationships between the U.K. and Canada, that means that seamless transition can take place,” Ms. May said.
Mr. Trudeau added that CETA would form the basis of a future bilateral deal, while acknowledging that some tweaks may be necessary.
“There will obviously be opportunities for us to look at particular details that could be improved upon for the specific needs and opportunities in the bilateral relationship between the U.K. and Canada. But as a strong basis for a smooth transition, CETA is perfectly designed and will be able to ensure for investors, for companies and for workers and consumers a smooth transition,” he said.

BOMBARDIER. BOEING. THE GLOBE AND MAIL. Sept. 19, 2017. Trudeau asks Canadian aerospace industry to direct pressure at Boeing
CHRIS WATTIE/REUTERS
DANIEL LEBLANC

OTTAWA - Prime Minister Justin Trudeau is calling on Canadian companies to put pressure on Boeing Co. to drop its trade complaint against Bombardier Inc., one day after vowing to continue freezing out the U.S.-based company from any federal contracts.

Earlier this month, 10 Canadian aerospace companies sent a letter to Mr. Trudeau urging him to approve a contract for 18 Boeing-built Super Hornet fighter jets.

At a news conference on Tuesday, however, Mr. Trudeau turned the tables on Canadian firms that are part of Boeing's supply chain and urged them to direct their lobbying effort down south instead.

"I encourage people who work with Boeing across the country to tell the company the extent to which its actions against the Canadian aerospace industry is not in its interest and certainly not in the interest of Canadians," Mr. Trudeau said.

Mr. Trudeau said he will continue to "push back" against Boeing's effort to hurt the ability of Bombardier to sell its C Series aircraft in the United States.

"We have been very actively engaged, both directly with Boeing and with the American administration, including governors and congressmen and women, and we will continue to stand up and defend Canadian jobs," he said.

Mr. Trudeau has been ratcheting up the rhetoric against Boeing this week, fuelling the dispute that started with the company's complaint to the U.S. Department of Commerce against the Bombardier C Series aircraft in April. According to Boeing, Bombardier is dumping its newly designed aircraft in the American market at "predatory" prices because of illegal federal and provincial subsidies.

A first ruling by the U.S. International Trade Commission is expected on Sept. 25.

With his comments on Tuesday, Mr. Trudeau was in effect asking Canadian companies to take Bombardier's side in the dispute. However, a number of Canadian companies and industry associations have deliberately remained silent throughout the five-month-long dispute.

One signatory of the Sept. 5 letter to Mr. Trudeau, CAE Inc., scrambled after it was published in The Globe and Mail to contact federal officials and reassure them they were not asking Ottawa to stop supporting Bombardier, federal sources said.

CAE went on to issue a news release to reaffirm its support for Bombardier, arguing that its letter to the Prime Minister was not related to the dispute between Boeing and Bombardier.

"CAE disapproves the fact that both issues are being linked in recent media coverage," said the company that manufactures flight simulators.

"CAE is the training partner of choice of Bombardier on many platforms, including the C Series, a great aircraft. We are not in a position to tell Canada what platform to buy, but to simply champion our Canadian capabilities on procurements," said CAE president and CEO Marc Parent.

In the letter, senior executives from companies such as Héroux-Devtek, GE Canada and L3 MAS Canada emphasized the importance of Boeing for the Canadian aerospace industry.

"Prime Minister, we ask for your co-operation as we work with Boeing to keep our collective growth and innovation story unfolding here in Canada. Our partnership is deep and enduring, but it needs your engagement," the letter said.

On Monday, however, Mr. Trudeau promised to keep up the pressure on Boeing to drop its complaint against Bombardier, using federal contracts as his main bargaining chip.

"We won't do business with a company that is busy trying to sue us and put our aerospace workers out of business," Mr. Trudeau said.

The Prime Minister's threat was clearly related to the potential $6.4-billion deal for 18 new Super Hornet fighter jets that is already in the works. Still, his words could eventually apply to a much bigger prize, namely Ottawa's plans to buy 88 new fighter jets to replace Canada's CF-18 fleet in the next decade at a cost of nearly $20-billion.

BOMBARDIER. BOEING. REUTERS. SEPTEMBER 19, 2017. Canada's Trudeau says talks on Bombardier dispute will continue

OTTAWA (Reuters) - Canada will continue talks with Washington on settling a dispute between Boeing Co (BA.N) and Bombardier Inc (BBDb.TO) regardless of whether a U.S. trade court next week backs a challenge launched by the American company, Prime Minister Justin Trudeau said on Tuesday.

Trudeau said his government would push back against Boeing, which he accused of trying to put thousands of Canadian aerospace employees out of work.

Boeing accuses Bombardier of dumping its new CSeries passenger jet in the U.S. aircraft market, a charge the Canadian firm denies.

A U.S. trade court is due to give a preliminary ruling on Boeing’s complaint on Sept. 25.

“We have been very actively engaged, both directly with Boeing and with the American administration, including governors, congressmen and women and the administration. We will continue to stand up and defend Canadian jobs,” Trudeau told a news conference in Ottawa.

He added that Canada was disappointed that Boeing walked away from negotiations ahead of the preliminary ruling, but said discussions will continue regardless of the ruling.

Trudeau said on Monday that Canada would not talk to Boeing about a proposed purchase of 18 F-18 Super Hornet fighter jets until the firm had dropped its challenge.

Canada last month tried to end the dispute by suggesting it could withdraw a threat not to buy the Super Hornets if Boeing withdrew the challenge, sources said, but Boeing rejected the idea.

Trudeau said Canada would consider its options to find an interim solution to equip Canadian forces while the dispute continued.

“We have a capability gap, we cannot fulfill our obligations toward both NORAD and NATO at this point, and we need to fix that,” he said.

Reporting and writing by Andrea Hopkins and David Ljunggren; Editing by Chizu Nomiyama and Alistair Bell

NAFTA

The Globe and Mail. 19 Sep 2017. Striking GM workers face threat of production shift to Mexico. GM: Ontario’s Cami plant has already lost 600 jobs. Auto maker had already moved some Chevrolet Equinox output south ahead of walk off at Cami facility. The number 46,100 is relatively small when it comes to vehicle production in North America, but it’s significant when it comes to the strike at the General Motors Co. plant in Ingersoll, Ont., that began late Sunday night.
GREG KEENAN, AUTO INDUSTRY REPORTER

That number is how many Chevrolet Equinox crossovers have been produced at two plants in Mexico since GM began making the vehicle in that country earlier this year to supplement the main source of the Equinox, which has been the Cami plant in Ingersoll for more than a decade.
But it’s also a sign of how GM has changed the balance of power versus Unifor, which represents the 2,800 workers now on strike. If Cami was the only plant making the Equinox – as it has been for much of the vehicle’s history – GM would have been reluctant to let production of one of its hottest-selling vehicles cease, even temporarily.
Equinox sales soared 85 per cent last month and inventories dropped to 53 days supply, compared with 74 in July, according to data compiled by consulting firm AutoForecast Solutions LLC.
The fact that GM would permit a plant making its key entrant in one of the fastest-growing segments of the market to be shut down, coupled with the shift in production of the GMC Terrain to Mexico from Cami earlier this summer, puts Unifor on notice that the auto maker has other options and it is prepared to use them.
“This is GM sending a signal and I think showing that they have a little more leverage, at least in the near term,” said industry analyst Jeff Schuster, senior vice-president of consulting firm LMC Automotive.
Unifor president Jerry Dias doesn’t disagree with that analysis, but points out that the strike underlines that Canada has lost and Mexico has won when it comes to the North American free-trade agreement and the auto industry.
“This plant is the poster child for what is wrong with NAFTA,” Mr. Dias said on Monday. NAFTA allows duty-free shipment of vehicles within Canada, the United States and Mexico if 62.5 per cent of the content is from North America.
That provision of NAFTA has helped turn Mexico into a global auto-making powerhouse that has attracted billions of dollars of new investment by auto makers in recent years.
Mr. Dias noted that Cami is one of the most productive plants in the GM network in North America and, despite that, has already lost 600 jobs because of the shift of the Terrain out of Cami. The plant has been operating well above capacity with three shifts of Unifor members working six days a week for eight years.
Vehicle production hit a record 351,722 at the plant last year, almost eight times the number cranked out by the two Mexican plants this year, DesRosiers Automotive Consulting Inc. data show.
“The loss of 600 people in the most productive plant in the world tells you that under the current NAFTA arrangement, nobody is secure,” he said.
The shift in Terrain production led the union to make job security its key demand in talks that broke off Sunday night.
The union asked GM to designate Cami as the lead plant for Equinox production, which would put the Ingersoll operation first in line for any new investment when it comes to redesigning the vehicle in the middle of the 2020s. The Equinox was redesigned for the 2017 model year and GM invested about $500-million at Cami.
Mike van Boekel, who is Cami plant chairman of Unifor local 88, said GM negotiators wouldn’t touch the issue of job security.
“They say they have two plants in Mexico [where workers make] $3 an hour and if they want to move the product, they’ll move it,” Mr. van Boekel quoted them as saying during the weekend talks. Workers at Cami are paid about $32 an hour.
In Canada and the United States, the cost of direct labour involved in the assembly of a vehicle represents about 7 per cent of the total cost of production.
No formal negotiations were scheduled in the dispute late Monday, but union officials said they were having informal discussions with the auto maker, which issued a statement late Sunday urging union negotiators to return to the bargaining table.

The Globe and Mail. 19 Sep 2017. Loonie drops sharply as BoC eyes impact of currency. BoC: ‘Material protectionist shift’ in NAFTA talks a source of uncertainty
BARRIE MCKENNA

A subtle warning from the Bank of Canada that it’s tracking the surging Canadian dollar has taken some lift out of the currency.
The dollar fell nearly a full cent Monday to 81.3 cents (U.S.) after deputy Governor Timothy Lane told an audience in Saskatoon that the central bank is paying “close attention” to how the economy is responding to higher interest rates and the “stronger” currency.
Mr. Lane’s comments suggest the bank will be patient about raising its benchmark interest rate to a more normal level, analysts said.
This is the Bank of Canada “signalling a more gradual pace of rate hikes,” TD economist Brian DePratto explained. “It puts it more into focus that the dollar still matters for them.”
The Bank of Canada has hiked its key overnight rate twice in the past two months. The rate, which generally sets the pattern for mortgages and lines of credit, now stands at 1 per cent, up from 0.5 per cent in early July.
Responding to questions after his speech, Mr. Lane said bank officials are monitoring the impact of the higher dollar on exports and two interest-rate hikes on stretched Canadian borrowers.
“That’s what data dependent looks like,” he said. “We’re trying to understand how the economy is evolving, and therefore what degree of monetary policy is still appropriate.”
It’s all part of a delicate balancing act by the central bank as it attempts to get its benchmark interest rate back up to more normal levels after nearly a decade of ultralow rates.
The two recent rate hikes followed a surprising spurt of growth for the Canadian economy early this year. GDP surged ahead at 3.7 per cent in the first quarter and 4.5 per cent in the second quarter.
So far, the data suggests growth is becoming “more broadly based and self-sustaining,” Mr. Lane said, echoing recent statements by the bank. He noted in particular that exports and business investment is picking up.
Mr. Lane’s speech focused on the dangers for the Canadian economy of the ongoing talks to renegotiate the North American free-trade agreement.
Anything that impedes the ability of Canadian companies to import and export freely could force the bank to raise interest rates sooner than planned in the future, Mr. Lane warned.
“The stakes are very high,” Mr. Lane said.
The possibility of a “material protectionist shift” in the NAFTA talks is a “key source” of uncertainty for Canada’s economy, Mr. Lane said.
Renegotiation of NAFTA could undermine Canada’s growth potential, making the economy more susceptible to rising inflation, he explained.
“We will be watching these developments, and their implications for Canadian exports and business investment, very closely,” Mr. Lane said.
The United States has been pushing hard to improve its own trade position in the negotiations by demanding more domestic content in products and ending the ability of NAFTA members to challenge protectionist trade measures before independent dispute settlement panels.
A third round of NAFTA talks is slated to take place later this week in Ottawa.
Mr. Lane said Canada is particularly sensitive to trade because exports and imports make up roughly 65 per cent of GDP – one of the highest concentrations among Group of Seven countries.
Canadian companies have also become highly dependent on global supply chains to stay competitive.

The Globe and Mail. 19 Sep 2017. If Ottawa values fairness, it should look at the Public Service Pension Plan. NAFTA talks: three scenarios and three bad outcomes

Senior fellow of the C.D. Howe Institute in Toronto and former Canadian diplomat who practises international trade law
With NAFTA Round 3 starting this weekend in Ottawa, good news is hard to come by.
Optimism is being dimmed by a lack of common purpose among the three countries, as Canada and Mexico try to deal with U.S. President Donald Trump’s aggressive “America first” agenda, aimed at hammering the two smaller partners into submission.
Unlike previous trade talks under Bill Clinton, George H.W. Bush and Ronald Reagan, and even going back to the 1910 U.S.-Canada reciprocity negotiations, there are few shared objectives with the Americans on critical issues this time around.
If there’s anything positive to report, it’s that three negotiating teams are diligently trying to find some areas of consensus in this brooding atmosphere, faced with the unrealistically short timeframe imposed by political circumstance. A deal must be done by early 2018 to avoid being caught up in the Mexican presidential election and the U.S. midterm elections later in the year. This weekend’s negotiations will increase the pressure.
Overlaying all of this are Mr. Trump’s threats to withdraw from the North American free-trade agreement if he doesn’t get his way. Recognizing the situation is still pretty fluid, here are three possible scenarios based on what we’ve seen so far. None is particularly encouraging. Scenario 1
The negotiations succeed with a NAFTA 2.0 deal by year-end or early in 2018. For Canada and Mexico, getting it approved is relatively straightforward. In the United States, under fast-track authority, it’s just the first step in a long and complicated journey: First, Mr. Trump has to give Congress 90 days advance notice before he can even sign the amended NAFTA. Congress can, and will, express its own views on the deal during this notification period.
After signing it, Mr. Trump has to submit the text plus draft implementing legislation to Congress. But that won’t happen until the International Trade Commission completes an independent assessment, which can take a maximum of 105 days.
All told, it could take at least 225 days before the draft bill is even sent to Congress, whereupon the Senate and House of Representatives each have 90 “sessional” days to consider it and either approve or reject the package. Sessional days mean when each house is sitting, not calendar days. There is no definitive requirement as to when the 90day period is to begin.
With this timeline, a vote can’t realistically happen before Congress adjourns for midterm elections. Even if it did, Congressional action would coincide with the Mexican election in July, 2018. It is hard to see NAFTA not being a political hot potato in both countries.
During this time, any signed deal will be hostage to shifting political tides in Washington, notwithstanding the fast-track process. For example, Congress could decide to approve the bill, but with conditions that require even more concessions from Canada and Mexico. And that’s under the most optimistic scenario. There are two others to consider. Scenario 2
The negotiations collapse and Mr. Trump notifies Canada and Mexico that the United States intends to withdraw from NAFTA. Mr. Trump’s repeated threats make this scenario entirely plausible.
Pulling the NAFTA plug would raise a huge outcry in the United States and kick-start a bitter constitutional wrangle with Congress over who has pre-eminence over international trade. There is no clear view on whether the President can withdraw from trade agreements without congressional approval. The better view is he can’t.
Even if Mr. Trump could revoke NAFTA duty preferences for Canada and Mexico by presidential decree, legislation will be needed to change a slew of U.S. laws in areas beyond tariff rates. The question is whether a Republicancontrolled Congress would follow through with such an agenda.
There will be long and bitter court battles under this scenario, taking months if not years to resolve. In the meantime, markets will be unsettled with so much uncertainty overhanging Canada-U.S. business relations. Scenario 3
The negotiations collapse and further talks are suspended. While Mr. Trump blusters and points fingers, he doesn’t pull the withdrawal trigger. Negotiations go into deep freeze. Mr. Trump seeks revenge through Twitter. Even with the bitter political animus that results, bilateral trade under the NAFTA umbrella goes on.
The downside is that under this scenario, the White House could use its considerable arsenal to intensify pressure on Canada and Mexico through things such as Mr. Trump’s tweets and a variety of trade restrictions in the hope of restarting talks on U.S. turf. Quotas on Canadian steel under a national-security guise could be applied. The Bombardier-Boeing dispute would go ahead. Any deal on softwood lumber would be at risk. We’ll have a better sense of which of these scenarios is more likely after this next round and the round in Washington after that. The ground could shift and things could improve. At this point, however, the news is anything but encouraging.

REUTERS. SEPTEMBER 18, 2017. Mexico sees 'elephants in the room' in NAFTA talks: minister
Reuters Staff

MEXICO CITY (Reuters) - Mexico’s economy minister said on Monday a successful retool of the North American Free Trade Agreement (NAFTA) would hinge on two or three complex areas that he called “elephants in the room,” just days before the next round of treaty talks in Canada.

Speaking at an event in Mexico City, Ildefonso Guajardo said four chapters in the agreement could be renegotiated in the third round of talks, due to take place Sept. 23-27 in Ottawa. The areas cover smaller companies, transparency and food safety.

The “elephants,” such as the U.S. trade deficit with Mexico and rules of origin, will determine the success of the trade treaty’s renegotiation, he said. Rules of origin specify the percentage of components in a product that must be from the three NAFTA nations for it to qualify as duty free.

“This challenge of resolving two or three un-traditional topics at the trade negotiation tables is what is going to determine if, at the end of the day, we’re going to have an agreement or not,” Guajardo said in a Forbes Mexico talk.

In addition, Guajardo added that as many as 13 other chapters would also be tough to negotiate.

Asked by journalists if Mexico would accept national content rules that would require a portion of products to be made in the United States, the minister said the topic had yet to reach the negotiating table.

“We would analyze it, but I believe as of today there is no trade agreement that contains this type of clause,” he said.

Guajardo reiterated that Mexico was ready to modernize the agreement, which U.S. President Donald Trump has threatened to scrap, and to find solutions with the United States and Canada.

Reporting by Sharay Angulo and Ana Isabel Martinez; Writing by Daina Beth Solomon; Editing by Richard Chang

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