Kim Parlee sits down with Frank McKenna, former Canadian Ambassador to the U.S. and Deputy Chair of TD Bank Group for a look at Canada in a post-NAFTA world and the potential impact of the upcoming U.S. midterm elections.
Here's what we're doing. You have to just kind of sort it all out for us, if that's OK. Just, in 12 minutes, tell us what's going on. You and I kind of chat every once in awhile. Not so much on the show, but in other places. But when you look at what's been happening in the States, and now that we've got more time under President Trump's belt, what would you say the scorecard is so far when you balance it? And I know political leanings, as you look at me. But the economy is doing well.
I mean, you can't argue with that. Other things, maybe not so much.
Yeah, no. I think we need to give credit where credit is due. The economy in the United States is doing extraordinarily well. But a lot of that's fueled by tax cuts. And those tax cuts were putting gasoline on a fire, because the economy had been doing well when President Trump was elected. In fact, the last 18 months under President Obama created more jobs than the first 18 months under President Trump.
So a good economy that's now been made red hot. And, of course, it's all on borrowed money, because the tax cuts have all been financed with borrowed money. And as we saw today, the deficit is $750 billion, and rapidly escalating. So that's a bill that's going to come due before too long.
But in the meantime, regulatory reform. I think the animal spirits that have been unleashed in the United States through the tax cuts and so on has created a red-hot economy. On the other side of the coin, tariff barriers are just a net loss for the United States of America and the rest of the world. So I don't think that's very good.
Reducing immigration means the United States is being starved of badly needed labor and badly needed intellectual firepower at a time when that's badly needed. So I think those are big negatives. And then there's the hostility that the president has shown towards all his traditional allies around the world. I think that's creating new alliances, which is not healthy in the long term for the United States.
Let me ask you, then. What do you think is going to happen in the midterm elections? I mean, we're getting close. I've heard speculation that the Democrats could take it all. I've also heard speculation Republicans could take it all. Do we know?
No, we don't know, and there's three weeks to go. And, quite frankly, the polls were wrong for the presidential election, so they could be wrong again. But here's the way it looks right now. It looks right now as if the Republicans will not only win the Senate but increase their seats. Problem is, one, of arithmetic for the Democrats.
There's about 23 or 24 Democrats that are running in this election. About nine Republicans. So the law of averages would tell you the Democrats are much more vulnerable. And they're vulnerable to the point where they may very well lose a couple of seats.
The House is a different story. Everybody's running. And in the generic votes, vote total has the Democrats ahead by about 7% or something of that range. The problem is, is that because of the voter suppression activity that Republicans have been so good at, and the gerrymandering, the calculus is that you would need about 7% increase in popular vote over your opponent in order to be able to win.
So the Democrats right now are at maybe 7.2%. So they're in the range where they are likely to win the House. And that could change in the next several weeks. But at this stage, the trend line would have the Democrats winning the House.
We're going to talk a lot about, I think, how this translates for us in Canada. Then let's just go through some scenarios. Democrats take everything. What happens?
Well, that just changes everything if the Democrats win the Senate and the House. But they're not going to win the Senate. I can just tell you that right now. But if they did that, they could block just about everything the president wanted to do. I mean, you'd have total and absolute gridlock if that were to happen.
And if we have it the other way, do Republicans take everything?
It'll be the status quo. It will be what it is now. And the president will end up getting his way, because right now he's steamrolled over the Republicans. And basically, the Republicans have swallowed all of their orthodoxy.
Deficits? They are now the biggest spenders on the planet. And free traders? They are now the biggest protectionists on the planet. So if he steamrolled them on that, he'll continue to steamroll them.
So what is this going to mean, then, for-- I mean, so much depends, I think, on the midterms, and what's going to happen for the back half of the year. But you look about how much he's done on trade. And you mentioned tariffs. It's anti-free trade, and the Republicans are behind him on that.
How is this going to play out, do you think, over the next two years? I mean, Canada has solved, I would say, their short-term issues with NAFTA, or USMCA. China? How is that going to play out, do you think, in the longer term?
Well, I think that will be the centerpiece battle. He ended up getting an agreement with Mexico and Canada. In my view, largely because he ran into a testing of the temperature on the Hill, and realized he was going to lose this battle.
Tell me more about that.
Well, I think when they went to Congress, Republicans and Democrats, they were told, don't bring us a free trade agreement that is only Mexico. We want a Canadian-Mexican-US free trade agreement. And I think it was at that moment that, effectively, they sued for peace. Or, put another way, kind of cut the deal that led to the end of the negotiations.
So I think that was true in that trade agreement. They look as if they're trying to find a way with Japan and with Europe in order to get something peaceful there. So the centerpiece battle is going to be China. And they've been girding their loins for this for some time, right from the beginning of this presidency. He's hired the biggest flamethrower in China-- or on the planet-- and that's Peter Navarro, who wrote the book Death by China. And so he would be a major influence on the president on China.
And they're looking at another, I would say, Cold War with China. Mike Pence signaled that with a speech a week ago that was extraordinarily inflammatory towards China. So that that's girding up to be the big battle over the coming months and years.
All right, stay with us. When we come back, we're going to delve into what all this means for Canada. Gets Frank's perspective on that. We're going to delve into politics, economy, and energy. You are watching Money Talk. We'll be right back.
We're back with Frank McKenna. He is Deputy Chairman of TD Bank Group since 2006 and, of course, the former Canadian ambassador to the United States. We've been talking about everything that's been going on in the States. Also talking about China. I want to bring this all back to Canada, because what does it mean for us? Actually, I'll start with just-- how, in your view, the USMCA. Was this a good deal for Canada?
Yeah, it was a good deal to preserve $1.250 trillion of trade. Mexico, Canada, US, something like that. At the end of the day, there are some nicks on it. But we do have the guardrails that will allow us to continue that extraordinarily profitable relationship.
We were talking about China. And as the US escalates and gets ready, one of the clauses I know that has caught a lot of attention is the ability to have free trade with a non-market economy. I spoke with a lawyer last week who talked about this USMCA, putting it together. A Fortress North America, which just is gonna basically prevent Canada from doing much in China. Is that accurate, do you think?
Well, I don't subscribe to that particular theory. And by the way, we need to watch what goes on with China and the US very, very carefully. As Canadians, we know that what the fat guy in the canoe does is very, very important.
In this case, we have two fat guys in a canoe. So we've got to watch that.
But I don't think so. I think Canada would have preferred not to have a clause like that. But at the end of the day, we can do all kinds of sectoral trade arrangements with China, which could cover off a lot of the trade relationship. Getting to a final free trade agreement with China is probably a five- or 10-year journey anyway. And after that time, the current administration will be long gone. And we may be dealing with people that have a different perspective. In the meantime, we can get most of the juice out of the relationship without infringing on that clause.
What's next for Canada? Again, the focus has been so much, I think, for-- collectively, I think a lot of businesses, CEOs, and was holding their breath waiting for this to happen. It's done. What should Canada focus on now?
Well, I think that's the most important question of all. We've just had a very large crisis that we faced as a country. And we did it together. And I think what we should do is learn from this crisis and not go back to where we were. 50 years ago, we had a similar crisis with tariff barriers. At that time, we had 69% of our exports going to the United States. Now we're up to 76%. It's gotten worse. So I think we have to do a lot of things.
Diversify. We've signed a lot of free trade agreements. Good on us. We need to do more. Latin American TRIP free trade agreements, for example. We need to deregulate. Trump has used that medicine on his economy, and it's really worked. So we need to deregulate, get rid of a lot of the regulatory overburden. We need to crash and crush interprovincial trade barriers. We just can't keep doing this to ourself.
We need to roll out modern tools. 5G across the country with the telecom companies. We need to recruit the best and the brightest immigrants to Canada, taking advantage of the dislocation in the world. And we're doing a lot of that now. We need to do more.
We need to orderly dismantle supply management so that we can be generous with the farmers, but allow them all to compete in the world economy the way that 80% to 90% of other farmers compete in the world economy. There's some things we should fix in health care, which is probably one of the most important values we have as a country.
We still have a gaping hole with Pharmacare. I think we should start with catastrophic drug care, something that's probably chewable and manageable, and use that as a model to try to go further in the fullness of time. But there's a lot of things we should fix with the crisis that we have. We should use our capital to fix stuff.
We should deal with the pipeline issue. A national energy corridor from coast to coast. Things of that nature that would fix a lot of problems.
One thing I was going to say-- and I've got a couple of minutes. I'm just letting you know because I know we're going to get going on this. The pipeline. I mean, it's Western Canadian Select. Of course, the oil that's coming out of Western Canada is, what, a $50 discount right now to WTI?
Is that a symptom of all these things we need to correct, do you think, in your opinion?
It is. We can't get stuff done in Canada. If you want to build an office building in Toronto, it's OK. If you're in Alberta or Saskatchewan or the other parts of Canada and try to get anything done on the resource sector, the so-called permit economy, you can't get stuff done. And it's killing us in terms of our world reputation, and in terms of the wealth creation in Canada, and the money we have available for the poorest of our citizens.
Right now, today, we're losing $100 million. As we speak here, we're losing millions of dollars.
On this Western Canadian Select as an example again.
Yeah. People have to understand that oil is selling in the world now at $75 or $80. We get $25 or so. We're still producing the oil. We haven't stopped producing it. We're producing it at a loss, and selling it at this giant discount.
I don't believe any fair-minded Canadian would accept that result. Would think it's right that our nurses and our teachers, our social service recipients-- all of these people are being denied all of the good things that could be available to them because we don't have the courage to deal with an issue that is very simple. And that's access to markets.
Sounds like a platform, Frank. I was going to say, I keep hoping you'll run. But anyway, Frank, thanks so much.
You're welcome. Thank you.
Frank McKenna, Deputy Chairman of TD Bank Group and, again, former Canadian ambassador to the United States.