After months of negotiation, Canada and U.S. struck a last-minute deal on NAFTA, just before the midnight deadline. Kim Parlee talks with Derek Burleton, Deputy Chief Economist, TD Bank Group, about what the new deal, to be renamed, the “United States-Mexico-Canada Agreement” means for the auto sector, dairy farmers, and future trade between Canada and the U.S.
I'm here with Derek Burleton. He's Deputy Chief Economist at TD Economics. We just heard, of course, that a deal has been done between Canada and the US, not NAFTA, but the USMCA-- quite a ring to it. What is your first thought? I mean, I know you still haven't had a lot of time to delve into the details.
I'm breathing a sigh of relief. I think, compared to some of the uncertainty of what could have been if they didn't reach an agreement-- exclusion of Canada from NAFTA, big tariffs on the auto sector-- this is certainly a better outcome. It's not a perfect deal, and I think, as we go forward, we're going to learn more of the details within the agreement. Some of them may not be as positive. But I think, from a big perspective, I think it's a good deal overall, and it seems to be a good deal for Canada.
If the goal was to sort of limit the damage, I think they appear to have pulled that off.
Let me ask you about your comment about not a perfect deal. And, again, I know you're still going through it. We're hours into it, not days. What stands out for you in terms of some of the big things that worked for Canada and maybe some things that the US got?
In terms of buying a little bit more security, I think, for me, that's the big thing. You know, Canada was able to preserve Chapter 19, the dispute mechanism. Other dispute mechanism, as well, the chapter 20, which is government on government, that is preserved. Chapter 11, the investor dispute mechanism, was something that they caved on, Canada. In other words, that was scrapped. But I think that wasn't a huge priority of Canada to preserve that. In fact, the US tends to use that investor dispute mechanism more-- at least, US companies. So not a big deal. But I think that's important. They preserved the dispute mechanisms for the most part.
I the auto sector was key, as well, that Canada is not going to be immune from all Section 232 duties on Canada that the US may impose in the future, but there's enough protection in there that I think the auto sector is well positioned to absorb those risks.
So overall, I think it's a good deal for the auto sector overall.
Yeah. I think I was listening to the head of the CAW this morning saying, you know, if he wrote it, he wouldn't write it that way, but he was really pleased with what actually happened, given the circumstances in terms of what we were negotiating.
Dairy-- I know this doesn't affect a lot of people in Canada, but, clearly, it affects dairy farmers, who are not happy with the outcome here. But was this a trade off we were expecting?
I think so. You know, it's about 3.5% of the market, from a high level, which has been opened up to US farmers. Initially, it appeared that they were shooting for more like 8% or 10%. So from that perspective, maybe not as bad for the Canadian dairy industry as may have been feared. But they have opened up the market for ultra filtered milk. Some of the milk products the US will certainly benefit from. The dairy industry, I don't think, will be particularly happy about this in Canada, but this is not surprising. I think this was one area that Canada appeared willing to concede.
And, again, this is a small thing, perhaps, in the whole agreement, but we saw that, of course, the cross-border shopping thresholds have increased quite a bit. I believe there was some movement in terms of allowing the government to tax some of that, at least to get some tax revenues. But from an economic standpoint, what does that mean for people who are trying to sell their stuff in Canada?
Well, the Canadian retail industry-- it's not going to go over that well. But then again, I think many had feared a bigger push for the US. The US allows $800 exemption in terms of what it allows duty free, so Canada going up to $150, you know, is not as far as some may have been concerned about at the start.
So, yes, not good, but, again, this was fully expected as part of a deal.
Let me ask you-- Bank of Canada coming up in a few weeks in terms of-- and they are probably-- a huge sigh of relief coming from Ottawa in terms of that being done. It makes their job a little bit easier. Does this change, do you think, your outlook in terms of what you think they might be doing?
It might. Not so much for this year. I think a hike later this month has pretty much been cemented, barring any kind of financial market turbulence, which this deal, reaching it, certainly helps to mitigate.
But it's more about next year. I think the Bank of Canada had built in what I call a trade policy discount in their growth forecasts, or about half a percentage point. So you remove this risk, more or less, from the equation. And it could mean a Bank of Canada hiking more than, say, twice next year. They could go three times.
Ultimately, they're ultra data dependent. It'll depend on what the data shows. And they'll be watching the investment numbers' overall growth. But, in my view, this raises a risk-- shifts a risk towards three hikes for next year as opposed to two.
And bond markets seem to be agreeing with that. We've seen longer term yields up today. The Canadian dollar is up to a four month high. And that's the other thing. The Canadian dollar is going to see strength, because a lot of the reason why it was sitting below $0.80, which is our estimate of fair value, is because of this trade policy risk. So you remove that, and you're probably going to get back to $0.80 quicker than many had expected.
Derek, thanks very much.