In the heat of Bombardier’s showdown with Boeing, the company struck a partnership with Airbus that included shifting assembly of the C Series jet from Canada to the United States.
The idea was to get around punishing duties that would have made sales of the Canadian-made plane to U.S. airlines impossible.
Bombardier later prevailed in the dispute when a U.S. trade panel ruled in its favour and authorities lifted the duties. But the Montreal-based aircraft maker is shifting production anyway, spending as much as $300-million to build a new assembly line in Mobile, Ala.
That is the new reality for many Canadian companies in the current investment climate. Even a level playing field isn’t good enough any more.
A host of factors have tilted the balance in favour of investing in the United States, including the uncertainty hanging over the North American free-trade agreement, rising protectionism, steep U.S. corporate tax cuts and regulatory roadblocks in this country.
The United States is winning the longer a new NAFTA deal remains undone. Perpetual uncertainty has become a potent trade weapon for the country – more powerful than tariffs. And it’s a silent killer. You can’t see investments that are not made.
There has been a lot of talk in recent weeks about an imminent agreement in principle. But a resolution of the thorniest issues remained elusive as intense negotiations continued this week in Washington. And that plays into U.S. hands.
Comments this week by President Donald Trump suggest he’s in no rush to get it done.
“NAFTA, as you know, is moving along,” Mr. Trump told reporters at the White House during a visit from French President Emmanuel Macron. “I could make a deal very quickly, but I’m not sure that’s in the best interest of the United States. We’ll see what happens, but we’re doing very well.”
The Trump administration appears to have taken the option of scrapping NAFTA off the table, under pressure from U.S. farmers, other business groups and the Republican leadership in Congress. A do-nothing strategy may now have taken its place.
Imagine the consequences of NAFTA negotiations that drag on past the November U.S. midterm elections and into next year, with no clear outcome. Putting money into Canada and Mexico would continue to be a riskier bet than investing inside the walls of the world’s largest market. By doing nothing at all, the United States is reaping the benefits of uncertainty.
The Bank of Canada estimated in its latest monetary-policy report that the combination of uncertainty around trade policy and U.S. tax cuts will knock 3 per cent off business investment and 1.5 per cent off exports between now and 2020.
Relatively speaking, these are not devastating impacts. But Canada’s investment challenge is like the drip-drip of a faucet that’s been leaking for years. Uncertainty and faltering competitiveness are a constant drag on economic growth in Canada.
Foreigners are already making the calculation that this country is a less attractive place to put their money. Canada experienced a record net outflow of foreign direct investment last year ($69-billion). New foreign-capital inflows have been halved since 2015. A big part of the story is the flight of foreign investors from the oil patch. But the phenomenon is affecting other industries as well.
Earlier this month, Royal Bank of Canada president and chief executive Dave McKay told the Canadian Press that a “significant” investment exodus is already under way, especially in the energy and clean technology sectors.
And he warned that a capital flight will inevitably trigger a loss of talent. “If we don’t keep capital here, we can’t keep the people here,” Mr. McKay lamented.
Finance Minister Bill Morneau insists fixing the competitiveness problem is his top priority. The Finance Department is conducting a detailed analysis of how U.S. tax and regulatory changes are affecting the Canadian economy. So far, at least, the government hasn’t done anything specific to address the issue.
Who knows if Mr. Trump is purposely ragging the puck on NAFTA. But Republicans have repeatedly warned the White House that greater protectionism could negate all the competitive gains from the tax cuts, and perhaps he’s listening.
Unless the United States secures major trade concessions from Canada and Mexico – which seems unlikely – the Trump administration may be content to let the talks go on indefinitely.
Unfortunately, that’s not doing Canada any favours. Quite the opposite.