CANADA ECONOMICS

NAFTA

EDC. FEBRUARY 1, 2018. A Mexico Moment
By Peter G Hall, Vice President and Chief Economist

‘Challenging’ is not a strong enough word to describe my last two annual visits to Mexico. Oh, I always look forward to catching up on the latest Mexican-Canadian business forays, discussing the local economy with analysts and officials, the warm hospitality, not to mention the warm weather (right now, Canada is in a deep freeze!). But lately, January hasn’t been this country’s best month. Last year, it was Week 1 of the new US Administration, complete with the announcement (and immediate withdrawal) of a border adjustment tax. This year, NAFTA hangs in the balance, and a general election is imminent. Is this just a repeat of last year’s fiasco, or is this a more serious Mexico moment?

NAFTA rounds continue to threaten freer trade in Mexico

The current US Administration’s about-face on trade policy is nothing if not dramatic. When NAFTA was agreed, the border became more fluid, the Maquiladoras were set up, and so on. It was an intentional policy that recognized that higher trade and investment deficits – for a season – were a worthy price for the US to pay to lower illegal immigration, illicit business activity and corruption. Freer trade and cross-border investment has given hope to a new generation of Mexicans who no longer have to flee to succeed. Current US policy threatens to undo that, with potentially serious consequences.

So far, the political bluster hasn’t blitzed Mexico’s economy. 2017 growth is set to reach 2.2 per cent. Exports have managed to post a respectable 2.8 per cent increase. Moreover, foreign direct investment into Mexico will easily surpass $20 billion, which is shy of record territory, but still an impressive number. As in Canada, Mexican business has barreled on, capitalizing on the upsurge of global growth.

Maintaining the status quo is becoming increasingly difficult. With the US upping its threats to cancel NAFTA, businesses face serious real-life decisions. Supply-chain risk is at the very least causing businesses to develop risk plans for sourcing. The prospect of new content rules is affecting location decisions. Foreign multinationals are more reticent about being under the White House’s microscope regarding current or prospective Mexican operations.

Mexican business investment at risk

In fact, on a number of fronts, it’s business investment in Mexico that’s most at risk. Proposed changes to current trade architecture are the big factor, but there are broader implications. With Mexico staring down the July 1 elections, the very real possibility of a U-turn in policy direction adds great uncertainty to the business climate. A populist shift to a more contentious and less business-friendly leader may exacerbate the situation, weighing against future investment projects.

The implied fiscal insecurity is another factor. Businesses add future tax liabilities into their investment equations; uncertainty on that front changes things. Moreover, government incentives have been instrumental in drawing investment to Mexico; lower capacity to fund new business ventures would be a drawback. Political change would also throw deregulation and privatization policies into doubt. Loss of economic activity also raises the spectre of the security factor and the rise of illicit business, which by its nature often capitalizes on economic deterioration.

If NAFTA unravels, nobody wins

The prospect of a throwback to poorer times is particularly frustrating, as for all parties concerned, it’s all so unnecessary. First of all, the notion that Mexico is stealing jobs from other nations doesn’t square with the data. The US has a 4.1 per cent unemployment rate, Canada’s is moving in on 5 per cent, and Western Europe is moving toward cyclical lows. True, the lower level of overall labour market engagement is exaggerating the success, but even that is changing for the better. A second related fact is that global growth is rising more rapidly than anyone expected – there seems to be plenty for everyone, without tit-for-tat protectionism. Third, a wide body of theory and now decades of practice prove that more restrictive trade is bad for everyone, including the perpetrators. Mexico stands to lose the most if the deal unravels – but they will be one of three on the loser podium; ultimately, nobody wins.

The bottom line?

Mexico is benefiting from a rise in global growth, good news for Canadian exporters and investors in the market. So far, that ‘rising tide that lifts all boats’ is working. Poke holes in one or more of those boats, and they become a liability for the all the other ships in the harbour.

The Globe and Mail .1 Feb 2018. Foreign Minister Chrystia Freeland accuses U.S. of ‘zero-sum’ mentality
ADRIAN MORROW, U.S. CORRESPONDENT

Foreign Minister Chrystia Freeland is accusing the “explicitly protectionist” Trump administration of wanting to use the renegotiation of NAFTA to slash trade between the United States and Canada.

In a broadside at her American negotiating partners two days after concluding the latest round of talks, Ms. Freeland accused Washington of taking an unrealistic “zero-sum” view of trade, said the U.S. is “never going to win” the race to bring back low-skilled jobs – a core tenet of President Donald Trump’s economic strategy – and slammed politicians who use economic anxiety “as a political resource” to attack immigrants and trade deals.

“At the NAFTA table, [Canada’s] overall goal is to say ‘Let’s modernize, let’s update and let’s find ways to trade even more together,” the Foreign Minister told a Council on Foreign Relations event in New York Wednesday afternoon. “The U.S. … administration is different. This is an administration that is explicitly protectionist and, in many areas, the objective quite explicitly is to shrink the trading relationship.”

While Ms. Freeland’s comments were effectively a summary of widely-held views within the Trudeau government, it is rare for a Canadian official to express them so openly. At NAFTA talks on Monday, for example, she was careful to refer to the U.S.’s tough protectionist demands merely as “unconventional proposals.”

Ms. Freeland on Wednesday hit back particularly hard at the U.S. over its auto content demands, a core sticking point in the NAFTA talks. Washington is proposing that all vehicles made in Canada and Mexico contain 50 per cent U.S. content, on top of boosting the required amount of North American content in NAFTA-zone autos to 85 per cent from 62.5 per cent.

Canada proposed a compromise at talks in Montreal last week that would instead see the method for calculating North American content revamped to include high-tech work, such as software development. The U.S. rejected this approach, arguing it would not do enough to force auto makers to use more car parts manufactured on the continent.

Ms. Freeland said Canada “had a hard time engaging with [the U.S.] directly” on autos. She said Canada’s proposals would encourage more high-skilled jobs in North America and include “credits” for auto companies to build or expand production of self-driving vehicles on the continent.

Without naming Mr. Trump, Ms. Freeland also slammed the brand of populism that forms the centre of his political message. “You have this real anxiety of people, and some political leaders in many countries around the world see that anxiety as a political resource,” she said. “The easy way to harness it is to point fingers at outsiders. To say ‘It’s the fault of that immigrant who speaks a different language and looks different from you,’ or ‘It’s the fault of that bad trade deal and that bad country that’s taking advantage of us.’”

Ms. Freeland said Wednesday that Canada’s strategy is to “find some creative ways that everybody gets a win.”

“You can see this negotiation as a zero-sum game: One guy wins, one guy loses. We sincerely think a trade relationship is a win-win. We think a win-win-win is possible – otherwise, why would you trade if it wasn’t good for both parties?” she said.

And despite the wide philosophical distance, Ms. Freeland said she would assume the U.S. has “positive intent” and push for a deal, even while preparing at least five contingency plans.

“We believe in preparing for the worst. We prepare for the blizzard,” she said.

Ironically, given her remarkably candid comments, Ms. Freeland opened the event by invoking the confidentiality of NAFTA talks. When the event’s host, former U.S. treasury secretary Jack Lew, asked how NAFTA talks were going, she replied: “I could tell you, but I would have to kill you.”

BLOOMBERG. 1 February 2018. There's Nafta Hope Yet So Long As Trump Is At Table
By JOSH WINGROVE

• Win-win-win possible though major gaps remain, Freeland says
• Nafta negotiations could have ’dramatic impact’ on auto sector

Canada wants a Nafta deal as soon it can get one. Until then, every day of talks is better than the alternative.

Chrystia Freeland, Canada’s Nafta chief, rattles off all the barriers that lie ahead. Canada and the U.S. are at odds on the very philosophies of trade, immigration, protectionism -- and, of course, on the merits of Nafta itself, flawed and aged as it is, that Donald Trump has been threatening to kill.

And yet he hasn’t. That gives Freeland cautious optimism Nafta will prove to be too good a deal to pass up, even for Trump, even with deep divisions. Until then, she’s staying at the table.

“We all do want to get to a deal and I think we are all really trying -- within the confines of having quite different visions of trade -- trying to reach a successful conclusion,” she said in an interview with Bloomberg News in New York on Wednesday, adding a sobering caveat: “I wouldn’t want to, in any way, exaggerate the progress we’ve made.”

Her trip to New York came one day after U.S. President Donald Trump sidestepped Nafta in his State of the Union speech while saying the U.S. “turned the page on decades of unfair trade deals.” The latest round of Nafta talks that ended Monday in Montreal yielded some progress, and U.S. demands to speed things up.

Freeland, Canada’s foreign minister with the added responsibility for U.S. economic ties, remains at odds with Trump on many things. The U.S. is “openly and proudly protectionist,” she said, with “serious reservations about the value of trade” leading to demands Canada has never agreed to before.

“We are negotiating with a counterparty that has quite a different vision,” she said. “We don’t think that trade or, for that matter, immigrants are the reason the middle class is being hollowed out.”

The differences have been in plain sight over six rounds of negotiations, which have yielded agreement on just three of roughly 30 chapters, leaving much ground to cover still. While Trump wanted a deal by the end of 2017, talks are now poised to run well into this year and possibly into 2019. “History shows us these take a long time to get right,” Freeland said, and warned against “false artificial deadlines.”

The two sides are farthest apart on the core issues, like the car sector, including a U.S. proposal to require 50 percent U.S. content in North American-built cars traded under Nafta. Freeland has rejected that idea, but has sought common ground in other ways. These include Canadian proposals such as changing how a car’s value is calculated, encouraging things like autonomous vehicle development and using North American steel.

Nafta’s auto sector rules are “fiendishly” complicated and that substantial changes “will have potentially a dramatic impact on the car industry,” Freeland said.

U.S. Trade Representative Robert Lighthizer effectively dismissed those efforts for an autos breakthrough on Monday, a sentiment voiced separately by U.S. Commerce Secretary Wilbur Ross Wednesday. “Little has been done on the hard issues,” Ross told CNBC, where he reiterated the threat that Trump could still give notice of quitting.

The Canadians are also indicating a willingness to compromise on Nafta’s existing investor dispute system, under Chapter 11, which the U.S. wants to opt out of and which Canada thinks could live on bilaterally with Mexico.

Canada recommended another U.S. proposal -- to allow automatic termination of the agreement after five years unless the parties agree to extend the deal -- could instead be replaced by a periodic review of the agreement.

One area Freeland indicated is not up for bargaining is the mechanism that allows companies to challenge anti-dumping and countervailing duties. Freeland said those Chapter 19 panels are “essential” for Canada.

Fundamentally, Freeland is optimistic economics will win the day. She described herself as an “economic determinist,” stopping short of predicting Nafta’s survival but expressing faith in the forces that may save it.

She invoked Martin Luther King Jr. in predicting the "arc of history" will bend toward the better outcome -- in this case, a deal on Nafta. "I think it’s going to bend in that direction,” she said.

— With assistance by Michael McKee, Anne Riley Moffat, and Greg Quinn

BLOOMBERG. 31 January 2018. Canada’s Freeland Says She’s Optimistic on Nafta Talks
By Josh Wingrove and Greg Quinn

• Foreign minister says parties making progress, despite gaps
• Freeland to meet Tillerson, Videgaray in Mexico City on Friday

VIDEO: https://www.bloomberg.com/news/articles/2018-01-31/freeland-optimistic-on-nafta-talks-as-significant-gaps-remain

Canada Minister of Foreign Affairs Chrystia Freeland discusses the progress of Nafta negotiations,
It’s possible the U.S., Canada and Mexico can rework Nafta to the benefit of all parties, Canadian Foreign Minister Chrystia Freeland said, adding to recent positive signs for the 24-year old trade pact.

Freeland, speaking Wednesday with Bloomberg’s Michael McKee in a television interview in New York, said it’s possible the three nations can come away with a “win-win-win” result on a revamped North American Free Trade Agreement, even as she acknowledged gaps remain on some issues.

“I was cautiously optimistic” following the end of a round of talks earlier this week in Montreal, Freeland said. “We made some progress on the most difficult issues, the areas of the unconventional U.S. proposals, where we managed to start a real conversation.”

Freeland’s comments come one day after U.S. President Donald Trump sidestepped Nafta in his State of the Union speech, saying only the U.S. has “turned the page on decades of unfair trade deals” -- and two days after the sixth round of talks ended with some progress and a U.S. demand to speed things up.

Freeland, a former trade minister, was shuffled into her role shortly after Trump’s election and given particular responsibility for U.S. ties. Canada is pushing for modernization of Nafta while mounting a widespread lobbying campaign in the U.S. to put pressure on Trump to not follow through on his threat to kill the deal.

“Significant differences remain,” Freeland said. “We have some hard work to do to bridge those differences. I believe that it is absolutely possible. I think a win-win-win outcome can be achieved. But at the same time our approach in Canada is hope for the best, prepare for the worst, and we are doing both.”

Freeland was asked about a separate trade spat with the U.S. over Canadian exports of softwood lumber. The best solution is a negotiated settlement, Freeland said, adding the disagreement, which predates the Trump administration, is on a separate track to the Nafta talks.

While she praised the U.S. International Trade Commission’s decision on Bombardier Inc., she declined to say whether Canada would now actively consider buying fighter jets from Boeing Co.

“As we’ve said from day one, we thought the initial commerce ruling was unfair and punitive,” Freeland said in a separate interview with Bloomberg. “We’re going to take a little bit more time to see what the reaction to all the parties is to the ITC ruling.”

Asked if Freeland agreed with her U.S. counterpart Robert Lighthizer that the pace of Nafta talks should pick up, she said, “all of us would like the negotiations to be finished as soon as possible.” She added there shouldn’t be any “false artificial deadlines on these talks.”

Freeland is set to meet U.S. Secretary of State Rex Tillerson and Mexico’s Foreign Minister Luis Videgaray on Friday in Mexico City, in part to discuss Nafta.

— With assistance by Michael McKee

AVIATION

The Globe and Mail. REUTERS. 1 Feb 2018. Boeing forecasts rising profit, sees end to job cuts. Despite surpassing net income outlooks, world’s largest plane maker does not intend start hiring more people
ALWYN SCOTT, NEW YORK

Boeing Co. on Wednesday forecast full-year profit well above Wall Street estimates as it looks forward to its busiest year ever for plane deliveries, sending its shares up almost 5 per cent.

The world’s biggest plane maker also said it would end years of job cuts in 2018, but would not start hiring more people now because of the recent reduction in the U.S. corporate-tax rate.

“More of an employment plateau in the near term,” Boeing chief executive Dennis Muilenburg said on a conference call with analysts on Tuesday.

Boeing has shed 20 per cent of its work force, or about 34,000 jobs, since employment peaked in 2012, in a bid to reduce costs and improve profits. Several U.S. companies have promised to boost hiring after December’s new tax law slashed the corporate rate to 21 per cent from 35 per cent.

Although Chicago-based Boeing delivered more aircraft to customers than Airbus SE last year, and is much more profitable, it is still in a dogfight to win orders after its European rival sold about 22 per cent more planes last year.

“Our focus is to make Boeing ever tougher,” Mr. Muilenburg said.

Boeing said it aims to ship between 810 and 815 commercial aircraft in 2018, as much as 7 per cent more than the industry-record 763 jets it delivered in 2017, putting it ahead of Airbus for the sixth year in a row. Airbus delivered 718 jetliners last year.

Both companies are speeding up production at their factories to chip away at the large backlog of orders for new jetliners, created over the past few years as airlines want new, fuel-efficient planes to cope with a surge in demand for air travel.

Helped by the hunger for new jets, Boeing forecast core profit would rise to US$13.80 to US$14.00 a share in 2018, ahead of analysts’ average estimate of US$11.96, according to Thomson Reuters I/B/E/S.

For the fourth quarter ended Dec. 31, Boeing’s core earnings nearly doubled to US$4.80 a share from US$2.47 a year earlier, buoyed by rising plane output and a US$1.74-per-share gain from changes to the U.S. tax law.

Boeing shares, which have more than doubled in the past 12 months, rose 4.7 per cent to US$353.60 on the New York Stock Exchange.

Boeing’s commercial planes unit posted an 8 per cent increase in revenue in the fourth quarter to US$15.47-billion, while operating profit rose 50 per cent to US$1.78-billion.

The company’s smaller defence business grow more slowly. Revenue for the unit rose 5 per cent to US$5.54-billion while operating profit rose 6 per cent to US$553-million.

Boeing’s new services business – which maintains and overhauls planes for their owners – posted a 17-per-cent increase in revenue to US$4-billion in the fourth quarter while operating profit rose 9 per cent to US$617-million. Boeing is aiming to hit US$50billion in revenue in that business by 2027.

However, profit margins at the unit narrowed slightly to 15.4 per cent, and Boeing said it expects margins near that level this year.

“Margins weren’t as good as I thought,” said Sheila Kahyaoglu, an analyst at Jefferies LLC in New York.

Boeing also forecast at least US$12.8-billion in free cash flow this year, encouraging Wall Street analysts, who generally view the company’s early targets as conservative.

“Actual results could ultimately be higher,” Seth Seifman, an analyst at JPMorgan, said in a note to clients. “As a result, we expect the stock to outperform despite its recent run now that management has set the table for a solid 2018.”

Excluding the gain, Boeing reported earnings of US$3.06 a share. On that basis, Wall Street had been expecting US$2.89 a share.

Mr. Muilenburg said Boeing still expects to increase operating profit margins to the midteens by 2020, from 9.6 per cent last year, with most of the gain coming from reducing the cost of making 787 Dreamliners, while holding costs of its workhorse single-aisle 737 steady. BOEING (BA) CLOSE: US$354.37, UP US$16.66

INTERNATIONAL TRADE

Canadian Intellectual Property Office. 2018-02-01. New Patent Prosecution Highway pilot arrangement between the Canadian Intellectual Property Office and the Taiwan Intellectual Property 

A new Patent Prosecution Highway (PPH) pilot arrangement, implemented by the Canadian Intellectual Property Office (CIPO) and the Taiwan Intellectual Property Office (TIPO), will commence on February 1, 2018, for a period of three years, ending on January 31, 2021.

Under the new arrangement, applicants whose claims have been found to be patentable by either TIPO or CIPO may request accelerated processing of their corresponding applications that are pending before the other office.

This PPH pilot arrangement allows applicants at TIPO and CIPO to obtain corresponding patents faster and more efficiently. The PPH arrangement also permits TIPO and CIPO to benefit from work previously done by each other's patent office, in turn, reducing examination workload and improving patent quality.

CIPO's goal for all PPH arrangements is to provide a first office action (allowance or first substantive report) within 90 days from receipt of the PPH request. CIPO has noted that approximately 34 percent of PPH applications are allowed without an office action, which is significantly higher than for non–PPH national applications (3 percent). This represents a savings of time and effort for both CIPO and our clients.

CIPO will continue to process requests for advanced prosecution under the PPH program, free of charge. Regular fees (Schedule II of the Patent Rules) for requesting examination will continue to apply.

FULL DOCUMENT: https://www.canada.ca/en/intellectual-property-office/news/2018/01/new_patent_prosecutionhighwaypilotarrangementbetweenthecanadiani.html

GDP

The Globe and Mail. 1 Feb 2018. Canada’s GDP bounce boosts North American optimism. Biggest one-month rise since May and positive U.S. Fed statement prompt forecasts of rate hikes
DAVID PARKINSON, ECONOMICS REPORTER

Positive signs from a key Canadian economic indicator and an upbeat statement from the U.S. central bank injected a double-dose of optimism about the strength of the North American economy Wednesday – feeding expectations that further interest-rate increases are coming by spring, on both sides of the border.

Statistics Canada reported that November real gross domestic product grew 0.4 per cent month over month, the biggest one-month increase since May. It was an impressive rebound from October’s flat reading and partly reflected a strong recovery in the country’s manufacturing sector, after the return of two major auto plants from October shutdowns.

Economists had largely expected the November bounce-back, in light of previously released monthly data that showed a recovery in manufacturing and exports. But they noted the growth spurt went well beyond the country’s factories, as 17 of 20 industry sectors recorded gains.

After a relatively tepid third quarter and October’s weak start to the fourth quarter, the November figures are an encouraging sign that Canada’s broad-based economic recovery is on track.

“The Canadian economy fired on all cylinders in November: Production resumptions led the way, but nearly all major sectors reported gains on the month,” Toronto-Dominion Bank senior economist Brian DePratto said in a research note. “As shown by this month’s breadth of growth, the underlying trend for the Canadian economy remains a positive one.”

Meanwhile, the U.S. Federal Reserve decided to leave its key interest rate unchanged in its first rate-setting meeting of the year. But the brief statement accompanying the decision suggested it is prepared to raise rates again at its March meeting in light of further strength in key U.S. economic indicators – and, most significantly, what it now sees as rising inflationary pressures.

MANUFACTURING

REUTERS. FEBRUARY 1, 2018. Canada manufacturing growth strongest in nine months in January

OTTAWA (Reuters) - The pace of growth in the Canadian manufacturing sector picked up at the start of the year to its highest level in nine months as measures of new orders and employment rose in January, data showed on Thursday.

The Markit Canada Manufacturing Purchasing Managers’ index (PMI), a measure of manufacturing business conditions, rose to a seasonally adjusted 55.9 last month from 54.7 in December.

It was the index’s highest level since April 2017. A reading above 50 shows growth in the sector.

New orders rose to 56.4 from 54.6 on increased demand from both domestic and overseas clients. New export orders rose to 53.3 from 50.6.

Employment rose to 55.9 from 54.8, the highest level since August as companies ramped up capacity. Canada’s job market has seen robust growth in the past year, sending the unemployment rate to a 41-year low.

However, input costs rose with manufacturers having to pay more for metals and oil-related items. Input prices rose to 65.1 from 61.1.

Still, the growth in the manufacturing sector could bode well for the Canadian economy, which was unexpectedly strong in 2017. Data on Wednesday showed economic growth accelerated in November, likely keeping the central bank on track to raise interest rates again before long.

Reporting by Leah Schnurr, Editing by Chizu Nomiyama

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NAFTA