The Canadian government shocked the professional financial and economic media with their latest fourth quarter GDP release showing the economy has essentially come to a grinding halt at 0.1% growth. [Compare to U.S. GDP growth of 3%]
The Canadian Q4 GDP growth isn’t one percent, it’s one-tenth of one percent: 0.1%, essentially halted; but everyone discussing this is missing something very important.
First, The Financial Post headline:
[FP] Canada’s economy practically came to a halt in the final three months of 2018, in a much deeper-than-expected slowdown that brings the underlying strength of the expansion into doubt.
The country’s economy grew by just 0.1 per cent in the fourth quarter, for an annualized pace of 0.4 per cent, Statistics Canada said Friday from Ottawa. That’s the worst quarterly performance in two and a half years, down from annualized 2 per cent in the third quarter and well below economist expectations for a 1 per cent annualized increase.
While a slowdown was widely expected in the final months of the year due to falling oil prices, it’s a much bleaker picture than anyone anticipated with weakness extending well beyond the energy sector. Consumption spending grew at the slowest pace in almost four years, housing fell by the most in a decade, business investment dropped sharply for a second straight quarter, and domestic demand posted its largest decline since 2015. (read more)
The financial punditry go on to give multiple reasons for the drop and all of them are factually accurate. However, there’s a key aspect that I cannot find discussed in any analysis of the data.
A very specific key aspect.
First, let me say CTH does not want to see the Canadian economy falter; not even a little bit. By disposition CTH wants to see economic abundance for everyone, especially our close friends and allies. But stand back, look at the bigger, BIG, picture, the media always avoid discussing…. you’ve got to ask yourself how can Canada be slowing down at the exact same time the USA economy is skyrocketing?…. There’s a connection.
Again, all of the currently expressed financial reasons for the slowdown are accurate; I am not disputing them. However, it’s what they are not discussing that really matters.
In the third paragraph of the FP article I highlighted a partial sentence: “business investment dropped sharply for a second straight quarter.” That means sharp drops in business investment for Canada in the time-frame July 2018 through December 2018.
Now pause, and reference the U.S. fourth quarter: “Consumer spending continued to grow solidly and, most encouragingly, business investment growth recovered sharply after a dip in the third quarter. Despite big external headwinds and financial market volatility in the fourth quarter, U.S. firms are not retrenching sharply on capex.”
Astute economic followers will note what the background is.
♦In July, August, September (Q3) of 2018 the new NAFTA negotiation was in the final stages. The U.S. and Mexico had already come to the terms; Canada was the outlier having to re-join an agreement in September where they previously abandoned negotiations.
♦On October 1st, 2018, the first day of Q4, the USMCA was unveiled. Now the U.S., Mexico and Canada were all committed. Throughout the fourth quarter, all business interests had an opportunity to review the much anticipated USMCA outcome and details.
Multinational corporations, domestic corporations, U.S. and Canadian businesses were all looking for the same very specific detail: What happened with the NAFTA loophole?
Within the new USMCA the critically important NAFTA loophole was closed.
Over the past three decades both Canada and Mexico structured key parts of their independent trade agreements to take advantage of their unique access to the U.S. market. Under the existing NAFTA, Mexico and Canada generate billions in economic activity through exploiting the NAFTA loophole.
China, Asia (writ large), and the EU enter into trade agreements with Mexico and Canada as back-doors into the U.S. market. So long as corporations can avoid U.S. tariffs (and rules of origin that pertain to those tariffs), by going through Canada and Mexico they would continue to exploit this approach.
By shipping parts to Mexico and/or Canada; and by deploying satellite assembly facilities in Canada and/or Mexico; China, Asia and to a lesser extent EU corporations exploited a NAFTA loophole for rules of origin on finished goods.
Through a process of building, assembling or partially manufacturing their products in Mexico/Canada those foreign corporations could skirt U.S. trade tariffs and direct U.S. trade agreements. The finished foreign products entered the U.S. under NAFTA rules.
Why deal with the U.S. when you can just deal with Mexico, and use NAFTA rules to ship your product directly into the U.S. market?
This exploitative approach, a backdoor to the U.S. market, was the primary reason for massive foreign investment in Canada and Mexico; it was also the primary reason why candidate Donald Trump, now President Donald Trump, wanted to shut down that loophole and renegotiate NAFTA.
At the conclusion of Round #6, just before giving up on Chrystia Freeland for good, this was the direct issue at the heart of a very frustrated U.S.T.R. Lighthizer’s strongly worded response to Canada:
[…] In another proposal, Canada reserved the right to treat the United States and Mexico even worse than other countries if they enter into future agreements. Those other countries may, in fact, even include China, if there is an agreement between China and [Canada]. This proposal, I think if the United States had made it, would be dubbed a “poison pill.” We did not make it, though. Obviously, this is unacceptable to us, and my guess is it is to the Mexican side also. (read full remarks)
This loophole was the primary reason U.S. manufacturers relocated operations to Mexico. Corporations within the U.S. Auto-Sector could enhance profits by building in Mexico or Canada using cheap parts imported from Asia/China. The labor factor was not as big a part of the overall cost consideration as cheaper machined parts and imported raw materials.
If the U.S. applied the same tariffs to Canada and Mexico we apply to all trade nations, then the benefit of using Canada and Mexico -by those trade nations- is lost.
Corporations will no longer have any advantage, and many are likely to just deal directly with the U.S. This was the reason Trump, Lighthizer and Ross to retained Steel and Aluminum tariffs on Canada and Mexico until they agreed to the new USMCA rules.
When Trump took away the flawed NAFTA market access; and when Trump removed the ability of Mexico and Canada to broker themselves for economic benefit; there was no longer a financial benefit behind corporations investing in Canada. Under a binding trade pact between the USMCA partners, the NAFTA flaw is closed.
As a direct outcome billions of investment dollars are now being removed from any future consideration into Canada.
That’s the overarching reason for the Canadian GDP to halt.
Here’s the proverbial $64,000 question: Can Canada re-engineer their economy and actually begin to “make” products again, not just simply “assemble” foreign products from other nations?
- Can Canada reverse three-decades of specifically structured economic policy decisions that were centered around this “assembly” (brokered) economy?
- Can the environmentalists be put back into a box while heavy manufacturing and raw material development are reconstituted?
- Can the environmentalists allow natural resource development? Oil development, mining operations, lowered overall energy costs, etc?
- Can Canada somehow lower national energy costs so that Heavy manufacturing might consider restarting? (NOTE: heavy manufacturing requires massive energy use.)
- Can Canada find any industrial development investors who would be willing to take a chance on all the above?
See the problem?
The Canadian economy is not likely going to get better without a radical shift in Canadian political perspectives and outlook(s).
Then again, perhaps that’s really why Justin and Chrystia were so damned set on protecting their “cultural industries” (ie. media) from competition.
Think about it.