A new NAFTA is rising

A new NAFTA is rising

The numbers call into question the extent to which Trump’s corporate tax cuts have diminished Canada’s appeal as an investment destination.

It is worse than the old one but better than no deal at all. Fears of a mass investment exodus from Canada in the face of trade uncertainty and U.S. tax reforms aren’t materializing.

Foreign direct investment totalled $8.9 billion last quarter, according to Statistics Canada data released last week in Ottawa. While down from a relatively strong first quarter, the overall picture in the first half of 2018 is an improvement on last year’s dismal numbers and a return to something more normal — with the possible exception of a still-lagging energy industry.

The numbers call into question the extent to which Donald Trump’s corporate tax cuts have diminished Canada’s appeal as an investment destination, despite warnings from business groups and pressure on Prime Minister Justin Trudeau’s government to match them. The relatively stable investment figures also indicate companies have been brushing aside concerns that talks to update the North American Free Trade Agreement could collapse.

Trudeau’s finance minister plans to address the competitiveness challenges facing Canadian businesses in a budget update later this year.

Here are some other highlights from the foreign-investment figures:

¥ Including $18 billion of inflows in the first three months of the year, FDI in the first half
of the year totalled $26.8 billion, up from $11 billion in the first half of 2017. That’s hardly spectacular, but within average levels over the past decade for a six-month period. Energy is still struggling.

¥ There was a net divestment of foreign capital from energy and mining between April
and June of $1.1 billion and the sector has lost a net $8.6 billion in FDI over the past five quarters.

¥ But there seems to be a revival of investment in manufacturing. Foreign companies
have invested $15 billion in the industry in the first half of 2018, the best six-month gain since 2013.

¥ Of course, it may be that trade uncertainty and competitiveness are real issues that are
being eclipsed by other factors such as a strong U.S. economy. There is also plenty of evidence that companies — after underinvesting for years — are now running up against capacity constraints and being forced into capital spending even in the face of all the headwinds.

¥ Nor can anyone argue Canada is a haven for investment. Domestic companies continue
to invest more abroad than foreign companies invest in Canada. In the second quarter, Canadian direct investment abroad totalled $18.9 billion — a full $10 billion more than what came into the country. But that trend too is showing no signs of worsening.

Canada can live with much of what the United States and Mexico agreed on, including the six-year review and the section on motor vehicles, which Ms Freeland noted required “big changes by Mexico”. But much of the deal remains up in the air. No full text yet exists. The Mexicans have left to Canada negotiations on dispute-settlement mechanisms and public procurement. And the weakening of legal protections for investors agreed to by Mexico could play well in Canada, where such provisions are controversial.


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Olivia Toledo
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