Gutting NAFTA: Why a Scotiabank economist says ‘Canada should be prepared to walk and not fear the outcome’

Briefing highlights

On gutting NAFTA
How we feel about the economy
And our kids' prospects
An ad jingle I’d love to hear
Markets at a glance
And just look at Tilray go
Danske Bank chief resigns

On gutting NAFTA

Derek Holt pulls no punches in his morning research note to clients.

Bank of Nova Scotia’s head of capital markets economics believes Canada should call any U.S. bluff and be prepared to leave the NAFTA bargaining table.

This comes as Foreign Affairs Minister Chrystia Freeland meets again in Washington as a supposed Sept. 30 deadline looms.

“In my personal opinion, Canada should be prepared to walk and not fear the outcome,” Mr. Holt said, referring to a call Tuesday between Prime Minister Justin Trudeau and President Donald Trump.

“The PM is dead right that no NAFTA agreement is better than one that guts NAFTA by removing dispute settlement mechanisms and exposes the country to the questionable trustworthiness of the Oval Office, Congress and the U.S. courts,” he added.

“That is especially true in the current climate whereby the value of the U.S. signature on its international agreements has seriously diminished and when the U.S. is intent upon rejecting all international accountability for the agreements it signs, whether we’re talking NAFTA or the WTO among other examples. “

And the “pure pressure tactics” from senior U.S. officials won’t sway Canada.

Mr. Holt made four points:

On Majority Whip Steve Scalise warning Canada doesn’t appear willing to make concessions: “I don’t find a US-Mexico agreement that excludes Canada to be a viable threat regardless of Scalise’s warning. Scalise’s probably going to be out of his present job in about seven weeks anyway, and won’t be in his role to whip up much of anything after that point on NAFTA or USMC or USM or whatever this thing potentially gets called.”

On Mr. Trump’s threat to hit Canadian auto exports with tariffs: “Congress may be a passive supporter of Trump’s actions against China, but try whacking their districts with U.S. auto tariffs imposed upon Canada. The effort would backfire upon the U.S. auto industry given its high import content of Canadian parts and seamless integration of cross-border production … Each of the U.S. auto industry, broader U.S. business interests and US organized labour are dead set against U.S. auto tariffs on Canada that would throw U.S. workers out of jobs and toss the entire North American auto industry into a state of upheaval right into the mid-terms.”

On the “artificial” Sept. 30 deadline: “Because Mexico – that, you’ll recall, may have betrayed Canada in the negotiations – wants an agreement to be signed by [the current president before a new administration takes power] on Dec. 1 … That’s not Canada’s problem and Canada owes nothing to Mexico after Canada stood by the Mexicans when they were the ones attracting more of Trump’s ire. In fact, if anything, Canada may well prefer a deadline after Quebec’s election on Oct. 1, and one has to be cognizant of the fact that Canada faces a federal election no later than a little over a year from now and possibly sooner.”

On the U.S. threat to withdraw from NAFTA: “Not gonna happen. The NAFTA agreement requires Trump to deliver a notice of intent to withdraw six months in advance of possibly doing so. The president is not the one who then makes the withdrawal call six months later. That power rests with Congress. At this point, the odds favour Canada in that the mid-terms are likely to strip away the GOP’s grip on power in Washington.”

On the potential market impact: “Over all, while markets would be volatile and [the Canadian dollar] and the peso would likely drop on failure to achieve a NAFTA agreement soon, these market shock absorbers and the points raised above put time on Canada’s side”

‘Economic nostalgia’

Canadians are fairly comfortable with the state of the economy, but they’re really bummed out about the prospects for their children.

What’s more, almost half the Canadians polled in a global survey by the Pew Research Center believe the average person was better off financially two decades ago.

The study released by Pew this week is interesting on several levels, notably where the financial crisis of 10 years ago is concerned.

Globally, economic confidence has recovered since the dark days of the recession, which many feared could turn into an all-out depression.

What’s interesting about us, according to the survey of more than 30,000 people in 27 countries, is that our confidence in 2009 was much higher than in other countries. Indeed, people in many other developed economies are at about the level now that we were at then.

The 2009 survey showed 43 per cent of Canadians believed the economic situation in the country was good. That’s now at 63 per cent.

Compare that, for example, to 11 and 46 per cent, respectively, in Britain; 10 and 44 per cent in Japan; and 14 and 43 per cent in France. Other countries are higher currently, including Germany at 78 per cent, and the U.S. at 65 per cent.

Canada certainly suffered less and rebounded faster than others.

Canada’s current 63 per cent is well above the median of 48 per cent. It’s how we think our kids will fare where we fall well shy of the median, as this table shows.

“Pessimism about the future is especially striking in some countries where current conditions are rated positively, as doubts remain about the next generation’s financial well-being,” Bruce Stokes, Pew’s director of global economic attitudes, said in his report on the survey conducted between mid-May and mid-August.

“Among advanced economies surveyed, only in Poland does a majority rate both the current economy (69 per cent) and the economic future of today’s children (59 per cent) positively,” he said.

“But even there, optimism declines from present to future.”

Then there’s “economic nostalgia.” Forty-eight per cent of Canadians think the financial situation of the average person is worse now than it was 20 years ago.

The median there is 46 per cent, so Canada is close to the mark. But the folks in Poland, Sweden, South Korea, Russia, Netherlands, Israel, Japan, Hungary, the U.S., Argentina, Australia and Germany are perkier than we are on that score.

Behind us are Britain, France, Spain, Italy and Greece.

(Well, you’d know there was big trouble if we hadn’t beat the Greeks, which was devastated by a debt crisis, and the Italians and the Spaniards, who also had their share of woes.)

Canada has recovered well since the crisis, Mr. Stokes noted in an interview, rebounding by 20 points since 2009 as to how we feel about the economy now.

The age breakdown in the survey is also interesting, according to the numbers provided by Mr. Stokes. Just 36 per cent of Canadians between the ages of 18 and 29 believe finances are worse today than they were 20 years ago, compared to 51 per cent among those of us who are 50 and older.

As for gender differences, 68 per cent of Canadian men believe the economy is in good shape, compared to 58 per cent of women.

And as for the future of our children, 28 per cent of men believe the kids will be better off, compared to 21 per cent of women.

(Dad was always the fun one, right?)

Pew didn’t ask that question in pre-crisis surveys, Mr. Stokes said, and now, “what we’ve seen persistently is that the future is not going to be better for our kids, especially in advanced economies.”