We are continuing with the second part of my article titled, “The new world with Trump,” today from where we left off. Our focus is, again, the economy. And our starting point is Donald Trump's anti-globalization statements and promises he made during his presidential campaign.
In the first part of this article, I had discussed how trade under the Free Trade Agreements (STA) was important for the U.S. and touched on the influence of the North American Free Trade Agreement (NAFTA). After discussing Mexico-U.S. trade relations, we should now discuss relations with the neighbor in the north. Thus, let us have a look at the issue from Canada's perspective. Even though Trump might not attack Canada as he does Mexico, this new period is likely to leave traces on the neighbor's economy in various aspects.
Let us start with NAFTA. What did Trump say?
“I will either go over this terrible agreement or rip it up.”
Just after Trump's victory, we witnessed statements implying that he was ready to speak to Mexico. He made these statements, but I don't really believe Mexico is ready to change anything as yet. The Latino economy does not have the upper hand in this one, but it will probably try and stand strong.
If Trump sees that things do not go according to his whims and desires, he might try to bury NAFTA into history. Of course our sine qua non here is for “NAFTA's [disregarding] the matter of its significance for the U.S.,” which I underlined in detail in my last article. As not only Mexico, but Canada, too, is an important partner of the U.S. According to 2015 data, Canada is the U.S.'s number one export and number two import partner. It is also the U.S.'s second largest service partner. We should also add that this service covers the deficit caused by trade in goods.
In this respect, data implies that Canada is rather dependent on the U.S. What would you say if I told you that 76 percent of Canada's goods export in 2015 was to the U.S.?
They are not the same
Getting back to the topic from the NAFTA front, the future of the agreement will, of course, depend on Canada's attitude, too. And frankly speaking, although it may not be as much as Mexico's, Canada has worries as well. Yes, Canada is dependent on the U.S. and the U.S. is dependent on Canada to a degree, but the likelihood of Trump deciding to say, “I don't care about any of this,” brings up questions about the future of NAFTA.
However, I should also add that as I mentioned above, while Trump bombards NAFTA, he never acted equally toward either of his partners. Therefore, it might be possible that the U.S. agonizes over Mexico while drawing closer to Canada (not to mention that it is neither clear how Trump's new administration will treat NAFTA, and nor how this will affect either partner), the two countries were once partners in the STA in 1989, long before NAFTA. At this integration point in which the production values have intertwined, and looking at the above motives, I do not think the U.S. will want to part with Canada in an aggressive manner.
Depends on the US economy
Thinking of NAFTA as a fixed factor, we can now move on to another potential factor. Another issue that might affect Canada's economy after Trump's victory, would be the U.S. economy. If the new president, aiming to strengthen the economy through infrastructure expenditures and tax cuts (when we put the budget and trade risks aside), happens to proceed in this respect, this will have positive effects on the Canadian economy. If the opposite happens, this will not have very good outcomes. On the other hand, if we do not peg NAFTA, the wind that comes from the developments of the U.S. economy will shape Canada's economy.
The following effects are possible too: Will the U.S. being affected by a protectionist and nationalist wave decrease the interest toward its economy? If it does decrease, will this interest shift toward Canada? Another idea: Will the tax cuts in the U.S. decrease the competitiveness of Canada's taxes?
All these are elements that can have a good or bad role in post-Trump interaction.
What will happen to the TPP?
Another possible reflection of Trump's presidency on Canada would be the Trans Pacific Partnership (TPP.) We all know the Republican president is against the TPP, which aims to bring together the 12 economies in the Asia-Pacific. And it is quite hard for Trump to not use this discourse after this moment. Hence, it is as if these are the TPP's, like that of its owner Obama.
If, based on this expectation, we assume that the TPP will be left without the U.S., then Canada, too, will be deprived from a regional trade agreement. But what would it mean if Canada is deprived of the TPP? At this point we can talk about an opportunity cost. In other words, seven additional markets that Canada can integrate into free trade via the TPP.
On the other hand, while it is a possibility that some of the agreements that the U.S. might turn its back on might benefit Canada, the U.S.-Canada energy cooperation might just be revived. Hence, we know that Trump said O.K. to the Keystone XL Pipeline project that Obama turned his back on. At this point, we should remember Trump's statements on trying to get rid of the OPEC combination.
Before we forget, we should mention that the TPP's future is important for China as well.
I was also planning to discuss China before I started to write, but we will discuss this issue in the third part of this series. However, I would like to end this article with a Trump statement: “My main focus is China and OPEC. These countries are absolutely destroying the USA.”