CANADA ECONOMICS

BOMBARDIER

The Globe and Mail. 24 Oct 2017. Boeing abandoned C Series talks weeks before U.S. duties imposed. Bombardier then struck deal with Airbus, allowing partners to sell airliners assembled in Alabama
ADRIAN MORROW, WASHINGTON
NICOLAS VAN PRAET, MONTREAL

Bombardier Inc. and Boeing Co. were closing in on a deal this summer brokered by Canadian government officials before the American plane maker abruptly pulled the plug and walked away, people familiar with the matter say.
The negotiations were designed to prevent an aerospace trade battle between Canada and the United States and could have seen Boeing take an ownership stake in Bombardier’s C Series aircraft. Instead, after the talks broke off, the United States imposed huge import duties on the planes and Bombardier struck a trans-Atlantic agreement with Europe’s Airbus SE in a deal that will change the face of the global aerospace industry and leaves Boeing poised to seek retribution.
After weeks of high-level talks that the Canadians felt were going well, Boeing International president Marc Allen phoned Canada’s Ambassador to the United States, David MacNaughton, one Saturday morning in August to say Boeing was breaking off discussions, said the people, who spoke on condition they not be identified.
While the negotiations between Boeing and Bombardier have been previously reported, new details show the extent to which talks progressed and what may have caused them to ultimately break down. However, the exact reasons for Boeing’s sudden about-face remain unclear. The extent to which Ottawa and Quebec worked with Bombardier to find a solution for the C Series highlights the depth of anxiety government had about the high-tech aircraft.
The talks, which began in earnest in June, came in the wake of a trade complaint in April by Boeing against Bombardier alleging the Quebec company used unfair government subsidies to develop and sell the C Series at “absurdly low” prices in the United States and demanding duties be imposed on C Series imports. Just a few weeks after negotiations broke off in late August, the U.S. Department of Commerce sided with Boeing and slapped duties of 300 per cent on C Series imports into the United States, effectively killing its sales potential in the world’s biggest market if the decision were upheld.
In abandoning the talks, Boeing told the Canadians the market prospects for the smallest singleaisle airliners such as the C Series were not as strong as advertised, according to one source. But privately, Boeing appears to have concluded that there was a good chance the U.S. Department of Commerce would punish the C Series, leading to the plane’s eventual death over time as it was enveloped by uncertainty and starved for sales, another source said.
“I think Boeing felt comfortable enough that the kangaroo court of the Commerce Department would support them,” said Jerry Dias, president of Unifor, which represents Bombardier workers among its 315,000 members. A Canadian government official said: “[Boeing] thought they would have more leverage once the DOC had come down with its preliminary ruling.”
That’s not how the story played out.
When the Boeing talks fell apart, Bombardier picked up previously abandoned negotiations with Airbus and announced a deal on Oct. 16 that will see the European plane maker take control of the C Series program.
Together, the two partners say they will be able to sell thousands of C Series airliners in the years ahead, in part from opening an additional C Series production site. Adding a new line to Airbus’s existing assembly plant in Mobile, Ala., also resolves the duties issue by making it a domestic product, they say.
“The new deal destroys Boeing’s trade case,” said Richard Aboulafia of aerospace consultancy Teal Group. “Boeing has pandered to the protectionist wing of the Republic party. The epicentre of that wing is in Alabama, which loves factory jobs, even from foreign companies.”
Sources say that during the negotiations between Bombardier, Boeing and the Canadian government, there were two options on the table.
The first was a joint partnership in which Boeing would take an ownership stake in the C Series. The second would see the two companies agree on a set of trade rules – including acceptable government backing – and co-operate to try to keep other rivals out of the North American market, particularly emerging competitors from Russia and China.
Bombardier and Boeing took the lead in talks but the Canadian government played a significant role trying to facilitate an agreement, sources said. Mr. MacNaughton and his staff at the Canadian embassy were involved, as were officials from Canada’s foreign and international trade ministries. Boeing’s top executives, including Mr. Allen and chairman and chief executive Dennis Muilenburg, also took part. Wilbur Ross, the U.S. Commerce Secretary, was informed of the discussions and did not openly object to them but the U.S. government was not at the table.
Things seemed to be going well, said one person with knowledge of the talks. Boeing told the Canadians they were interested in a deal and Canada’s proposals were constructive.
But everything came to a sudden end when Mr. Allen told Mr. MacNaughton he’d have an answer on Canada’s latest proposal by the end of one week in August. He e-mailed Mr. MacNaughton on Friday requesting a meeting on Saturday, according to sources. The ambassador was not available in person so the two connected by phone. Mr. Allen told the ambassador that Boeing would not be presenting a counter-offer and broke off negotiations.
Bombardier declined to comment. Boeing did not respond to a request for comment.
There are several potential reasons why Boeing walked away from negotiations, according to JP Morgan analyst Seth Seifman. Among them is the fact that taking over the C Series is not consistent with Boeing’s longer-term strategy, he said. Mr. Seifman said he believes Boeing plans to develop a new middle-market plane for 2025 that establishes a production system that will feed a new small aircraft for five years later to replace the 737.
“In this light, the C Series might have seemed like a distraction” in exchange for a marginal return, Mr. Seifman said. He estimates the C Series could have generated $300million (U.S.) of earnings before interest and taxes (EBIT) for the American plane maker by the time it increases in 2020, a 3-per-cent contribution to Boeing’s expected $10-billion commercial aircraft EBIT that year.

NAFTA

REUTERS. OCTOBER 24, 2017. Auto industry tells Trump 'We're winning with NAFTA'
David Shepardson

WASHINGTON (Reuters) - Major automakers, suppliers and auto dealers are launching a new coalition on Tuesday to urge U.S. President Donald Trump not to withdraw from the North American Free Trade Agreement.

Auto trade associations representing General Motors Co (GM.N) Toyota Motor Corp (7203.T), Volkswagen AG (VOWG_p.DE), Hyundai Motor Co (005380.KS), Ford Motor Co (F.N) and nearly every other major automaker, are part of the coalition dubbed “Driving American Jobs” and backing an advertising campaign to convince the White House and voters that the agreement has been crucial in boosting U.S. automotive sector production and jobs.

Trump has threatened to withdraw from the trade deal with U.S., Canada and Mexico, which is heavily utilized by automakers who have production and supply chains spread across the three countries.

In the most recent round of talks to renegotiate NAFTA last week, Trump proposed changes to the rules of origin for autos, which are used to determine how much of an auto is made in a certain place. The proposed rules were viewed as untenable for automakers, as well as Mexico and Canada.

The auto industry joins the U.S. Chamber of Commerce and other large business groups that have become more vocal in recent weeks about Trump’s efforts to change the 23-year-old accord, saying they would be detrimental to American jobs.

The auto coalition, which includes the Motor & Equipment Manufacturers Association and American International Automobile Dealers Association, said ending NAFTA, which underpins $1.2 trillion in annual trade between the three countries, would put U.S. auto sector jobs at risk.

They pointed to $9.5 billion in new investments announced this year by the auto and auto parts sector and feature the personal stories of auto sector employees throughout America - from plant workers to auto dealership personnel.

“We need you to tell your elected officials that you don’t change the game in the middle of a comeback. We’re winning with NAFTA,” the group said on its website.

The campaign comes amid rising concern that the Trump administration could opt early next year to withdraw after giving six months notice, a move that could expose automakers to high tariffs who are building trucks in Mexico and impose new tariffs on parts and cars made throughout North America.

President Donald Trump told the Fox Business Network in an interview that aired Sunday he thinks the deal will “probably” be renegotiated, but said he will withdraw if it is not fair. “We can’t allow the world to look at us as a whipping post. Not going to happen anymore,” Trump said.

The Chamber of Commerce accused the Trump administration of trying to sabotage the talks with “poison pill proposals,” including demands for more favorable treatment for the U.S. side on car production, and a “sunset clause” to force regular negotiations.

U.S. Trade Representative Robert Lighthizer said earlier this month the Trump administration was focused on trying to get an agreement that was fair but said he had “seen no indication that our partners are willing to make any changes that will result in a rebalancing and a reduction in these huge trade deficits.”

Under NAFTA, at least 62.5 percent of the material in a car or light truck made in the region must be from North America to be able to enter the marketplace tariff-free.

The Trump administration has proposed raising the amount of NAFTA content in autos to 85 percent and securing 50 percent of the total for the United States.

Reporting by David Shepardson

BLOOMBERG. 24 October 2017. Auto Industry Campaign Aims to Steer Trump Away From Quitting Nafta
By Ryan Beene

• Carmakers, suppliers, dealers form coalition to lobby for pact
• Group to run digital ads in states with large auto presence

Five groups representing automakers in the U.S. and around the world, along with suppliers and car dealers, have joined forces in a campaign to try to convince President Donald Trump that the North America Free Trade Agreement is worth saving.

With the Trump administration pushing to overhaul the pact that unites the U.S. with Canada and Mexico, the new coalition, Driving American Jobs, plans to campaign to keep Nafta’s auto provisions intact. The advertising campaign, estimated to cost more than $500,000, will run for four weeks, just as renegotiation of the trade agreement’s auto provisions heats up.

“Pulling out of Nafta would lead to a decrease in vehicle production, a decline in jobs and an increase in what our customers spend when buying a new vehicle," Jennifer Thomas, vice president of federal affairs at the Alliance of Automobile Manufacturers, said in a statement. "This would also have an impact on our abilities to export vehicles to foreign markets."

U.S. negotiators last week proposed requiring vehicles assembled in North America to get 85 percent of their parts from factories in the region, up from 62.5 percent today. At least 50 percent would have to come from the U.S. to qualify for duty-free status, under the U.S. proposal. The changes could reshape industry supply chains or push companies to pay tariffs instead of boosting regional parts sourcing.

The website for the coalition includes a form letter that supporters can send to the White House. It warns that U.S. proposals to change Nafta "could have the same impact on the U.S. auto industry as a complete withdrawal, which would be disastrous for the industry, its workers and the U.S. economy."

It’s also the first time that auto industry trade groups representing automakers from the U.S., Europe, Japan and South Korea have all joined together to advocate on a single issue, according a spokesman for the coalition.

BLOOMBERG. 24 October 2017. Even a Nafta Collapse Won’t Keep Companies From Moving to Mexico
By Thomas Black

• A host of companies are sticking to plans to relocate
• Higher tariffs wouldn’t be enough to offset cheap labor

It wasn’t supposed to be like this, but the folks who help U.S. companies set up production in Mexico say they’re having a solid year.

Tecma Group has more business than ever in its three decades doing relocation. In just the last few weeks, it aided a maker of cleaning equipment and a packaging company make the move south. Chicago-based Mexico Consulting Associates has three new prospects interested in Mexico. Keith Patridge, who runs McAllen Economic Development Corp., expects at least 12 companies to set up shop in Reynosa alone this year. And another firm, Tacna Services Inc., has assisted two businesses locate in the Baja California area.

President Donald Trump’s vow to scrap or revamp the North American Free Trade Agreement was expected to put a scare into companies considering these kinds of moves. But many are sticking to plans to set up shop in Mexico even if the pact isn’t renewed, according to the experts who help firms relocate and find new plants.

Lots of factors go into the decisions but these companies have made a simple calculation: Cheap labor in Mexico -- as much as a $20,000 saving per worker compared with the U.S. -- is enough to offset the higher costs of any tariff imposed by Nafta’s demise. That math shows how Trump’s America First effort to revive manufacturing faces hurdles.

“If they just wiped out Nafta and went back to normal trade tariffs, I think that’s manageable,” said Ross Baldwin, chief executive officer of Tacna. “Life would continue on because the labor rate is so dramatically different.”

Drastic Consequences

The latest rounds of talks over the 23-year-old trade treaty ended last week, with Mexico and Canada rejecting hard-line U.S. proposals. Negotiations will resume in November but the ministers agreed to put off any resolution until next year.

To be sure, some economists predict a less rosy outcome than do the relocation firms, who have reason to put a gloss on their business. Economists point to studies warning of drastic consequences if the accord is ended -- a loss of more than 250,000 jobs in the U.S. and almost 1 million in Mexico, which has been deeply transformed by Nafta. Trade with the U.S. exploded to $524 billion last year from $82 billion in 1993, the year before the pact took effect.

After his election, Trump used the bully pulpit to shame executives who intended to move manufacturing to Mexico. The campaign worked for a few months as some companies froze their Mexico plans. But the flow of jobs south resumed earlier this year as they weighed the cost advantages.

Under Nafta, the three countries pay nothing on almost all goods that cross their borders. But if Trump decides to kill the agreement, trade would be subject to tariff limits set by the World Trade Organization. On average they are less than 3.5 percent for Mexico and about 7 percent for the U.S., said Benito Berber, a senior economist for Latin America at Nomura Holdings Inc.

Wage Gap

Many companies may just swallow those costs because of the wage gap. A starting salary for a Tijuana factory worker, including benefits, is the equivalent of about $2.50 an hour, according to Baldwin. The average hourly wage for U.S. assemblers is $14.93 and the lowest paid 10 percent of the group earns $9.24 an hour, Bureau of Labor Statistics data show.

Plus, Mexico’s labor costs have barely changed over the last couple decades, while China’s -- a rival to woo manufacturing jobs -- have steadily risen.

Intermex Industrial Parks, which provides real estate and services for factories, boasts on its website that U.S. corporations can save $20,000 annually per worker, and touts Mexico as “among the best in labor stability.”

Kongsberg Automotive, an auto-parts maker, is taking advantage of the differential. Early next year, it’s closing a factory in Easley, South Carolina, that makes hose and tubes and moving production to Mexico, the Norwegian company said in August. The factory employs 97 workers.

“There is a strong need to become more efficient and reduce costs, which can only be achieved by relocating the Easley manufacturing operations,” Kongsberg said.

Medical Devices

Halyard Health Inc. is closing a plant in Buffalo Grove, Illinois, that makes medical devices and is moving part of the operations to Mexico, according to federal filings. Layoffs of the 85 workers there began at the end of September. Halyard has factories in at least four Mexican cities, according to a company filing. A spokesman didn’t respond to a request for comment.

All this has even the relocation experts admitting to some surprise over the strength of their business.

“Actually, demand has probably grown slightly and the conditions right now in Mexico are actually pretty good,” said Gene Reilly, chief of the Americas for Prologis, a developer of industrial real estate with operations in Mexico.

ECONOMY

BLOOMBERG. 24 October 2017. Trudeau and Poloz Are On an Economic Collision Course
By Theophilos Argitis

• Should stimulus removal begin on the monetary or fiscal side?
• Fiscal update due Tuesday; Bank of Canada decision Wednesday

Canadians only get six major economic “report cards” from federal policy makers every year -- four quarterly monetary policy reports from the Bank of Canada, a federal budget typically early in the new year and a fiscal update some time in fall.

So, it’s rare when these releases juxtapose as they will this week with Finance Minister Bill Morneau’s update Tuesday, and Bank of Canada Governor Stephen Poloz’s MPR Wednesday. It’s fitting too, given fiscal and monetary policy in Canada are potentially on a collision course.

The two reports will essentially tell the same story about the economy -- that it’s on the strongest footing in years. Policy makers will get the opportunity to crow: both fiscal and monetary policy have clearly played key roles in the economy’s recent success. The federal government is expected to spend some of the additional revenue on programs, including its marquee Canada Child Benefit.

Yet the economic strength also poses new challenges. For one, it makes the case for deficits less compelling, since the spending threatens to crowd out other parts of the economy. In fact, any additional federal stimulus could trigger further interest rate increases.

“With the economy near full capacity, any fiscal stimulus is likely to be inflationary -- prompting an offsetting response from the Bank of Canada,” Josh Nye, an economist at Royal Bank of Canada, wrote in a preview of the update. “We think the government’s improved fiscal position would be put to better use by returning to a balanced budget.”

Government Assistance

Over the past year, Canada’s economy has been running at a pace rarely seen in the past couple of decades, rapidly eliminating spare capacity and prompting the central bank to raise interest rates twice since July. Economists are projecting 3.1 percent growth in 2017, easily the best in the Group of Seven.

A synchronized global recovery and rising trade volumes are backstopping the growth. The bottoming of the oil shock in western Canada is also helping, along with rising industrial production in developed economies and soaring home prices in Toronto and Vancouver. Government policy has also helped. Federal deficit spending, particularly the enhanced child benefit system, has undeniably been fueling consumption.

The bottom line, documents Tuesday will probably show, could be C$50 billion ($40 billion) less in cumulative deficits over the next five years, absent any new spending measures from Prime Minister Justin Trudeau’s Liberals. Essentially, the economy is telling policy makers it doesn’t need as much stimulus as it did only six months ago.

Who First?

That poses a problem for an administration that has put government at the forefront of its economic agenda. The Bank of Canada meanwhile is going through a similar exercise, and taking advantage of growth to bring interest rates back to something approaching normal. Investors are betting another rate increase is in the cards by January, though not this week, after two hikes since July.

The dilemma becomes what stimulus should be removed first -- monetary or fiscal?

A case can be made for bigger government combined with more higher borrowing costs. There’s an economic case for redistributing income more fairly and financing productivity-enhancing infrastructure, if the government could figure out how to get money out the door for those projects.

Tuesday’s update will contain new measures including the expansion of child benefits, according to a report by the Canadian Broadcasting Corp. Last week Trudeau unveiled a cut to the small-business tax rate that will lower revenue by about C$2.9 billion over five years, beginning in 2017-18.

More ‘Firepower’

Larger government deficits, coupled with less private debt and tighter monetary policy could even be seen as a stabilizing force for an economy with record household leverage. Trudeau’s Liberals have already taken the political lumps for deficits. They might as well enjoy the spoils.

“To the extent that fiscal policy undertakes actions that provide a little bit more firepower to the economy, it gives the bank greater flexibility in terms of raising interest rates and trying to impact household spending and borrowing behavior,” Jean-Francois Perrault, chief economist at Bank of Nova Scotia and a former finance department official, said by phone from Toronto.

But such a scenario -- even if it was desirable or politically feasible -- isn’t in the cards partly because it requires a level of coordination between the government and the central bank that currently doesn’t exist.

Instead, expect a heavy dose of caution, centered on looming risks. These could range from the collapse of Nafta to the slowdown of Toronto and Vancouver housing markets or even another U.S. recession.

For Morneau and the governing Liberals, heightened uncertainty can be used to argue against rushing to balance or taking up fiscal leeway.

The Bank of Canada is likely to use some of the same arguments for remaining circumspect on rates.

BLOOMBERG. 24 October 2017. Trudeau Can Bank or Spend Economic Dividend in Fiscal Update
By Josh Wingrove

• Finance minister to unveil midyear budget scorecard Tuesday
• ‘What a difference half a year can make,’ TD economist says

The Canadian government will unveil a budget update widely expected to show shrinking short-term deficits, as Finance Minister Bill Morneau looks to turn the page on questions about his own finances.

Morneau will deliver his Fall Economic Statement at about 4 p.m. Tuesday in Ottawa. The midyear update to the March budget will reflect the improving picture for government finances, driven by surprisingly strong growth. Over the past four quarters, the economy expanded by an average 3.7 percent, the best performance in almost a decade.

That will have an impact on the government’s bottom line. The budget forecast a shortfall of C$28.5 billion ($22.6 billion) for 2017-18. CIBC World Markets Deputy Chief Economist Benjamin Tal expects it instead to come in between C$15 billion and C$16 billion, including the so-called budgeted risk adjustment.

“That’s dramatically better than expected, mostly due to the fact the economy was way stronger,” Tal said in a telephone interview.

Annual deficits over the coming few years will hover in the same general range, with the forecast ratio of the federal debt relative to the nation’s economy also set to improve, Tal said. “The highlight will be a much lower deficit.”

Child-Benefit Boost

But Prime Minister Justin Trudeau already looks set to spend.

The government will expand the Canada Child Benefit, a system of transfer payments aimed in particular at low-income parents, according to a report by the Canadian Broadcasting Corp., citing unnamed sources. Bank of Canada Governor Stephen Poloz has said the program has had a “pretty significant” impact since its introduction in the government’s debut budget in 2016. Trudeau has also already announced a cut to the small-business tax rate that will lower revenue by C$2.9 billion over five fiscal years, beginning in 2017-18.

Brian DePratto, senior economist at Toronto-Dominion Bank, nevertheless expects a deficit of about C$16 billion for the fiscal year, also including the risk adjustment. “The fall fiscal update or Budget 2018 will provide an opportunity for the government to credibly re-commit to a fiscal anchor, such as a reduction of the debt-to-GDP ratio over a five year horizon,” DePratto wrote in an Oct. 11 research note.

The growth outlook has improved substantially since the annual budget released in March. “What a difference half a year can make,” he said.

Tax Backlash

In the midst of the better budget news, Trudeau’s government is facing a backlash over tax reform. The measures, introduced in July, were aimed at restricting the ability of high earners in particular to skirt the top marginal income tax rate by using corporations, converting income to capital gains or paying relatives who didn’t actually work for them. The government is backtracking on some of the proposals.

Trudeau was the only Canadian party leader to pledge deficits in the 2015 election campaign, though said they would not exceed C$10 billion annually and that he’d balance the budget by the 2019 election. His latest projections instead forecast deficits of at least C$23 billion in each of his first four full years in power, with no projected return to surplus.

In addition, Morneau has been at the center of a controversy over his personal finances. He announced on Oct. 19 that he would put his family’s assets in a blind trust and sell about one million shares in Morneau Shepell Inc., the human resources and benefits firm his family founded and that he once led.

The minister has faced allegations of conflict of interest because he owned the shares. He’s also under pressure to withdraw a proposed law that opens the door to a type of pension plan he advocated for while still at Morneau Shepell. The finance minister produced a letter last week to demonstrate he followed the advice of the country’s ethics watchdog on how to handle his assets, and said he moved to sell the shares to avoid what he called further “distraction.”

Challenges Ahead

The budget update gives Morneau a chance to shift focus away from the tax flap and questions over his ethics. Though challenges also loom for the country’s fiscal outlook.

Borrowing costs are rising, albeit slowly, and health transfers to provinces and direct transfers to the elderly are expected to be higher by 2021-22 than forecast just six months ago, DePratto said, leaving scant wiggle room for new spending.

“Although we expect a much better near-term fiscal outlook, the likely path for revenue and expenditures results in a fairly persistent deficit, rather than the steady, if modest, improvement envisioned in Budget 2017,” he wrote.

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LGCJ.: