2015 In Exports: Volatility and a Voracious Appetite for Canadian Exports

2015 In Exports: Volatility and a Voracious Appetite for Canadian Exports

The year 2015 was certainly one of economic turbulence and surprise. Currency dips for Canada, a retraction of China’s economy, some success in negotiations for the Trans-Pacific Partnership, optimism for soon-to-come ratification of a trade deal with Europe, commodity price plunges and interest rate predictions that made the market continually adjust were just a few of the highlights.

And now, in more detail, we look back at the Top 10 news events for trade in 2015.

1. Commodity price drops

The fall of oil prices, base metals and natural gas was surprising, as was the speed and depth of their fall.

“When you have a six or seven years in which you’re out of equilibrium, [and priced] higher than the market can actually sustain, that’s what happens,” said Peter Hall, chief economist for Export Development Canada (EDC).

The drops have had an enormous effect on the energy trade side of the Canadian economy with the No. 1 effect being on profit margins. The impact, Hall said, doesn’t hit right away, but when those instruments actually play out and you’re in the new price paradigm, you have to make some very bold decisions.

“Right now, we’re in a period where we’re seeing project cancellations and major restructurings,” he said. “There’s about a two-year period where that will happen. It also always seems worse than it ends up being. The panic and the prospect of termination of contracts and loss of cash flow right through the supply chain gets everyone to sharpen their pencils and agree to pass on fairly large gains to consumers.”

2. Return to investment in the auto sector

Re-investment began in late 2014 with big investment announcements from Ford and Honda and continued into January when Sergio Marchionne, CEO of Fiat Chrysler, came to Windsor to announce a $2-million Fiat-class investment for a crossover utility vehicle. In January, automotive parts maker Linamar made an announcement of $500 million for its Guelph facility, a move that required 1,200 new skilled workers. By July, Toyota announced $421 million investment in the production of the Lexus RX350 and the RX450H.

“After years of people hand-wringing and saying investment is never coming back to the auto sector, all of a sudden, we have a spate of these things happening,” Hall said. “It’s about running out of capacity stateside. It’s a sector that’s bursting at the seams.”

The effect on the economy was a positive one, with hiring, tightening of production and a big dose of optimism returning to the sector. “This shows there’s a future in the sector after all,” Hall said.

3. Heyday for non-energy exports

While energy exports were taking a hit, there were double-digit export gains happening in other sectors including automotive, fertilizers and aerospace. There was also high growth, though not double digit, in the machinery and equipment sector. “These are all sectors you could say were having difficulty with a high Canadian dollar, so the lower loonie was a boon to them.”

Also of note was a large increase in demand for Canadian office furniture. “We have a reasonably significant sector and the U.S. can’t get enough of that right now,” Hall said.

4. TPP and CETA

The Trans-Pacific Partnership is a next-generation trade deal, Hall said, that deals with things Doha couldn’t effectively. “It’s walking right into the agriculture sector and saying ‘Okay, we’ve got to drop down the walls,” Hall said. “New Zealand has taken a big lead on this. They had walls built around their agricultural sector that made Fort Knox look like a pup tent and they’ve dismantled those and shown the rest of the world you can do this effectively and come out winning.”

He noted that the deal opens up not just the agricultural sector but also the automotive sector, a boon for Canada’s tier-one suppliers.

Asked about whether he was concerned the U.S. might not ratify it as the Democratic and Republican frontrunners have both spoken out against it, Hall said: “I’m not overly worried about rhetoric that happens during an election. This is a deal that puts the U.S. profile in the region. The alternative is a China-centric deal.”

Brian Kingston, senior associate in charge of trade at the Canadian Council of Chief Executives, said the emergence of the multilateral trade agreement — with TPP and the Comprehensive Economic and Trade Agreement with Europe — was the biggest story of 2015.

5. Fall of the loonie

“The loonie’s dramatic drop was a sea change,” Hall said. “And we don’t believe the Canadian dollar is going anywhere for some time.” He said that fact will require exporters to amend their business plans and make more permanent plans based on where the currency is now. “We had businesses that were built to operate at parity,” Hall said. “So this is making costs higher, but on balance, a number of Canadian businesses are benefiting from this in a very big way.”

Jayson Myers, CEO of the Canadian Manufacturers & Exporters, said for him, this was the major story of 2015, in addition to the pickup in demand in the U.S. — both of which led to a significant increase in Canada’s exports.

6. Free-trade agreements with Korea and Ukraine

Neither of these agreements will have tremendous lift, said Todd Winterhalt, vice-president of international business development at EDC, but they do indicate that Canada is back and trade is on the agenda. Continued bilateral agreements and the emergence of multilateral agreements will be a theme for next year.

7. Ongoing trade negotiations

Canada is negotiating a number of trade agreements. With Indian Prime Minister Narendra Modi’s mandate, there are high hopes the Canada-India Foreign Investment Promotion and Protection Agreement (FIPA) will be finalized. Canada-Japan is in the works as is Canada-Singapore. Agreements being negotiated with smaller countries include Dominican Republic, Morocco, Guatemala, Nicaragua and El Salvador and CARICOM.

“Canada is back in the trade negotiation business in a big way,” Hall said, and added that new trade priorities are expected from the recently-elected government. “We’re waiting to see where the focus will be. Initially, I’d say China and India are areas of focus at the moment.”

8. Rejection of Keystone

If there wasn’t a plunge in oil prices, Hall believes the U.S. rejection would have been a much more challenging debate. “The fact that America sees that its shale reserves have ballooned takes the concern of energy security away from them,” he said. “They’re also at the same time talking about exporting their own resource.”

For Canada, any expectation built around crude flowing southward is gone for now. “It’s not off the table forever,” Hall said. “But there’s a much greater incentive to work on east-west pipelines.”

9. China surpassing Canada as the U.S.’s major trading partner

This was a story that was a non-story, Hall said. “China did that on a merchandise-trade basis,” Hall said. “The valuations of Canada-US trade have gone down, but when you add trade in services into that, Canada is still the No. 1 exporter into the U.S. and we will be for some time.”

10. Interest-rate increases

Markets anticipate interest-rate changes and are already compensating for them, so U.S. Federal Reserve’s mixed-messaging in September — in which an increase was anticipated but didn’t happen — really threw markets off, Hall said. “All the forward pricing that had already happened started to unwind,” he added. “You see markets going in bizarre directions because they can’t handle the uncertainty and they can’t resist the opportunity to make money off the volatility.” He said the Fed has to be concerned about the tightening labour market and the wage increases that could get out of hand. If that starts to influence inflation, it’s a difficult thing to tame. Managing those expectations is a key job of the Fed.”

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