Category: Economic World News

Canada’s pursuit of deeper trade ties with China will not be hindered by the USMCA pact, as Ottawa seeks to make the Asian superpower an “essential component” of its trade diversification strategy, International Trade Diversification Minister Jim Carr said Monday.

Carr, who will co-chair a two-day business conference in China with Finance Minister Bill Morneau later this week, told the Toronto Region Board of Trade that “no conversation about the Pacific Region would be complete without talking about Canada’s second-largest trading partner, China.”

“We should be under no misapprehensions that our trading relationship with the United States will continue to be the most important of all; of course it will be,” he said. “But there’s a value in expanding trade markets, including to China.”

Asked about a controversial clause in the USMCA that would give any party the option to leave the pact with six months’ notice if another enters a free trade agreement with a non-market economy — widely believed to be China — Carr insisted “it doesn’t change anything.” The clause has fuelled worries that Washington, currently engaged in a trade war with Beijing, will attempt to interfere in Ottawa’s trade relationships.

“We’ve given up no sovereignty and no, I’m not concerned about it,” Carr said, noting that the current North American Free Trade Agreement also has a provision allowing for an exit with six months’ notice.

Carr and Morneau’s trip to Beijing comes during the same week as a separate trade mission to China led by Federal Agriculture Minister Lawrence McAulay, Treasury Board president Scott Brison and the premiers of Nova Scotia, Prince Edward Island and Newfoundland and Labrador. The goal of that effort is to promote Canada’s food, education, clean growth and tourism sectors.

Exports to China from Atlantic Canada grew 37 per cent last year to more than $1.5 billion, with seafood exports having doubled in the past five years alone, according to the federal government. Chinese tourism is also on the rise, while Atlantic Canadian universities currently get more than 30 per cent of their international students from the economic powerhouse.

Our trading relationship with the U.S. will continue to be the most important of all. But there’s value in expanding trade markets, including to China

Canada has built an “unparalleled platform” of trade relationships spanning 14 free trade agreements covering 51 countries, Carr said, including the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the recently ratified 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

But taking advantage of those deals will mean engaging small and medium-size enterprises in global supply chains and infrastructure projects and mobilizing “non-traditional and first time exporters,” including businesses led by women and indigenous people, Carr said.

“When only 11 per cent of women-owned businesses export, we are leaving hundreds of billions of dollars on the table.”

The previous government scaled back programs available through the Trade Commissioner Service to only serve companies already established in overseas markets, Carr said.

“We will reverse that trend and get our sales numbers way up,” he said. “And Canada will not see the multilateral trading system eroded. We will defend it and we will reform it.”

OTTAWA  Industry groups are warning Ottawa against introducing certain exemptions on a project list set to be released under Bill C-69 this fall, saying such a move would politicize decisions over which oil and gas projects will be subject to new federal regulations.

The warnings come in response to a proposal by Ottawa to force some oilsands projects to face stricter federal environmental reviews if Alberta scraps its hard cap on oilsands emissions, now set at 100 million tonnes per year. The move was widely viewed as a political snare for United Conservative Party leader Jason Kenney, who has threatened to axe some of Alberta’s climate policies if he wins the upcoming provincial election.

The decision by Ottawa would put so-called “in-situ” oilsands developments on a list of projects that specifies what kind of industrial activity will be subject to tough new federal environmental assessments. Under current legislation, in-situ projects, which use steam to loosen up bitumen reservoirs deep below the earth’s surface, are only subject to provincial reviews.

Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers, said Ottawa is “holding the hammer over industry” with its project list, and has long called for in-situ developments to fall under provincial jurisdiction.

“If you have a good rationale, let’s talk about it,” McMillan said. “But if you’re going to put [in situ] on the list only to exempt it off, even though you have no rationale, that just doesn’t make sense.”

His comments add to growing concerns over Bill C-69, a sprawling piece of legislation that will substantially broaden the scope of environmental reviews for major projects such as pipelines, hydro dams and offshore oil wells. Lobby groups have been putting pressure on Ottawa as it prepares to release its project list this fall, calling for relief on certain pipeline expansions, in-situ projects and offshore drilling programs.

Earlier this year, Environment and Climate Change Canada released a discussion paper that laid out guidelines for what projects might be subjected to environmental assessments under C-69. It said in-situ oilsands facilities “could be” added to the project list, but said they could also be “exempted from federal assessment if a jurisdiction has in place a hard cap on greenhouse gas emissions.” Alberta is the only province with a hard cap on oil-related GHG emissions.

A spokesperson for Environment Minister Catherine McKenna declined to specify when the project list would be released. She said in-situ projects could be subject to review under those environmental conditions because GHG emissions are “shared jurisdiction,” and therefore require some level of climate policy to be in place.

“We are working to depoliticize the process — criteria for major projects have been made public, with decision making based on science and evidence,” Environment spokesperson Caroline Thériault said in a statement.

CAPP has also called on Ottawa to remove offshore exploration drilling programs from the project list. Such drilling programs may take just three to six months to complete, the group said, but take years to secure the relevant regulatory approvals.

We are working to depoliticize the process

Meanwhile, the Canadian Energy Pipelines Association has asked for a sizable extension to its thresholds for pipeline projects that are subject to federal review. Currently, any pipeline that crosses provincial borders and is longer than 40 kilometres is subject to a federal environmental assessment; CEPA has asked that threshold to be expanded to 500 kilometres.

“This impact assessment review should only be for those major, nation-building infrastructure projects,” said Chris Bloomer, head of the CEPA.

Such concessions could go a long way in quieting industry criticism of C-69, which has been widespread ever since Kinder Morgan Canada’s Trans Mountain pipeline was quashed by a Federal Court of Appeal ruling in August.

Bloomer has been among the fiercest critics of the legislation, telling a House committee this year that it was “difficult to imagine that a new major pipeline could be built in Canada” under the looming C-69 changes.

Last month, Alberta Environment Minister Shannon Phillips called on Ottawa to “stop dithering” and release the project list.

Alberta, as well as several industry lobby groups, have said Bill C-69 creates unnecessary regulatory overlap between the provinces and federal government. Many regulatory decisions are best left to provincial bodies like the Alberta Energy Regulator or the Canada-Newfoundland and Labrador Offshore Petroleum Board.

Environmental groups have called on Ottawa to include in-situ projects on the list, saying to do otherwise would mark a contradiction in the Liberals’ environmentally-minded climate policies.

“That’s like saying you’re going to study the environmental impact of road vehicles and then giving a free pass to SUVs and transport trucks — it doesn’t make any sense,” said Patrick DeRochie at Environmental Defence.

The in-situ process, unlike the open-pit mines that have come to symbolize the oilsands, involves injecting steam through well bores as a way to tap bitumen seams well below the Earth’s surface. Because most near-surface oil deposits have been tapped in northern Alberta, analysts expect that as much as 80 per cent of future oilsands growth will come through in-situ methods.

“Really, the future of oilsands expansion, if there’s going to be any expansion, is in situ oil production,” DeRochie said.

Bill C-69 is currently in second reading in the Senate. A committee is expected to study the bill this winter.

There has been a lot pounding of the arena glass since the Bank of Canada raised interest rates on Oct. 24.

“If there are typos in this missive, it’s because I’m still shaking my head,” David Rosenberg, a famous Bay Street analyst, wrote after policy makers announced that they had reset the Canadian benchmark rate at 1.75 per cent.

Ted Carmichael, an economist and long-time observer of the Canadian scene, tweeted

that he “couldn’t agree more” with Rosenberg, adding that “things aren’t nearly as rosy as the Bank of Canada believes.” Martin Pelletier, a portfolio manager at Calgary-based TriVest Wealth Counsel Ltd., advised investors to get “on the other side of the Bank of Canada and their rainbows-and-unicorns outlook.”  

A small sample, to be sure, and the harsh assessment of the central bank’s outlook probably represents a minority. Still, the negative reaction got the attention of Stephen Poloz, the governor. The Toronto stock exchange dropped more than three per cent over the days that followed the interest-rate increase, even though Poloz and his deputies on the Governing Council had asserted that household spending was “healthy” and that income growth was “solid.”

Stocks have recovered somewhat, but trading remains volatile. Investors appear to have forced Canada’s central bank to stress test its view on where the economy is headed. “Recent action has some commentators questioning whether many economic forecasts, including ours, are too rosy,” Poloz told an audience in London on Nov. 5. “Such a divergence between the economic outlook and market action needs to be taken seriously.”

Let’s consider that outlook for a moment. The Bank of Canada, which has been nailing its forecasts of late, predicts gross domestic product will expand 2.1 per cent this year, 2.1 per cent in 2019 and 1.9 per cent in 2020. That’s a little faster than the central bank thinks the economy can grow without stoking inflation. The jobless rate has been hovering around an historic low of 5.8 per cent for nearly a year, suggesting the economy is approaching full employment. Factories and other industrial facilities are running at levels that suggest companies’ ability to keep up with orders is maxing out.   

Call the outlook “rosy” if you want, but those are the conditions that typically put upward pressure on inflation, which the central bank is mandated to contain. That’s why Poloz and his lieutenants raised the benchmark rate last month. And it’s why they signaled they will continue doing so; borrowing costs still are delivering lots of stimulus to an economy that doesn’t appear to need it.

“If Poloz believes Canada is ‘at capacity,’ and it looks like the U.S. is there too, then this is the stuff of inflation scares,” Jeff Weniger, a strategist at WisdomTree Asset Management Canada, wrote in a blog post on Oct. 29. “Of the forecasting outliers (those pencilling in 2 per cent or 2.75 per cent for year-end 2019), we think the latter camp has a better chance of being proven correct.”

The Rosenberg view deserves attention for a couple of reasons. One is that he’s been right before: the former Wall Street economist who now works in Toronto for Gluskin Sheff + Associates Inc. is among the relative few who can claim they saw something bad happening ahead of the Financial Crisis.

Rosenberg also has a large audience. His writings show up in both the Financial Post and the Report on Business, and he is often quoted by Bloomberg News and others in the financial press. The man has a megaphone, and late last month he was using it to condemn the Bank of Canada as a collection of idiots.

“How can anyone in their right mind declare that the outlook is anything close to constructive when the Chinese stock market is down nearly 30 per cent from its highs, the ex-U.S. global MSCI is off nearly 20 per cent from its 2018 peak, the entire world equity index is down 11 per cent and the TSX is down seven per cent?” Rosenberg wrote in a commentary for the Post on Oct. 25.

The Bank of Canada must attempt to weigh both the upside and downside risks and take the middle, risk-balanced path

Stephen Poloz

Let’s give the allegedly deranged leader of Canada’s central bank a chance to respond. Poloz told his London audience that he takes a longer view of equities; yes, the S&P 500 Index is off its peak from earlier this year, but it still is 35 per cent higher than three years ago, he said.

The recent slump surely has something to do with a darker outlook. But repricing is natural now that deflationary fears have passed and two-way risk has returned to financial markets. And if you look close, you see that the stock-market declines are concentrated in industries that are exposed to Trump’s trade wars.

“It is evident, therefore, that rising interest rates can explain only part of what we have observed in stock markets — trade actions are playing a central role,” Poloz said.  

That explanation probably won’t satisfy the Canada bears; they seem committed to the idea that the economy is on a bad path. They could be correct. But the central bank doesn’t have the luxury of taking one side of a bet: the trade wars could wreck the economy, or they could end tomorrow. That’s why policymakers have stated repeatedly they will proceed cautiously.

“The Bank of Canada must attempt to weigh both the upside and downside risks and take the middle, risk-balanced path,” Poloz said.

Email: kcarmichael@postmedia.com  | Twitter: CarmichaelKevin

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