Two weeks after U.S. President Donald Trump took his seat at the Oval Office, the mood among many Canadian businesses has largely shifted from cautious optimism to alarmed stand-by mode.
Trump’s first few days in office have been “unprecedented in terms of the number and things that are now up in the air,” said Canadian entrepreneur Michael Serbinis.
And that, he added, is bad for business.
“What I know about markets and scaling up a business is that we don’t like uncertainty,” noted Serbinis, who founded digital reading company Kobo and currently heads Toronto-based health insurance startup League.
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That feeling of not knowing what’s going to happen next is likely to deter businesses from expanding operations and pouring money into things like new plants and equipment.
“The uncertainty created from the policies coming from the Trump administration will make Canadian exporters more cautious about building capacity until they know what the rules of the game are going to be,” said Craig Alexander, chief economist at the Conference Board of Canada.
Canada was already suffering from chronically low business investment, despite the Bank of Canada’s (BoC) best efforts to keep investment financing costs low by holding interest rates at rock bottom.
Business investment growth, which is crucial to economic growth and job creation, was virtually flat between April and September of 2016 after shrinking for the previous five quarters. In general, Canada’s post-recession recovery in business investment has been the weakest on record since the 1980s, according to Maclean’s.
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An uptick in the BoC’s survey of investment intentions for the last three months of 2016 was driven by the fact that fewer firms said they planned to cut investment, rather than by growth in the number of those who said they would increase it, Alexander noted.
Now even that modest gain may see a reversal, as executives and policymakers across Canada struggle to interpret Washington’s messages on trade, immigration, taxes and regulation.
Take trade, for example. The White House has repeatedly reassured Ottawa that its focus in renegotiating trade agreements like NAFTA is on Mexico and other low-wage jurisdictions like China. But just last week it was Germany that found itself in the cross-hairs of the Trump administration, with one of the president’s aids accusing it of manipulating its currency to exploit its U.S. and European Union trade partners.
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The episode raises questions about what truly awaits Canadian negotiators when the NAFTA talks reopen.
“Is America going to be thumping on the table demanding conditions that benefit it unilaterally, or is there going to be space for a constructive dialogue about how to update this trade agreement?” asked Alexander.
To add to the confusion, Republicans in the U.S. Congress have introduced their own corporate tax reform, which would result in a 20 per cent tax on imports.
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Immigration policy is also a question mark. A temporary presidential ban on travel from seven Muslim-majority countries was the subject of a series of contradictory statements from U.S. officials about whether Canadian citizens and permanent residents would be affected before being suspended by a U.S. judge. The move had scores of Canadian firms scrambling to cancel or postpone cross-border business travel.
Proposals to curb the U.S.’s popular H1B visa program for skilled workers would have much deeper and more lasting consequences.
Still, with the exception of protectionist measures, few of Trump’s policy proposals would necessarily harm Canada.
The new H1B-visa limit, for example, would likely benefit some Canadian firms by helping them attract international talent.
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And Trump’s directive to roll back Wall Street regulations enacted after the financial crisis has been widely seen as a boon for Canada’s largest banks, which have been expanding aggressively south of the border in recent years.
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In general, the president’s pledges to cut red tape, lower the U.S. federal corporate tax rate, and spend $1 trillion in infrastructure spending have the potential to turn into brisk business for Canadian exporters.
“In 2017, Canadian business will see stronger export demand from an over-stimulated U.S. economy and a weaker loonie,” the Canadian Chamber of Commerce predicted in an early-January release titled Crystal Ball Report, which forecast U.S. growth of nearly three per cent in 2017.
But even if that more optimistic scenario were to come to pass, the fact remains that the crystal ball has become far murkier for Canadian firms since Inauguration Day.
In the short term, the overall impact of that uncertainty in Canada is likely to be even lower business investment.
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