THREATENING, TARIFFIED WORLD CIM September 25, 2019 Todd Evans - PowerPoint PPT Presentation

TRADING IN AN UNCERTAIN, THREATENING, TARIFFIED WORLD CIM – September 25, 2019 Todd Evans Principal, EDC Economics

OVERVIEW 1. Challenging trade environment for Canadian exporters 2. Global Trade becoming more regional 3. Outlook for China-US trade dispute 4. Implications for Canada 2

CHALLENGING TRADE ENVIRONMENT FOR CANADIAN EXPORTERS 3

ELEVATED POLICY UNCERTAINTY Global economic policy uncertainty index 300 250 New populism 200 Financial crisis 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4

GLOBAL MOMENTUM SLOWING Year-over-year % change 6 5 4 3 Industrial production 2 1 World trade volumes 0 2015 2016 2017 2018 2019 -1 5 Source: Haver Analytics

ORDERS CONTRACTING Slowing growth since 2018… …slowdown synchronized. Global purchasing managers index Purchasing managers index >50 = expansion Heatmap: green >50; red <50 55 54 53 52 51 50 May – Aug contraction 49 2016 2017 2018 2019 6

CONTEXT Populism and protectionism 7

CANADIAN TRADE CONFIDENCE FELL TO ITS LOWEST LEVEL IN SEVEN YEARS… EDC’s Trade Confidence Index 90 85 80 Historical average 73.7 75 70 69.8 65 60 55 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 8 The Index score represents the responses from five different components

GLOBAL TRADE BECOMING MORE REGIONAL 9

GLOBAL TRADE HAS EVOLVED INTO THREE PRIMARY SUPPLY CHAIN HUBS Input trade Source: Santoni, Gianluca, Dari Taglioni (2015)

CANADA’S OUTWARD AND INWARD INVESTMENT GROWING MUCH FASTER THAN TRADE 2000-18, cumulative nominal percent change 300 250 Outward Investment 200 150 Inward Investment 2000-18 CAGR 100 CDIA 7.4% Imports FDI 5.8% 50 Exports Imports 2.9% 0 Exports 1.8% -50 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

CANADA’S SERVICE EXPORTS GROWING MUCH FASTER THAN MERCHANDISE GOODS EXPORTS 2000-18, cumulative nominal percent change 120 100 Merchandise Goods 80 Services 60 2000-18 CAGR 40 Goods 1.7% Services 4.0% 20 Canada 2018 Exports 0 Goods $584 bn Services $121 bn -20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

CANADA’S FOREIGN AFFILIATE SALES EXCEED ITS EXPORTS Canada 2016, billions of dollars 658 626 700 600 500 400 300 200 100 0 Foreign affiliate sales Exports Goods Services

OUTLOOK FOR CHINA-US TRADE DISPUTE 14

US ADMINISTRATION NOT HAPPY WITH THIS PICTURE Annual US trade balance in goods and services, billions USD 50 0 -50 -100 -150 China joins WTO -200 December 2001 -250 -300 -350 Canada Mexico China -400 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bureau of Economic Analysis, US Department of Commerce.

U.S. RESPONSE: MORE TARIFFS ON CHINA Share of US goods imports from China covered by special protection (%) Percent 100 96.8% 90 Dec. 15, 2019 80 70 68.5% Sept. 1, 2019 60 50.6% 50 Sept. 23, 2018 40 30 8.1% 20 2017 10 0 Source: Peterson Institute of International Economics. 16

TARIFFS ARE HAVING AN IMPACT ON TWO-WAY TRADE US – China quarterly merchandise trade, billions USD 160 140 US Imports from China 120 US Exports to China 100 80 60 40 20 0 1999 - Q1 2001 - Q1 2003 - Q1 2005 - Q1 2007 - Q1 2009 - Q1 2011 - Q1 2013 - Q1 2015 - Q1 2017 - Q1 2019 - Q1 Source: US Bureau of Economic Analysis.

LOOKING AHEAD 1. Comprehensive China-US agreement removing all tariffs a low probability outcome for 2019 2. US demands are key sticking points for China 1. Guarantees for IP and investment protection requires changes to Chinese domestic laws 2. So does establishment of trade enforcement mechanisms 3. Trump needs a foreign adversary to help him win the 2020 election – China fits the bill 4. Reaching a deal likely to drag well into 2020 – false starts, uncertainty (CUSMA experience) 18

IMPLICATIONS FOR CANADA 19

CANADA’S GLOBAL ‘TRADE’ RELATIONSHIP GOES WELL BEYOND MERCHANDISE EXPORTS Goods Exports = $584 bn Service Exports = $121 bn Direct Investment Stock = $1,340 bn Foreign Affiliate Sales = $658 bn Goods Imports = $596 bn Service Imports = $146 bn Direct Investment Stock = $970 bn Foreign Affiliate Sales = $1,104 bn A $C 5.5 trillion commercial relationship! 20 Source: EDC Economics, Statistics Canada.

2019 GROWTH OUTLOOK 0.8 21 Source: EDC Global Economic Outlook, Fall 2019.

UNCERTAINTY, LOWER CONFIDENCE IMPACTING BUSINESS SPENDING US and Canada business investment: structures and equipment (year/year % change) 15 10 5 0 percent -5 Greater exposure to -10 global trade means a United States bigger impact on -15 Canada Canadian investment -20 2012 - Q1 2013 - Q1 2014 - Q1 2015 - Q1 2016 - Q1 2017 - Q1 2018 - Q1 2019 - Q1 Source: EDC Economics, Haver Analytics.

EDC’S Growth CANADIAN 2018 2019 (f) 2020 (f) EXPORT Goods 7% 3% 3% FORECAST Services 6% 4% 4% 23 Source: EDC Global Export Forecast Outlook, Spring 2019.

TWO ILLUSTRATIVE SCENARIOS FOR CANADA Protectionist “new normal” Normalization   Trump re-elected   CUSMA Canada 1st-mover over US in CETA, CPTPP US rejoins CPTPP US-China Escalates Agreement → Canada collateral damage → Chinese restrictions on Canada lifted dispute ROW US battles EU, Japan, Mexico No Brexit WTO Reform stalls, dispute settlement inactive “Ottawa Group” makes progress • Sector/country shocks continue So what? → Ad hoc support needed (S/A, canola) • Easier FDI attraction • Investment: Harder to attract inward; • Faster growth in trade Outward push continues • Increased diversification • Slower trade diversifying to ROW 24

Todd Evans Principal, EDC Economics, Export Development Canada Email: TEvans@edc.ca

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