Trump’s threat to impose tariffs on autos adds new pressure to NAFTA talks

President Donald Trump’s threat to impose sweeping new tariffs on imported automobiles may be an attempt to pressure his NAFTA partners into striking a deal that would help drive manufacturing jobs back to the U.S.

Trump directed Commerce Secretary Wilbur Ross on Wednesday to initiate a so-called Section 232 national-security investigation into imports of cars, trucks and vehicle parts that could possibly lead to tariffs.

These investigations can take months to conclude. In the meantime, the clock is ticking to clinch a NAFTA deal that can be voted on by the current Congress this year. An agreement over auto-production rules has been one of the key sticking points in nine months of talks.

The looming threat of auto levies could further weigh on Mexico and Canada, which have a large stake in the U.S. auto market as the two biggest foreign suppliers of vehicles.

It’s “inconceivable” that Canada would pose a threat to America’s security, Adam Austen, spokesman for Canadian Foreign Minister Chrystia Freeland, said in an email on Thursday. “Canada and the United States have the greatest economic and security partnership of any two countries in the world,” he said.

Any attempt to use the auto-import probe as leverage is unlikely to work, said Bill Reinsch, a former Clinton administration commerce official who’s now a senior adviser at the Washington-based Center for Strategic and International Studies.

“A deal on autos is within reach but the other U.S. demands remain unresolved, and Canada and Mexico are not going to agree on autos without assurances on the other stuff,” Reinsch said. “I don’t see how bullying them on auto tariffs will change that. In addition, you’re talking about a process that is going to take some time.”

The Commerce Department, which is leading the probe, said in a statement on Wednesday that automobile manufacturing “has long been a significant source of American technological innovation.”

The investigation will examine whether the decline of the U.S. automobile sector threatens to weaken the U.S. economy by reducing research and development, skilled jobs and more advanced manufacturing processes like electric and autonomous vehicles, Commerce said.

Hours before the announcement of the investigation on Wednesday, Trump said on Twitter that “big news” was “coming soon for our great American Autoworkers. After many decades of losing your jobs to other countries, you have waited long enough!”

‘Not Smart’

Linda Hasenfratz, chief executive officer of Canada-based auto-parts maker Linamar Corp., said it’s “ludicrous” to suggest vehicle imports from Canada and Mexico represent a security risk.

“This is clearly a negotiating tactic to draw to a close the ongoing NAFTA negotiations and other trade disputes,” she said in a statement Thursday. “While I support coming to an agreement on NAFTA to eliminate that uncertainty and allow us to all get back to business, I certainly don’t support a tactic which will drive inflation and ultimately economic recession.”

U.S. President Donald Trump directed Commerce Secretary Wilbur Ross to initiate a so-called Section 232 national-security investigation into imports of cars, trucks and vehicle parts that could possibly lead to tariffs.

Canadian auto parts stocks slipped on the U.S. move. Magna International Inc., North America’s largest auto supplier, was down 1.2 per cent at 1:03 p.m. in Toronto, while Martinrea International Inc. fell 1.6 pe rcent and Linamar dropped 1 per cent.

More than half of the cars built in Canada are made by American manufacturers with a majority of U.S. content, said Flavio Volpe, president of the Toronto-based Automotive Parts Manufacturers’ Association. Tariffs would “punish American companies, suppliers and customers. This is not smart,” Volpe said.

The Trump administration has already stoked tensions with Canada and Mexico by threatening to impose permanent tariffs on imported steel and aluminum if they don’t agree to successfully conclude a revamped NAFTA. Those duties are being implemented as part of separate Section 232 probes into the metals that wrapped up earlier this year. Temporary relief from the duties for Canada and Mexico is due to expire on June 1.

Trade experts were at a loss to explain how the booming U.S. auto sector could be considered a national-security risk. They also warned the measures would be hard to defend at the World Trade Organization and are likely to invite retaliation from a number of countries, if Trump follows through.

“This is a case where there is no auto shortage, the companies are not currently in trouble, and there are plenty of alternative sources from friendly allies,” Reinsch said.

Bloomberg.com

Deutsche Bank axes at least 7,000 jobs, with up to 10,000 cuts possible, in trading retreat

FRANKFURT — Deutsche Bank is slashing more than 7,000 jobs to cut costs and restore profitability, while keeping its international reach as its new CEO seeks to reassure investors and clients.

Germany’s biggest bank said global headcount would fall to well below 90,000 from 97,000, with a 25 per cent cut in equities sales and trading jobs, which are mainly in New York and London and where it has been losing ground to U.S. rivals.

Deutsche Bank did not give a specific number, but a person with knowledge of the matter told Reuters ahead of the lender’s annual general meeting on Thursday that it was aiming to axe 10,000 positions.

Christian Sewing, who became CEO in an abrupt management reshuffle last month, said the bank was committed to its international presence, fleshing out his plan to scale back its global investment bank and refocus on Europe and its home market after three consecutive years of losses.

Last month the bank flagged cuts to U.S. bond trading, equities, and its business serving hedge funds.

“We remain committed to our Corporate & Investment Bank and our international presence — we are unwavering in that,” Sewing said, while acknowledging a “challenging” revenue environment.

Deutsche Bank has already dismissed 600 investment bankers over the past seven weeks and will cut spending by 1 billion euros (US$1.17 billion) by the end of 2019 in its investment bank.

“This reduction is already fully underway, and so far, due to the considered way we’ve handled this, we have not seen any meaningful revenue attrition,” Sewing said.

EUROPE’S ALTERNATIVE

Deutsche Bank has long been a default source of lending and advice for German companies seeking to expand abroad or raise money through the bond or equity markets, a role which has had the tacit backing of successive governments in Berlin.

Sewing said that Deutsche Bank’s position as a competitor to the Wall Street banking heavyweights such as Goldman Sachs, JP Morgan, Morgan Stanley and Bank of America, whose clout has grown in recent years, remained an important focus.

“We are Europe’s alternative in the international financing and capital markets business. However, we must concentrate on what we truly do well,” he said.

Another big European bank, BNP Paribas, effectively ruled out any tie-up with the German lender as the French bank’s chief executive told its shareholders that it was not considering big deals.

“In the foreseeable future, the group has no intention to carry out large-sized operations, because it is not possible,” Jean-Laurent Bonnafe said, when asked by an investor at its AGM if BNP was “analyzing” Deutsche Bank.

Deutsche Bank has been losing ground to rivals in investment banking in all regions, Thomson Reuters data shows. Its ranking for investment banking fees fell to 10th from 8th in the Americas between 2010 and 2017, to 15th from 6th in Asia-Pacific and to 3rd from 2nd in Europe.

Coalition data shows that in global equities, Deutsche has also lost market share in the cash, derivatives and prime services businesses over the same period. Overall in global equities it ranked between 7th and 9th in 2017 against a ranking of between 4th and 7th in 2010.

The reductions will reduce the investment bank’s leverage exposure by 100 billion euros, or 10 per cent, but KBW analysts said the moves were disappointing and its shares, down more than 31 per cent this year, were down 3.7 per cent at 1221 GMT.

“We view this as confirmation of our view that drastic but necessary restructuring is impossible at this stage,” KBW wrote.

“We remain concerned with their ability to generate free cash flow to support business growth post restructuring,” it said, adding that to achieve its target for a return on tangible equity of 10 percent, Deutsche would need 6 billion euros of profit, something the broker viewed as highly unlikely.

The cuts are merely a first step and further details are needed, Ingo Speich, a fund manager at Union Investment which holds Deutsche Bank shares, said.

“We would have liked to see concrete announcements at today’s shareholder meeting,” he told Reuters. “We need clarity on how the decisions will affect the bottom line.”

SHAREHOLDER PRESSURE

Deutsche Bank shareholders, who were fed with Frankfurter sausages and pretzels at the AGM, called on it to speed up the recovery process after months of internal turmoil.

“It is high-time to … end the years-long and still-popular ‘Deutsche Bank bashing’ and get to work finally getting our bank back on its feet after six long years of restructuring,” Klaus Nieding of shareholder lobby group DSW said.

Chairman Paul Achleitner last month abruptly replaced CEO John Cryan with Sewing amid investor complaints the bank was falling behind in executing a turnaround plan.

Achleitner defended his decision, adding that U.S. banker John Thain would head a new strategy committee on the supervisory board of the bank, which is also under pressure from credit ratings agencies.

© Thomson Reuters 2018

RBC beats expectations with 9% per cent profit rise

TORONTO — Royal Bank of Canada, Canada’s biggest lender by market value, on Thursday posted an 11 per cent rise in its second-quarter earnings, helped by strong growth at its wealth management and retail businesses.

The bank said earnings per share totalled $2.06 in the quarter to Mar. 31. Excluding one-off items, earnings per share rose to $2.10. Analysts had on average forecast earnings of $2.05, Thomson Reuters I/B/E/S data showed.

Net income increased by 9 per cent compared with the previous year to $3.1 billion. That included net income of $1.46 billion at its personal & commercial banking business, up 7 per cent reflecting improved margins and sales.

The bank’s wealth management business lifted net income by 25 per cent to $537 million, in part reflecting benefits from tax reform in the United States.

RBC’s investment banking business fared less well, with net income totalling $665 million, roughly unchanged on a year ago amid less favorable market conditions.

© Thomson Reuters 2018

Canada’s $35 billion Infrastructure Bank picks Pierre Lavallee to become CEO

The $35 billion (US$27 billion) Canada Infrastructure Bank has found its chief executive officer, with Pierre Lavallee soon taking the helm of an agency Prime Minister Justin Trudeau hopes will spur widespread spending on things like transit and trade links.

Lavallee will be announced Thursday as the new president and CEO of the Toronto-based bank and is scheduled to start on June 18. He was formerly senior managing director and global head of investment partnerships for the Canada Pension Plan Investment Board, where he spent six years.

The arm’s-length, government-financed lender will have “a lot of flexibility as to where in the balance sheet we can position ourselves” to spur relatively large-scale revenue-generating projects, Lavallee said in an interview Wednesday. He said the bank could build on the global reputation of Canada’s pension funds, that projects will be assessed case-by-case and that the bank can be “creative” in how it structures a deal.

“There is a real demand for infrastructure assets that I think the bank can help attract into Canada, and this is both from Canadian institutional investors and foreign institutional investors,” Lavallee said. “It’s really not everyday someone offers you the ability to lead the startup and build-out of an institution like that.”

The bank is mandated to invest in revenue-generating projects in three categories: public transit, green infrastructure and trade-and-transportation. Finance Minister Bill Morneau has said the bank’s goal is to leverage its funding — drawing five or six dollars of private money for every one of its own.

‘Open Mind’

The infrastructure bank was a key platform commitment by Trudeau’s Liberals in the 2015 election, but was launched only last year. It hasn’t yet invested in a project, though the enacting law has been passed and the board selected.

Setting up a major agency takes time, Lavallee said, “and I personally don’t feel like it’s actually been a long time, but that’s one man’s view.” Morneau has said $15 billion of the bank’s capital will be concessional capital, or direct funding to push projects to approval, while the remaining $20 billion will be for loans or equity stakes.

Lavallee’s appointment comes with one Canadian infrastructure project in the spotlight: Kinder Morgan Canada’s Trans Mountain oil pipeline expansion. The federal government is in talks with the company to somehow backstop the project after the company threatened to walk away in the face of provincial opposition.

Lavallee demurred when asked if the bank could invest in Trans Mountain or other pipelines, declining to comment on a specific project but citing the mandate to invest in revenue-generating projects from the three categories. “We’re keeping a very open mind, so I expect that there will be lots of opportunities that will come our way over time,” he said.

‘Transformational’ Projects

Infrastructure projects are notable for how long they take, and typically take more time than a buyout. “I wish I could tell you this is a few weeks’ cycle-time, but the reality is, it’s going to be several months and the timing is going to be very project-specific,” he said, adding the focus will be on a smaller number of big projects, rather than a large number of smaller-scale ones. “We are going to focus on relatively large transformational-type projects.”

Lavallee will lead strategy and day-to-day operations of the bank while reporting to the board. At CPPIB, Lavallee led a team managing about $94 billion in assets, the bank said in a statement. He was previously executive vice-president at Montreal-based Reitmans Canada Ltd. and a partner with Bain & Co.

“With an exceptional combination of investment and public-sector expertise, Pierre is well placed to set the strategic course and direction of Canada Infrastructure Bank and develop a high-performing management team,” Janice Fukakusa, the bank’s chair said. Annie Ropar, incoming chief financial officer and chief administrative officer, begins June 1.

Bloomberg.com

Canada’s biggest banks shrug off mortgage slowdown with profit beats

TORONTO — Royal Bank of Canada and Toronto-Dominion Bank, Canada’s two biggest lenders, reported second-quarter earnings that exceeded market expectations on Thursday, shrugging off concerns over slowing mortgage growth.

Canadian authorities have introduced policies, including taxes on foreign buyers, intended to cool rampant housing markets in Toronto and Vancouver and bring about a “soft landing,” where prices stabilize gradually.

Canada’s banking regulator introduced new regulations in January, requiring borrowers taking out uninsured mortgages to be stress-tested to determine their ability to make repayments at a rate 200 basis points above their contracted mortgage.

TD’s Chief Financial Officer Riaz Ahmed said the new rules had slowed new mortgage applications but he was happy with the direction the broader market was taking.

Ahmed said the bank had seen some reductions in mortgage applications in the second quarter, reflecting the slowdown in the overall market, but remained comfortable with its previous expectation of mid-single-digit growth for the year.

“I think we’re happy with how this ‘soft landing’ appears to be emerging at the minute. Sales activity is down and prices are down. The market cooling seems to be working and we’ll hope that it continues to play out that way,” he said.

RBC, Canada’s biggest lender by market value, posted an 11 per cent rise in earnings per share to $2.06 in the quarter to March 31. Excluding one-off items, earnings per share rose to $2.10. Analysts had on average forecast earnings of $2.05 a share, Thomson Reuters I/B/E/S data showed.

RBC said net income increased by 9 per cent compared with the previous year to $3.1 billion. That included net income of $1.5 billion at its Canadian retail business, up 7 per cent, reflecting improved margins and sales.

Rival TD said earnings per share, excluding one-off items, totalled $1.62 in the quarter to March 31, compared with $1.34 a year ago. Analysts had on average forecast earnings per share of $1.50, according to Thomson Reuters I/B/E/S data.

Canadian banks are also benefiting from improved margins as a result of the country’s central bank having raised its key interest rate three times since July 2017.

TD said net income at its Canadian retail business grew by 17 per cent to $1.83 billion.
Smaller rival CIBC said on Wednesday it expected new mortgage sales to drop by 50 per cent in the second half.

© Thomson Reuters 2018

TD Bank tops expectations with strong performance at home

TORONTO — Toronto-Dominion Bank, Canada’s second-biggest lender by market value, on Thursday reported second-quarter earnings which were ahead of market expectations, benefiting from a strong performance at its domestic retail business.

The bank said earnings per share, excluding one-off items, totalled $1.62 in the quarter to March 31, compared with C$1.34 a year ago. Analysts had on average forecast earnings per share of $1.50, according to Thomson Reuters I/B/E/S data.

© Thomson Reuters 2018

Trump launches probe into whether auto imports to U.S. pose national security threat

WASHINGTON — The Trump administration on Wednesday launched an investigation into whether tariffs are needed on the imports of automobiles into the United States, moving swiftly as talks over the North American Free Trade Agreement have stalled. President Donald Trump predicted earlier that U.S. automakers and auto workers would be “very happy” with the outcome of the NAFTA talks.

The White House said in a statement that the president had asked Commerce Secretary Wilbur Ross to consider whether the imports of automobiles, including trucks, and automotive parts threaten U.S. national security. The president said in the statement that “core industries such as automobiles and automotive parts are critical to our strength as a Nation.”

The U.S. remains far apart on the talks over rewriting the trade pact with Canada and Mexico, with the discussions at an impasse over rules for car production. The initiation of the trade investigation could be seen as an attempt to gain leverage in the talks with the two U.S. neighbours. Treasury Secretary Steven Mnuchin has said that efforts to renegotiate the trade agreement could spill into next year.

Nearly half of the vehicles sold in the U.S. are imported, with many coming from assembly plants in Mexico and Canada. During a meeting with auto executives earlier this month, Trump said he would push for an increase in the production of vehicles built at U.S. plants. He has also criticized European Union auto imports and tariffs and earlier this year threatened a “tax” on European imports.

A person familiar with the discussions said the president has suggested seeking new tariffs of 20 to 25 per cent on automobile imports. The person spoke on condition of anonymity and was not authorized to speak about private deliberations.

Trump brought a little-used weapon to his fight to protect auto workers: Section 232 of the Trade Expansion Act of 1962. The provision authorizes the president to restrict imports and impose unlimited tariffs on national security grounds.

The Trump administration used that authority in March to slap tariffs of 25 per cent on imported steel and 10 per cent on aluminum imports. Until then, the United States had pursued only two such investigations since joining the World Trade Organization in 1995. Both times — in a 1999 case involving oil imports and a 2001 case involving iron ore and steel imports — the Commerce Department refused to recommend sanctions.

Critics fear that other countries will retaliate or use national security as a pretext to impose trade sanctions of their own.

Daniel Ujczo, a trade lawyer with Dickinson Wright PLLC, said the tariff threat is likely meant to pressure Mexico into accepting U.S. demands for NAFTA changes that would shift more auto production to the U.S. from Mexico. But he questioned whether it would work.

“I do not believe that it will have the desired effect,” Ujczo said. “Everyone knows that (the investigation) will take too long and has no chance of surviving any legal challenge.”

Trump offered a hint about the move earlier in the day on the South Lawn, telling reporters that “you’ll be seeing very soon what I’m talking about.” He noted that both Mexico and Canada have been “very difficult to deal with” during the negotiations.

“I am not happy with their requests. But I will tell you in the end we win, we will win and will win big,” Trump said before departing for New York. He said America’s neighbours have been “very spoiled because nobody’s done this but I will tell you that what they ask for is not fair. Our auto workers are going to be extremely happy.”

Mexico has so far resisted U.S. attempts to get higher regional content rules in the auto industry and move production to higher-wage U.S. and Canadian factories. The U.S. has also sought to change NAFTA’s dispute-resolution system, and include a sunset clause that would allow countries to exit after five years.

The Trump administration has already missed an informal deadline that had been set by House Speaker Paul Ryan to get a revamped deal to Congress in time for lawmakers to vote on it in a midterm election year. Mexico, meanwhile, will hold presidential elections on July 1 and Andres Manuel Lopez Obrador, the leftist candidate who has led in polls, has said the re-negotiation shouldn’t be rushed through and should be left to the winner of the election.

If the negotiators fail to agree to a revamped version of NAFTA, the discussions could be extended into 2019. Trump could also carry out his threat to abandon the agreement that he has long railed against, throwing commerce among the three countries into disarray.

Trump has sought to overhaul NAFTA in an effort to return auto production to the United States and reduce America’s trade deficit. The U.S. has been demanding that a percentage of a car’s content of auto parts originate in a country — the U.S. or Canada — with average auto worker wages of about $15 an hour to qualify for NAFTA’s duty-free status.

But companies have built supply chains that straddle NAFTA borders and changing the rules could disrupt their operations, raise costs and potentially put them at a competitive disadvantage with manufacturers in Asia and Europe.

Chinese takeover of Aecon blocked on security grounds

The Canadian government has blocked a proposed takeover of construction firm Aecon Group Inc. by a unit of China Communications Construction Company Ltd. on national security grounds.

Prime Minister Justin Trudeau’s government announced its decision Wednesday after launching a security review earlier this year, according to a statement from  Innovation Minister Navdeep Bains obtained by Bloomberg News.

Shares of Aecon, which helped build Toronto’s iconic CN Tower, have declined in recent weeks to the lowest since the $1.19 billion deal was announced in October on concern that it would be blocked. Aecon’s construction work includes several sectors that could impact national security, including building out the nation’s telecommunications networks.

The shares ended trading Wednesday at $17.34, up 0.5 per cent, and a day earlier traded at the lowest level since the day the deal was announced. CCCC International Holding Ltd. had agreed to pay $20.37 a share to acquire the construction firm.

“We listened to the advice of our national security agencies throughout the multi-step national security review process under the Investment Canada Act,” Bains said in a statement. “Based on their findings, in order to protect national security, we ordered CCCI not to implement the proposed investment.”

Aecon’s project portfolio includes work in fields such as telecommunications, nuclear power and military housing and training facilities, Anita Anand, a professor of law at the University of Toronto who holds J.R. Kimber Chair in Investor Protection and Corporate Governance, said in an interview before the decision was announced. She had called for it to be blocked.

“There is clear evidence that there are national security issues at play in this transaction,” she said in an earlier interview. If government sees “reasonable grounds to believe there’s a potential injury to national security, then it should intervene.”

The move comes at a critical point for the future of the country’s trade relationships. Canada is considering launching trade talks with China as it seeks to become less reliant on the U.S. market. It is also haggling with the U.S. and Mexico over how to update the North American Free Trade Agreement as President Donald Trump’s administration spars with China.