Battle Lines Are Drawn On International Trade

By Angus Gillespie

Even during the best of times the economies of the world’s richest countries often find themselves on tinder hooks nervously awaiting any one of a myriad of complications that could quickly unfold and send shock waves through stock markets and in a heartbeat change the prospective economic direction. That’s just become the accepted norm and even more so now with the Internet’s ability to connect with millions of people with information that wasn’t possible 15 years ago.

AT THE HEART of any country’s economic base is the trading it does with other countries. Canada, with a population of about 36 million, is most definitely an exporting nation. Blessed with many natural resources, advanced manufacturing and hi-tech know-how there is an ability to share those commodities with other countries.

But there are signs that 2019 will not be an easy one if the recent World Economic Forum in Switzerland is any indicator. World leaders in favour of international co-operation and free trade – including Canada – pushed back against a growing tide of populist nationalism that is becoming more prominent than in the past. Of course, this has been spearheaded by the United States and President Donald Trump’s unrelenting stance of ‘America First.’

But the United States is not alone in its stance on trade. Brazil has also shown a desire to place protectionist measures on their trading partners as well.

While there have been calls for more global co-operation, what really seemed to emerge from the gathering in Switzerland was a clear sign that a line has been drawn in the sand. The leaders of Germany and Japan led the chorus for a need to focus on co-operation. It’s no coincidence that they happen to be the two countries that have managed a huge economic turnaround after being destroyed under nationalist leaders in World War Two.

“I believe that it’s worth bringing together like-minded people around the world, because anything else will lead us into despair,” said German Chancellor Angela Merkel.

The delicacy of international trade cannot be overstated and requires constant attention to detail.

Merkel, who tends to find the positives even in less than stellar circumstances, points to a free trade deal between the European Union and Japan, which took effect as of February 1.

U.S.-China Dispute

The escalating U.S.-China trade feud has been magnified significantly since the U.S. announced charges against telecom giant Huawei and its chief financial officer Meng Wanzhou, the daughter of the company’s founder. Meng was arrested in December at the Vancouver airport at the request of U.S. authorities. It seemed as if the Americans were not going to follow through with the extradition process, but did in fact send a written request to the Canadian government just before the January 31 deadline.

Meng now faces 13 criminal charges in the United States for alleged violations of international trade sanctions against Iran. American prosecutors are seeking her extradition while she remains under partial house arrest in Vancouver. The U.S. alleges that a secretive Chinese company was dealing with Iran and that company is a subsidiary that is controlled by Huawei.

U.S. President Donald Trump had previously stated that he would essentially be able to make the problems for Meng go away if it were to assist in trade talks with China. The world’s two largest economies are locked in a significant trade dispute and have put tariffs on hundreds of billions of dollars-worth of traded goods. The impact will certainly result in negative repercussions for both sides, but it’s clear that China is being hit much harder as of this point.

The U.S. government is concerned that China is not being transparent on government subsidies it gives Chinese companies and has made repeated allegations that the Chinese government is stealing intellectual property from Western firms. Numerous proven hacking episodes back up those claims.

Japanese Prime Minister Shinzō Abe says the World Trade Organization needs to be overhauled.

“Major changes are taking place and the WTO is behind the curve — it’s not keeping up with pace,” Abe said in a statement from Switzerland. “We need to reform it.”

Trump had intended to visit Davos with a big delegation to meet with the Chinese over the trade issues. They cancelled the trip, however, due to the U.S. government shutdown. Trump has temporarily reopened the American government but says it will be shut down again if negotiations with Democratic House and Senate leaders do not find common ground on his demands to be given $5.7 billion for his wall along the border with Mexico.

The uncertainty over Brexit is also weighing heavily on the minds of countries around the world, including Canada. In the UK, Prime Minister Theresa May has found herself in hot water over the handling of the planned exit from the European Union. At this stage there’s no guarantee it will actually occur after British lawmakers voted down May’s deal with the European Union. Speculation is running rampant that Britain could exit the EU without any appreciable deal in place, which has many businesses in the UK exceedingly concerned.

Merkel said she is working for a “wellordered” Brexit and is looking for a “good” future partnership with Britain not just on trade but issues like security and defence.

The bilateral trade relationship between the U.S. and China has the among biggest focal point for businesses and investors, and it’s something Canada has its eyes focused upon.

The vast uncertainty has resulted in the International Monetary Fund downgrading its outlook for global growth to 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points, respectively, from its projections from October.

Trump and China’s President Xi Jinping agreed in December to halt additional tariffs until March 1 as part of a goodwill gesture to try and resolve their differences. China, for its part was fine with the status quo; it was the U.S. government that initiated change saying the massive trade imbalance is inherently unfair and costing American workers thousands of jobs.

For the past 60 years Canada has exported more commodities than it has imported and has had a merchandise trade surplus. Services and payments for borrowed capital have normally greatly exceeded the export of services and receipts from investments, so that there has generally been a sizable annual deficit in combined trade in commodities and services.

Impact on Canada

Canada has had trade agreements with China dating back to 1970 and has routinely been this country’s top Asian market to deal with. It has become plainly apparent that the country is in need of a greater number of countries to deal with on a substantial level. The U.S. has become increasingly self-sufficient regarding oil production, and is therefore taking much less Canadian crude than it has in the past. Secondly, the Chinese have proven to be less than trustworthy on a number of occasions. Those are Canada’s two largest trading partners.

As Canada’s second-largest export market, China takes in more than $5 billion of Canadian agriculture and agri-food products on an annual basis.

International trade, which is the lifeblood of the Canadian economy has become increasingly challenging over the past 20 years for exporters.

Mineral fuels, including oil is valued at about $122 billion, is the top exporting industry, representing 20% of all exports. Automobiles is next at $81 billion, representing 15%, followed by machinery, including computers is $42 billion, or 8%. Other significant sectors include precious metals, wood, electrical machinery, plastics, aluminum and steel, aircraft and oil seeds.

There is economic data to indicate that growth in Canada is becoming more broadly based and self-sustaining, which is certainly a positive. Canada’s fortunes will continue to rise or fall with trade, as they have throughout our history.

A large contingent of nearly 70 Canadians was on-hand at the World Economic Forum including several cabinet ministers and influential business people.

In light of the recent tensions between Canada and China, primarily concerning the Huawei situation, the federal government showed an impressive amount of pushback following veiled threats made by China, which had said Canada would pay dearly for its part in the apprehension of Meng and that it best not jeopardize Huawei projects relating to the unrolling of the next 5G network in Canada.

Instead, Canada made the announcement that it was aligning with Huawei rival Nokia on a $40 million research project on the development of the 5G technology, which most tech experts say will be the next big thing in wireless communications. The government funding will help support Nokia Canada’s current workforce of more than 2,000 employees in Ottawa and Mississauga.

Nokia Canada President and CEO Rajeev Suri issued the following statement on the new alliance: “We are pleased to stand as a strong partner to Canada’s innovation ecosystem by joining forces with Innovation, Science and Economic Development Canada and creating a new Canadian presence for Nokia Bell Labs. Together, we will enable a digital future powered by cutting-edge technologies such as 5G, IoT, cloud computing, artificial intelligence and machine learning, transforming Canada’s industries, cities, and local communities.”

According to the BDC’s Chief Economist Pierre Cleroux, estimates for economic growth in 2019 should be 2%, which is an indicator that the country is using current capital and labour at close to full capacity. The Bank of Canada has raised its trendsetting rate to 1.75%, however it has remained unchanged over the past two reviews.

Canada exported a total $605 billion worth of products in 2017. That dollar amount reflects an 8% decline since 2013 but an 8% gain between 2016 and 2017, according to figures from Statistics Canada.

For the first nine months of 2018, Canada’s exported goods were valued at nearly $340 billion. The nine-month metric puts Canadian exports on track for an annualized $450 billion estimated for all 2018 and a projected 7% year-over-year gain.

With the nervousness over just how abundant our trade will continue to be with the United States and China, Canada continues to explore new avenues in developing trading partnerships. The new USMCA agreement has yet to be given the full litmus test. Obvious partners to look at increasing trade would be the United Kingdom, Japan and South Korea.

Economic expansion remains broad-based, with investment and exports picking up steam. So far, exports are up 2% compared with a year ago. While services and goods exports have grown, the latter haven’t kept up with foreign demand. In spite of a lot of squabbling over tariffs and quotas, the fact that Canadian goods are still in high demand bodes well for exporters.