2017 – A Year in Review

By Angus Gillespie

Just like every other year that has preceded it, 2017 was full of incredible highs and lows and everything in between in the world of business. Some things shocked us – other things were entirely expected. Depending on one’s industry and interests there could be arguments for and against some of the biggest stories that helped shape our economy this past year as our country celebrated its 150th birthday and The Canadian Business Journal celebrated its 10th anniversary. Here is a look back on some of those headlining events that helped to shape the year.

NAFTA Renegotiation

Nobody said this was going to be easy – and it hasn’t been. U.S. President Donald Trump made it abundantly clear as far back as his election campaign that he wanted to renegotiate the 23-year-old trilateral accord with Canada and Mexico as a means of establishing a better return for Americans. Heading into 2018 the negotiations are still taking place and they may not conclude until the spring. At this point there is no consensus on whether Trump is merely playing hardball to eke out every last drop that is possible or whether he truly does want to exclude Mexico from the new agreement. On several occasions Trump said he has no issues with Canada, so by process of elimination the bulk of his disdain can only be targeted at one other partner.

In direct talks, Prime Minister Justin Trudeau and Trump have been relatively cordial to one another, but it seems obvious Canada is walking on eggshells in not wanting to aggravate the situation. There are those pundits who would argue that NAFTA is crucial to the continued growth of the Canadian economy while others prefer to take a step back as a means of protecting traditional industries such as automotive.

President Trump has been very vocal about wanting a major overhaul of the 23-year-old North American Trade Agreement to improve the deal that has “fundamentally failed” many Americans, U.S. trade representative Robert Lighthizer said as renegotiation talks formally kicked off in Washington.

“We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement,” says Lighthizer.

Canadian Foreign Affairs Minister Chrystia Freeland says the trade deficit is not a primary measure of whether a trade agreement is working, noting that the Canada-U.S. trade relationship has become more balanced and mutually beneficial, and is now “almost perfectly reciprocal.”

A report issued by the Bank of Montreal concludes that ending the North American Free Trade Agreement would harm the U.S. and Canadian economies, while simultaneously hurting their competitiveness against regions such as Europe and Asia.

According to the bank’s report, “The Day After NAFTA,” dropping the 20-year trilateral free trade agreement would result in a 0.2% net reduction in U.S. gross domestic product over the next five years and a 1% decrease for Canada.

The Trump administration has continually been a fly in the ointment, threatening to withdraw from the pact altogether if the U.S. doesn’t get better terms moving forward. Financial experts are split as to whether President Trump is merely blustering as part of an aggressive negotiation tactic to get as much as possible or whether he really wants to end the agreement. Those who believe the latter point to the fact he has mentioned an interest in doing a deal with Canada — but not Mexico, where the U.S. is currently dealing with a $60 billion trade deficit.

Doug Porter, chief economist of BMO Financial Group and one of the report’s authors, said that while the three North American economies would adjust to a new reality, a shift in low-wage work to Mexico enabled by NAFTA had made them collectively more competitive on the global stage.

The United States, Mexico and Canada concluded a fifth round of talks to update NAFTA towards the end of last year with several major differences unresolved, casting doubt on whether a deal could be reached by the end of March 2018.

Former Chamber of Commerce policy expert Hendrik Brakel wrote the following in a column published in CBJ: Canada’s negotiators have done their very best in a challenging environment. They have reached out to Canadian people and business, they have extended a warm hand of friendship to their U.S. and Mexican counterparts and they have tabled sensible, generous proposals to improve NAFTA. But, we all have to prepare for the possibility that the U.S. will withdraw from NAFTA, based on the poisonous proposals U.S. negotiators have presented.

At the end of the day, it will be better for Canada to have no deal than a bad deal. Let’s hope it doesn’t come to that.

Sears Canada

It was a humiliating decline into nothingness for Sears Canada – a once proud pillar of the Canadian retail environment and it was a sad day for shoppers when the company threw in the towel, unable to secure a buyer or develop a plausible business plan that would have resulted in a financial turnaround.

Sears Canada had sought court protection from its creditors in June in a last-ditch effort to restructure but no viable plan was able to be found moving forward. The once mighty retail giant approved a plan to liquidate the assets of the remaining stores in an effort to generate about $300 million for its creditors. Court approval for the liquidation of assets was granted almost immediately.

“Sears Canada, with the recommendation of its advisers and approval of the Monitor, FTI Consulting Inc., is seeking an order to commence a liquidation that would result in a wind-down of its business following court approval,” the company said at the end of the summer in a prepared media release. “The company deeply regrets this pending outcome and the resulting loss of jobs and store closures.”

The store chain got its start 65 years ago in an alliance called Simpson-Sears. That association lasted until 1984, when the corporate chain of stores became known as Sears Canada.

Extended warranties on merchandise purchased from Sears Canada were not honoured beyond October 18, 2017. Gift cards remain valid for the duration of the liquidation process, which is now winding down. The hope of the liquidation process is to generate $300 million in an effort to at least cover partial payments to creditors.

Customers often paid extra for protection and repair services for years down the line, and those are null and void.

Brandon Stranzl, the former chairman who had been trying to buy the chain during the liquidation process, stepped down when it became apparent salvation was unattainable.

In spite of going out of business, Sears Canada managed to come up with $2.8 million in retention bonuses to pay to 36 head office staff members. Promised bonuses were only supposed to be paid in full if the company found a way to survive. However, Sears received court approval to pay out retention bonuses to key staff such as executives and managers who will now orchestrate the process of the liquidation.

In total, Sears will end up paying up to $6.5-million in bonus payments to head office staff from the time it filed for insolvency in June until it closes for good.

About 16,000 people who worked for Sears Canada are not eligible for severance and are also quite likely to face reduced pensions and possibly no pension at all.

Sears had originally agreed to pay more than $7.5 million in bonus payments to 43 key senior managers and executives as part of an effort to convince them to remain with the company and help in the turnaround effort. Sears has already paid out about $3.7 million, but some of those who were paid have since left anyhow.

The Sears story also points to a larger, far more troubling trend for bricks & mortar business, which seems to be losing more ground to online sales with the emergence of such companies as Amazon.com and eBay.

Bill Morneau

Canada’s Finance Minister was named as the top business newsmaker by Canadian Press in 2017. But being named the top newsmaker isn’t always a good thing. It can just as often have negative connotations, which was clearly in play during this year’s vote.

The Canadian economy got off to a strong start in 2017, but then he introduced a tax reform policy that was loudly criticized by small business entrepreneurs including farmers, doctors and many tax experts.

Morneau’s toughest part of the year was in dealing with his controversial tax-reform plan, which was met by a flurry of disapproval from business owners and even backbenchers within his own Liberal party.

Numerous ethical questions over how he handled his substantial personal assets after coming into office also took centre stage. If that wasn’t enough, he then faced conflict-of-interest allegations that led the federal ethics commissioner to launch a formal examination and the Opposition’s call for his resignation.

From his perspective, Morneau argued the reforms were designed to promote fairness into the tax system for the middle class. But amid the widespread backlash, Morneau was eventually forced to scale back and even abandon certain contentious elements of the plan.

The federal ethics commissioner fined Morneau $200 for failing to disclose his role as a director in a private corporation that owns a villa in France. How that little tidbit managed to escape his mind as being noteworthy is something people find hard to believe.

Attention was also focused on his shares in Morneau Shepell, the large human resources firm he helped to build with his father and presided over as executive chairman until the federal election victory in the fall of 2015. The minister did not put his Morneau Shepell holdings into a blind trust after being named to cabinet, which also did not go over well with the general public. Eventually, Morneau sold of the remainder of his corporate shares, believed to have been worth more than $20 million. He donated to charity the difference between what the shares were worth at the time of the sale and their value in 2015 when he was first elected – estimated at about $5 million. The rest of his assets are now in a blind trust.

Conservative Leader Andrew Scheer demanded Morneau’s resignation – and failing that, urged Trudeau to fire his minister. However the prime minister has continued his public support for Morneau, although there have been rumours the two men are not particularly close friends. If that’s the case, the embarrassing episodes of 2017 will have done little to bring them closer together.

Legalization of Marijuana

With the legalization of marijuana by the summer of 2018, Prime Minister Justin Trudeau’s Liberal government plans to fundamentally change the way cannabis is handled and sold in the country. Canada will become the first industrialized nation to legalize and regulate marijuana from production to consumption.

Numerous companies have stepped up to be part of the production, distribution, selling and possession of cannabis. And, it appears as if legalizing marijuana is going to provide the federal government with every bit as much tax revenue as most people expected — and maybe more.

Five of Canada’s 10 provinces have come forward with frameworks for retail marijuana sale. In Ontario, Quebec and New Brunswick, cannabis sales will be run by provincial government-owned entities. The western provinces of Manitoba and Alberta have said they will license private retailers.

The federal government set the minimum legal age for buying marijuana at 18, but the provinces can raise that as they see fit. In Ontario, it has already been determined that the minimum legal age will be 19 – the same as drinking alcohol.

Anyone planning to purchase legal marijuana starting next year will have to pay the taxman $1 per gram, plus GST.

The plan would add an excise tax of $1 per gram or 10% of the final retail price, whichever is higher. The revenue that is generated would then be split evenly between Ottawa and the provinces and territories.

The taxes would be levied on both on fresh and dried marijuana, pot-infused oils and seeds and seedlings used for home cultivation.

In the U.S., 29 states and the District of Columbia have legalized marijuana with eight jurisdictions allowing recreational use of pot. However, cannabis remains illegal at the federal level, which is where Canada and the U.S. differ considerably.

The government wants to reap the millions in tax dollars by the sale of marijuana. It now begs the question as to whether the unlicensed black market will look to engage in a full-scale pricing war in an effort to keep their clientele, which if true, would be a boon for pot smokers, albeit still illegal.

Bitcoin

The growing enthusiasm for bitcoin has raised questions whether this is a fad that will eventually crash and burn like the infamous dotcom crash in the early 2000s, or whether this represents the future.

Bitcoin is a decentralized digital cryptocurrency and worldwide payment system with no affiliation to any central bank or administrator. The network is run on peer-to-peer relationships. Transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. It was first released as open-source software in 2009.

The U.S. Securities and Exchange Commission issued a statement recently warning investors and potential investors to be wary of any substantial investment in bitcoin or other digital currencies. Further to that, the Commodities Futures Trading Commission has proposed regulating bitcoin like a commodity, not unlike gold, silver, platinum or oil. If that happens, then all bets are off as to where it will stand as a legitimate means of doing business.

Futures are a type of contract where a buyer and seller agree on a price on a particular item to be delivered on a certain date in the future. Futures are available for nearly every type of security, but are most familiarly used in commodities, like oil wheat, soy and gold.

Bitcoin has quickly become the world’s most popular virtual currency. However, the issue as of now is that such rogue currencies are not tied to a bank or government and allow users to spend money anonymously. That is fine, within a confined network, but eventually there will be a need to broaden the scope of trading and that will invariably bring governments into the fray. And so, the dilemma for investors is whether this is all going to be sustainable. While it has garnered many supporters, there are also those who adamantly argue that this type of cryptocurrency represents little more than an ability to circumvent government systems akin to money laundering through anonymous payment methods. For smaller countries there would be the potential for Bitcoin to be used as a means of trading if a national currency falters.

As of our publication date, Bitcoin’s price continued to push towards new all-time highs, despite a recent one-day 30% plummet, which saw the volatile cryptocurrency tumble below $14,000 briefly on the Bitstamp exchange. But it quickly rebounded back above $19,000 and has come close to the $20,000 plateau.

Bitcoin‘s success brought cryptocurrencies to the forefront and has also increased the public profile of its biggest rivals, including Verge and Ripple.

Some people have gotten extremely rich from Bitcoin, including Cameron and Tyler Winklevoss, the twins who became known for suing Mark Zuckerberg after claiming he stole their idea for Facebook. The Winklevoss brothers were awarded $65 million from the Facebook lawsuit, and invested $11 million of their payout into Bitcoin in 2013. The value of their investment is now worth well over $1 billion at the current Bitcoin value. However, the cryptocurrency has been labelled a speculative bubble by many including former U.S. Federal Reserve Chairman Alan Greenspan. Billionaire investor Warren Buffett isn’t the least bit interested in bitcoin and says the hysteria surrounding it has a lot to do with people who have a fear of missing out (FOMO) on something that could potentially be massive.

The United Kingdom has come out in support of increased regulation of Bitcoin and other digital currencies by expanding the reach of European Union anti-money-laundering rules that force traders to disclose their identities and to also report suspicious activity to the appropriate authorities.

With demand for Bitcoin surging, fuelling a 1,000% rally in 2017, the British finance ministry said it expected negotiations over changes to the EU rules would conclude in early 2018.

A top U.S. derivatives regulator plans to allow CME Group and CBOE Global Markets to list Bitcoin futures contracts, opening the door to added regulation.

Australia has also said it would strengthen its money-laundering laws by bringing Bitcoin providers under the government’s financial intelligence unit.

It’s unclear as to what action Canada’s finance ministry will take.

Keystone Approval

After more than a decade of controversy it appears as if expansion of TransCanada’s Keystone XL pipeline will move forward after it garnered approval from regulators in Nebraska. Nebraska was the only state that had not granted permission. Word of the approval comes just days after part of the existing Keystone oil pipeline system had to be turned off following a 5,000-barrel leak in South Dakota.

Keystone XL is to cross through parts of Montana, South Dakota and most of Nebraska en route to the Gulf of Mexico.

The pipeline extension will expand on the existing Keystone system, which runs through North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas and into Missouri and Illinois. The second-phase of the pipeline will link Canada’s oilsands from Hardisty, Alberta to Houston, Texas.

U.S. President Donald Trump was adamant the project would get back on track after being derailed by the previous Obama administration.

Approval was granted despite the fact part of the existing Keystone oil pipeline system had to be turned off after a 5,000-barrel leak in South Dakota just prior to Nebraska voting on whether to approve the deal going through the state or not. All other U.S. states impacted by the extension had already given the thumbs up to Keystone expanded route.

U.S. President Donald Trump is a supporter of Keystone XL and provided TransCanada a federal permit in March, reversing former President Barack Obama’s decision.

Trump and proponents of the expanded pipeline say that it will help to lower fuel prices and create jobs in both Canada and the U.S. The extension would run from Alberta to refineries in the southern U.S.

Media Convergence

Walt Disney announced it is buying a sizable portion of Rupert Murdoch’s company 21st Century Fox in a deal valued at $52.4-billion. The transaction will immediately reshape the communications’ landscape of film, television, cable and reciprocal entertainment networks and companies not only in the U.S., but internationally.

Disney will be acquiring such high-profile assets such as: film studios Twentieth Century Fox and Fox Searchlight Pictures; TV production units Twentieth Century Fox Television, FX Productions and Fox21; Twenty-two regional Fox Sports channels; TV channels FX and the National Geographic Channel; and a minority stake in Hulu, a popular online streaming service. On a global scale, Disney is also getting the Star TV network in India and a stake in European pay-TV provider Sky.

Disney’s buyout doesn’t include several Fox-branded channels including Fox News, Fox Business Network, FS1, FS2 and Big Ten Network. Those will instead be spun out into a newly listed public company with a much narrower focus on news and sports, and less entertainment programming and movies.

Murdoch’s stable of newspapers, including the Wall Street Journal, are unaffected, as they are largely owned by a different subsidiary in his empire, News Corp.

Meanwhile, here in Canada a major transaction took place between Post Media and Torstar, which essentially had the two publishing giants swapping out multiple publishing properties. But it was far better to have wound up with Torstar as owner, because Post Media immediately proceeded to shut down many of its acquisitions, including several long-term daily newspapers in Ontario.

Despite many of its holdings being driven into the ground, Post Media Chairman Paul Godfrey believes he and other executives are entitled to their multi-million bonuses. In fact, Godfrey says he’s doing it cheaper than anyone else would. But if the end result is the closure of more and more newspapers, it begs the question as to whether it really matters who is at the helm.

NASA Moon Landing

One of Donald Trump’s keen interests includes having NASA send humans to the moon for the first time in 45 years. He signed a policy directive on December 11, which formally directs NASA to focus on returning humans to the moon.

President Trump signed the order during a ceremony in the Oval Office, surrounded by members of the recently re-established National Space Council. NASA astronauts Christina Hammock Koch and Peggy Whitson, Apollo 11 astronaut Buzz Aldrin, and retired astronaut Jack Schmitt, who flew to the moon on the Apollo 17 mission, were also on hand. Aldrin was the second man on the moon, after Neil Armstrong when their Lunar Modular landed on July 20, 1969.

NASA has often said that the path to Mars will include a stop at the moon, where the agency has plans to build a facility known as the Deep Space Gateway. Such a structure would serve as a go-between Earth and Mars.

Robert Lightfoot, NASA’s acting administrator, believes this new directive could provide boost to the agency and for the people working in the program. Both President Trump and Vice President Mike Pence say the increased spotlight on NASA will help create many thousands of reciprocal jobs and will be a shot in the arm for the nation’s defense and military.

“As everyone knows, establishing a renewed American presence on the moon is vital to achieve our strategic objectives and the objectives outlined by our National Space Council,” Pence said. “In pursuing these objectives, we will enhance our national security and our capacity to provide for the common defense of the people of the United States of America.”

Once on the moon the plan would likely include building a lunar space station that would make the trip to Mars that much more efficient. It could also help create a lunar station that simplifies Mars voyages. Critics, however, believe that focusing on a return to the moon may hinder direct progress of the Mars missions and set the timeline back considerably. Whether for or against, it appears President Trump has made up his mind.

The Legacy of Gord Downie

It’s not really a business story, other than perhaps if documenting the number of albums sold and the economic impact the Tragically Hip had on towns and cities across Canada, but the passing of lead singer Gord Downie was one of those rare moments in history when an entire nation came together to celebrate a life well lived. There are few times when Canadians show so much united pride and emotion. Gord Downie was ours – much like hockey – which just happened to be his favourite sport.

During that last concert tour in 2016, Downie sent a clear message to the people of Canada and the prime minister that he wanted to see improved living conditions for the Indigenous people, who have lived in poverty with few amenities and services. Speaking out on behalf of those unable to do so for themselves will be a major part of Downie’s legacy.

During a speech at the United Nations General Assembly, Prime Minister Trudeau addressed the plight of the Indigenous communities, speaking of forced migration, broken treaty promises and families being separated and forced to have their young children sent to public schools in faraway towns.

The death rate among Canada’s Indigenous population is three times the national average for those under the age of 35. The annual death rate among Native Canadians has declined on a per thousand basis, but it still remains about 1.5 times higher than other Canadians.

Downie left a legacy of passion, creativity and love for all mankind. His was a message of how people should treat each other with respect and work together for the better good of the entire world. Let’s see what level of progress is made in 2018.

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