Canadian exporters continue to struggle even with oil price rally

Canada recorded smaller trade deficits than expected in the first two months of 2019 on a rally in oil prices, but figures released Wednesday show the nation’s exporters are still struggling.

The nation posted a smaller-than-expected $2.9 billion deficit in February, and Statistics Canada revised down its initial deficit forecast for January by $1 billion. Yet, the improved trade balance reflected stronger crude prices and masked what seems to be a deteriorating outlook in just about every other sector.

The stagnant trade performance will need to change if the nation’s economy is to emerge from its current soft patch. Exports in the non-energy sector fell 4 per cent in February and dropped to the lowest level in 12 months. In volume terms, the drop was even larger at 4.5 per cent.

“Non-energy exports — every non-energy export sector notched declines in February — was an unambiguously weak spot in the data,” said Brett House, deputy chief economist at Scotiabank. “Overall, a weak print, but in line with expectations based on other major macroeconomic indicators.”

Total exports are still down more than 6 per cent from record highs last July, and the slump is one of the main reasons why Canada’s economy has practically stalled over the past six months. Even with the smaller than expected deficits in January and February, the nation’s trade gap is hovering near historic highs.

All of this is beginning to undermine business sentiment, hampering investment and threatening to spill over into other parts of the economy. Earlier this week, the Bank of Canada warned the recent economic slowdown and global trade tensions were beginning to hamper confidence.

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•  Wednesday’s report included revisions that showed better export numbers in nominal terms in January — with a revised 5.3 percent gain that month — followed by a 1.3 per cent drop in February.

• Even as rising oil prices helped export receipts, that key sector too is shipping out less product, in part because of production curtailments imposed by the Alberta government this year. Export volumes of crude oil were down 5.3 per cent in February

• While not as bad as exports, imports too have been sluggish, suggesting the problems in the export sector are part of a broader curtailment of trade flows. In nominal terms, imports were down 1.6 per cent and little changed in volume terms.

With assistance from Erik Hertzberg

Bloomberg.com

Slump in world trade is just as bad as the decline sparked by the dotcom crash, warn analysts

A recent collapse in global trade is the worst since the financial crisis and as steep as during the recession of the early 2000s, according to new figures from the Dutch government.

World trade volumes slumped 1.8 per cent in the three months to January compared to the preceding three months as factories grapple with a deepening global industrial downturn, the CPB Netherlands Bureau for Economic Policy Analysis revealed.

An industrial slump has been triggered by a perfect storm of factors, including China’s slowdown, the car industry downturn, Brexit paralysis and Donald Trump’s attempt to upend the international trade system with tariffs on European and Chinese goods. The U.S. has imposed higher taxes on Chinese imports worth US$250 billion in the tit-for-tat tariffs battle with industrial hubs in Asia and Germany suffering sharp drops in trade in recent months.

The sudden loss in momentum has approximately been as severe as the aftermath of the dotcom bubble in 2001, when volumes slid as much as 2.2 per cent.

The International Monetary Fund warned last week that global trade “has slowed sharply from its peak in late 2017” as it downgraded its 2019 growth forecast for the third time in six months.

It warned that trade growth will slow further this year followed by “some recovery” in 2020.

WTO’s softwood lumber ruling drags Canada into fire of longstanding ‘zeroing’ dispute

A new World Trade Organization ruling on softwood lumber has dragged Canada into the heart of a long-running dispute over a controversial American trade practice — a standoff experts say is unlikely to end soon.

Canada is appealing the decision by a WTO panel that would allow the United States limited use of a method known as “zeroing” in its calculation of antidumping duties, Foreign Minister Chrystia Freeland said Monday.

“The WTO has ruled more than 20 times that zeroing, a method of calculating and applying artificially high and unfair duty rates, is inconsistent with WTO rules,” Freeland said in a statement.

But as the U.S. continues to block the appointment of new judges to the WTO’s appellate body or top court — an action that could leave it powerless by December — Canada’s challenge is almost certain to languish, said Tom Prusa, an economics professor and expert in trade policy at Rutger’s University.

“This finding does not mean Canada will ultimately lose when the case gets to appeal,” he said. “But unless the U.S. changes its tune on the WTO, this case will sit in in limbo for a long time. That’s the problem for Canada, it’s stuck now in the zeroing dispute.”

The arcane practice of “zeroing” is one of the most hotly contested issues among the WTO’s 164 member countries. It has long been used by the U.S. to prove that foreign firms are unfairly “dumping” or selling products into American markets at prices that are lower than in their home markets.

Put simply, a zeroing calculation attempts to prove dumping has occurred by taking into consideration the average of all shipments from a foreign firm sold below the average U.S. price. To the frustration of U.S. trading partners, it then ignores all shipments sold above the U.S. price, effectively giving them a weight of zero. Countries targeted by the practice complain that it exaggerates the gap in prices, making a dumping finding more likely and penalties more severe.

“It’s complete gibberish mathematics,” said Prusa. “It’s a trick that works for the U.S. by throwing out adverse facts and now Canada is trapped in it.”

An additional irritant for Canada in the softwood lumber case is that the “home price” for Canada was calculated across many months — ignoring seasonal fluctuations, he added.

“It matters because prices change over time,” said Prusa. “You might have high demand in the summer and low demand in the winter. When you do that average the way the U.S. has been doing, even normal variations look like dumping.”

Following complaints from countries like Japan and Brazil — frequent targets of antidumping — the WTO effectively outlawed zeroing in the mid 1990s. But while most countries abandoned their use of the method, the U.S. carried on, despite approximately 20 WTO rulings against it. In 2012, the U.S. abandoned its use of zeroing except in what it called “exceptional cases” a definition that ensnared Canadian softwood lumber.

“The softwood lumber case not only allowed the U.S. to treat Canadian softwood as exceptional it also allowed it to use zeroing broadly in exceptional cases,” said Prusa. “It was no doubt a loss for Canada.”

But the ruling also placed strict limitations on what parameters can be used to define a case as exceptional, said Simon Potter, counsel for McCarthy Tetrault representing Quebec border mills in the case.

What’s more, when the case eventually reaches the appellate body, he expects a ruling would also go against the use of zeroing even in exceptional circumstances.

“I think they’ll say ‘no, you can’t do it,’” he said.

But that ruling may prove elusive until the U.S. stops blocking the appointment of judges. The seven-member body is now down to three judges — the minimum required to hear cases — and continued American efforts to block appointments could soon render it paralyzed.

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IMF cuts global outlook to lowest since the financial crisis

The International Monetary Fund cut its outlook for global growth to the lowest since the financial crisis amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade.

The world economy will grow 3.3 per cent this year, down from the 3.5 per cent the IMF had forecast for 2019 in January, the fund said Tuesday in its latest World Economic Outlook. The 2019 growth rate would be the weakest since 2009, when the world economy shrank. It’s the third time the IMF has downgraded its outlook in six months.

The global volume of trade in goods and services will increase 3.4 per cent this year, weaker than the 3.8 per cent gain in 2018 but reduced from the IMF’s January estimate of 4 per cent, the fund’s report showed.

Global economic growth will recover in the second half of this year, before plateauing at 3.6 per cent from next year, according to the Washington-based fund. A series of encouraging developments have boosted optimism about the world economy in recent weeks, including the decision of the Federal Reserve to put interest-rate hikes on hold and encouraging data from China’s manufacturing sector and the U.S. job market.

Still, the IMF is warning that risks are skewed to the downside, with a range of threats menacing the global economy, including the possible collapse of negotiations between the U.S. and China to end their trade war, and the departure of Britain from the European Union without a transition agreement, known as the “no-deal” Brexit scenario.

“Amid waning global growth momentum and limited policy space to combat downturns, avoiding policy missteps that could harm economic activity needs to be the main priority,” the IMF said.

IMF Managing Director Christine Lagarde is warning that the world economy faces a “delicate moment” as finance ministers and central bankers prepare to gather in the U.S. capital this week for the spring meetings of the IMF and World Bank.

While intense trade talks between the U.S. and China have raised expectations of a lasting truce between the world’s two-largest economies, analysts remain worried about the strength of the global economy, a decade after the financial crisis. Lagarde said last week the fund doesn’t anticipate a recession in the near-term.

U.S. Downgrade

The fund cut its forecast for U.S. growth to 2.3 per cent this year, down 0.2 percentage point since the IMF’s last global outlook in January. The downgrade reflects the impact of the partial government shutdown that ended in January, as well as lower-than-expected public spending. The fund upgraded its U.S. forecast next year to 1.9 per cent, up 0.1 percentage point, on the Fed’s shift to a more patient stance on interest rates.

The IMF slashed its outlook for the euro area to 1.3 per cent this year, down 0.3 point from three months ago. Growth is expected to be softer in several major European economies, including Germany, where weak global demand and tougher car-emission standards have hit factory production. Weak domestic demand and high sovereign-debt spreads have dimmed Italy’s outlook, while street protests in France weighed on growth, the fund said.

The IMF cut its outlook for U.K. growth to 1.2 per cent this year, down 0.3 points from three months ago.

The IMF raised its forecast for Chinese growth by 0.1 point to 6.3 per cent this year, while lowering its projection for growth in Japan by 0.1 point to 1 per cent. The fund cut its outlook for India’s growth this year to 7.3 per cent, down from 7.5 per cent in January.

Bloomberg.com

U.S. Proposes Tariffs On E.U. Goods Over Airbus Subsidies

The United States is threatening to impose around $11 billion worth of tariffs on goods from European Union countries – including cheese, wine and oysters – in retaliation for E.U. subsidies to European aeronautics company Airbus.

The U.S. has repeatedly condemned the subsidies, which they argue unfairly hurt Boeing, Airbus’ American competitor. In 2004 the U.S. complained to the World Trade Organization, which in May 2018 ruled that the E.U. had issued some illegal subsidies to Airbus.

U.S. Trade representative Robert Lighthizer claims the subsidies inflict roughly $11 billion worth of damage on Boeing and the U.S. economy. On Monday he issued a list of hundreds of goods categories that could be targeted by the new tariffs equalling that amount. The products threatened are wide-ranging and include Airbus aircraft, as well Swiss and Roquefort cheeses, clementines, hunting knives and wall clocks.

“When the E.U. ends these harmful subsidies, the additional U.S. duties imposed in response can be lifted,” Lighthizer said in a statement. The U.S. said it would wait for a final ruling from the W.T.O., expected “this summer”, on the value of countermeasures it could impose before announcing a final product list.

“The E.U. has taken advantage of the U.S. on trade for many years,” President Donald Trump tweeted after the announcement. “It will soon stop!”

The threats are the latest escalation in trade tensions between the U.S. and the E.U. In June last year, the U.S. introduced new levies on steel and aluminum imports from key allies, including the E.U. The bloc responded with its own tariffs on $3.4 billion worth of American goods, including whiskey, motorcycles and jeans.

Since July, the U.S. and E.U. have been in talks aimed at ending their disagreements over trade and eventually negotiating a trade deal. But U.S. officials have expressed frustration and the slow pace of progress, according to the Associated Press.

Trade tensions flare as Trump threatens new EU tariffs on jetliners, helicopters, motorcycles, cheese, wine …

The European Union is preparing retaliatory tariffs against the U.S. over subsidies to Boeing Co., significantly escalating transatlantic trade tensions hours after Washington vowed to hit the EU with duties over its support for Airbus SE.

The two sets of planned punitive measures are the latest twists in a 14-year-old dispute that the U.S. and EU have fought at the World Trade Organization, with each side accusing the other of illegally subsidizing their main aircraft makers. President Donald Trump’s administration on Monday said it would impose tariffs on US$11 billion in imports from the EU because of the European aid.

The Office of the U.S. Trade Representative said that EU support for Airbus had caused “adverse effects” when announcing the new measures, which would target European goods including jetliners, cheese, wine and motorcycles. The EU called the US$11 billion sum cited by the USTR “greatly exaggerated” and said preparations were underway to hit back. While the EU hasn’t disclosed the amount of American goods it would target, Airbus said the bloc would proceed with “far larger countermeasures against the U.S.”

The heightened tensions come as the 28-nation EU works toward approving a mandate for the European Commission, the bloc’s executive arm, to negotiate cuts in industrial tariffs with the Trump administration. The new threats may complicate those efforts, which are part of European efforts to ward off American threats of separate duties on foreign autos and car parts.

The threatened American tariffs, which come after the WTO ruled in May that Airbus had received illegal funding for its A380 and A350 models, costing Boeing sales, would be implemented only after the WTO gave the final go-ahead this summer, the administration said, marking a rare show of faith in an institution that Trump himself has assailed.

Airbus said in a statement that the U.S. tariff threat was “totally unjustified” and that it had taken “all necessary measures” to comply with the WTO ruling regarding illegal aid.

Shares of Toulouse, France-based Airbus fell as much as 2.3 per cent, the biggest drop in 2 1/2 weeks, before trading 1.3 per cent lower as of 11:14 a.m. in Paris. Aerospace suppliers including Rolls-Royce Holdings Plc and Meggitt Plc were also priced lower.

Escalation

The proposed measures are relatively minor compared with the U.S.’s ongoing trade war with China, in which the two sides have imposed tariffs on about US$360 billion of each other’s goods in the past nine months. But they mark a significant escalation in tensions with the EU, which has implemented retaliatory duties on 2.8 billion euros (US$3.2 billion) of U.S. imports following Trump’s trade restrictions on foreign steel and aluminum.

Some EU members, led by France, are already skeptical of the value of negotiations with the U.S., which were agreed to last July in a bid by the EU to avoid auto tariffs Trump has threatened. Furthermore, a draft of the mandate seen by Bloomberg specifically gives the EU an opt-out if the U.S. were to impose new tariffs on the bloc.

“It’s in the interests of the U.S. and the EU to find a friendly accord on the issue of penalties in the airplane sector,” French Finance Minister Bruno Le Maire told reporters in Paris on Tuesday. “When I see slowing world growth, I don’t think that we can afford a trade war, even if it’s just in one industrial sector.”

Robert Lighthizer, the U.S. trade representative, said in a statement on Monday night that the U.S. had lost patience with what is now one of the WTO’s longest running sagas.

“This case has been in litigation for 14 years, and the time has come for action,” he said in the statement.

Yet he also signaled that the administration wanted to see an end to the EU subsidies in question, which Boeing and the U.S. claim give Airbus an unfair advantage in the highly competitive passenger aircraft market internationally.

“Our ultimate goal is to reach an agreement with the EU to end all WTO-inconsistent subsidies to large civil aircraft,” he said. “When the EU ends these harmful subsidies, the additional U.S. duties imposed in response can be lifted.”

In a statement, Boeing said the company “supports the U.S. trade representative and his team in their ongoing efforts to level the playing field in the global aircraft marketplace.”

The proposed tariffs come nearly 15 years after the U.S. first complained to the WTO that Airbus had widely benefited from billions of dollars in illegal subsidies. A countersuit by the EU is still winding its way through the trade court, which found last month that about $325 million in tax incentives offered by Washington state to Boeing were unlawful.

With assistance from Julie Johnsson, Richard Bravo and Christopher Jasper

Bloomberg.com

The new NAFTA deal is ‘in trouble’ amid looming elections, fights over tariffs

MEXICO CITY/OTTAWA — More than six months after the United States, Mexico and Canada agreed a new deal to govern more than US$1 trillion in regional trade, the chances of the countries ratifying the pact this year are receding.

The three countries struck the United States-Mexico-Canada agreement (USMCA) on Sept. 30, ending a year of difficult negotiations after U.S. President Donald Trump demanded the preceding trade pact be renegotiated or scrapped.

But the deal has not ended trade tensions in North America. If ratification is delayed much longer, it could become hostage to electoral politics.

The United States has its next presidential contest in 2020, and Canada holds a federal election in October.

The delay means businesses are still uncertain about the framework that will govern future investments in the region.

“The USMCA is in trouble,” said Andres Rozental, a former Mexican deputy foreign minister for North America.

Though he believed the deal would ultimately be approved, Rozental said opposition from U.S. Democrats and unions to labour provisions in the deal, as well as bickering over tariffs, made its passage in the next few months highly unlikely.

Canada’s Parliament must also ratify the treaty and officials say the timetable is very tight. Current legislators only have a few weeks work left before the start of the summer recess in June, and members of the new Parliament would have little chance to address ratification until 2020.

Trump, a Republican, has shown frustration with the Democratic-led U.S. House of Representatives for failing to sign off on the USMCA. He has threatened to pull out of the old pact, the North American Free Trade Agreement (NAFTA), if Congress does not hurry up.

If Trump did dump NAFTA, the three nations would revert to trade rules in place before it came into effect in 1994.

TARIFFS

Canada and Mexico are seeking exemption from U.S. tariffs on global metal imports imposed last year.

The metals tariffs were not included in the USMCA and Mexico and Canada are impatient to resolve the issue. Mexico has repeatedly threatened to target new U.S. products by the end of April in retribution if tariffs are imposed.

Meanwhile, Trump on Thursday threatened to slap tariffs on Mexican auto exports unless Mexico does more to stop drug traffickers and illegal immigration.

Mexico’s government is in the final stages of completing a new list of potential U.S. imports to be targeted, said Luz Maria de la Mora, a Mexican deputy economy minister.

“There’s going to be a bit of everything,” she told Reuters, declining to give details of how the list — originally encompassing products such as bourbon, cheese, motor boats, pork legs, steel and apples — could be modified.

De la Mora would not be drawn on whether Mexico could refuse to ratify USMCA if steel tariffs are not withdrawn, saying only: “All options are on the table.”

U.S. Secretary of State Mike Pompeo meets with Canadian Foreign Minister Chrystia Freeland at the U.S. Department of State in Washington, D.C. on April 3, 2019.

In Ottawa, Canadian Foreign Minister Chrystia Freeland said this week her government was “constantly” looking at its own retaliation list, noting that Trump’s tariffs left the country over $16 billion worth of space to strike back.

Freeland did not say when that list could change, and a government source, speaking on condition of anonymity, said it might not be necessary. Still, Freeland said Canada was coordinating with Mexico about its options.

Prime Minister Justin Trudeau, who faces a tough re-election battle, on Thursday rejected accepting quotas on Canadian steel and aluminum in exchange for U.S. tariffs being dropped.

Trudeau was criticized during the USMCA negotiations for giving ground to Trump on access to Canada’s dairy sector.

WORKERS

U.S. Democrats have threatened to block the USMCA unless Mexico passes legislation to improve workers’ rights, a demand shared by the Canadian government.

A bill already in Mexico’s Congress to strengthen trade unions should be approved this month, the government says.

Trump blamed NAFTA for millions of job losses in the United States as companies moved south to employ cheaper Mexican labour. Trump is running for re-election in 2020, and his ‘America First’ policy will likely feature prominently in the campaign.

Forcing Mexico and Canada to rework NAFTA was one of Trump’s signature pledges during his shock win in 2016, and Democrats are pulling out the stops to avoid losing again.

“The closer the election gets, the harder it will be for Democrats to grant Trump a victory” by ratifying the USMCA, said Sergio Alcocer, a former deputy Mexican foreign minister.

Some Democrats are pushing to change the deal — an idea that both Canadian and Mexican officials resist.

“People need to be very careful around opening up what could really be a Pandora’s box,” Freeland said on Thursday.

Canadian officials say they fear that if one part of the treaty were reopened, it could spark clamour for other sections to be renegotiated as well.

© Thomson Reuters 2019

‘Bad policy’: U.S. aluminum bosses slam tariffs, say quotas are risky

Top executives from the U.S. aluminum industry say substituting quotas for import tariffs will squeeze supply of the metal, making it “harder, even impossible” for American companies to grow and invest.

The United States has been pushing Canada and Mexico to accept quotas in exchange for lifting the tariffs on steel and aluminum imposed by U.S. President Donald Trump last year.

That strategy — which Mexico City and Ottawa have resisted — risks creating shortages that disrupt supply chains and tie up funds that would otherwise be used for business investment, said Jean-Marc Germain, chief executive of Amsterdam-based Constellium N.V. which operates a number of facilities in the U.S.

“We know aluminum regularly crosses the border multiple times before reaching an end user as a finished product,” Germain told reporters following a spring meeting of the U.S. Aluminum Association, representing aluminum firms including Alcoa, JW Aluminum, and Scepter Inc. “Under a hard quota system, that metal could end up stuck at one side of the border after the quota has been filled.”

Speaking on behalf of the association, Germain called on Trump to scrap the tariffs, arguing they represent “bad policy” and have done little to stop the “trade distorting behaviour” of China while increasing costs for downstream producers who represent 97 per cent of the jobs in the sector.

A recent study by the Organisation for Economic Co-operation and Development found China provided its aluminum industry with subsidies in excess of US$70 billion between 2013 and 2017 — 85 per cent of which went to five firms. The overcapacity has been blamed for depressing prices and pulling production away from U.S. producers.

“The real issue on the world stage with aluminum and fair competition is China,” Germain said. “The rest of the world is by and large playing by the rules. … That’s why we’re saying a targeted action against those players in China who don’t play by the global rules is the solution to our problems. “

While antidumping and countervailing duties — which target unfair trade in specific products from individual countries — have proven successful in thwarting dumped goods, the same cannot be said of the tariffs, the association maintains. China’s primary aluminum capacity rose by nearly 6 per cent in 2018 despite the levies and its production rose in the second quarter of 2018, around the time they were applied. Meantime, the levies boosted the cost of aluminum from Canada, the largest supplier to the U.S. market.

“What you have in the antidumping and countervailing duty tariffs is an ability to take that targeted approach versus the section 232 which is a much more blanket or broad approach and I think that’s where we would draw the distinction,” said Michelle O’Neill, senior vice president, global government affairs and sustainability for Alcoa.

The stated goal of the U.S. tariffs — issued on national security grounds under Section 232 of the 1962 Trade Expansion Act — is to increase America’s self sufficiency in steel and aluminum production by lifting capacity utilization above 80 per cent in both industries. Though the steel industry has now surpassed that marker, U.S. aluminum smelters are unlikely to move above 60 per cent this year, said John Mothersole, director of pricing and purchasing at IHS Markit in Washington.

By contrast, Canadian aluminum producers who supply 47 per cent of the metal consumed in the United States are currently operating at above 90 per cent capacity, despite the tariffs.

Analysts say investment south of the border remains hindered by the high cost of operating in U.S. currency and the challenges of competing with Quebec producers, who benefit from access to cheap hydroelectricity.

“The U.S. primary producers have lifted production somewhat but not as much as the administration would have liked,” Mothersole said, adding that U.S. aluminum prices are now the highest in the world. “If you make metal in the U.S., the tariffs can be good I guess but if you make things out of metal, not so much.”

The White House is facing mounting pressure from business groups and senior Republicans and Democrats to drop the tariffs before Congress considers ratification of the new NAFTA. Canada and Mexico have also said they will not ratify the deal with the tariffs in place.

“We remain very much opposed to quotas and tariffs because all that would do is hinder our growth by capping how much we can export to the U.S. which is our natural market,” said Jean Simard, president of the Aluminum Association of Canada. “Quotas micromanage trade and we won’t support that.”

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