Hedley wrote “the new U.S. administration is engaged in a wrenching struggle to deliver on promised tax cuts and deportations, in the face of already burdensome federal deficits and debt and an economy operating at full employment.
“What’s at stake is the potential for sharp changes in inflation, interest rates, currency valuations, and U.S.-international trade relations- and that could just be the beginning”.
Mussell wrote ““the whirlwind emanating from Washington is resetting the table for Canada’s economic and trade relations with the U.S.
“We must assume that the policy resets the U.S. makes- from macroeconomic policy, to regulatory policy, to trade policy- will become the table stakes in its future trade and foreign policy discussions with Canada.
“Many of these U.S. actions are driven by America First, and not intended to be in the Canadian interest. We need to understand this in-depth, and determine how best we can respond.”
In their paper, they write “Canadian agri-food has much at risk in this environment, even if it is not an immediate target.”
They predict outcomes from the key changes so far.
Mass deportations will reduce the U.S.
workforce, and act to reduce gross domestic product.
The resulting reduction in will reduce
taxable income. Reduction in income tax rates
will further reduce revenue to the U.S.
Treasury.
This, combined with a commitment to deficit
reduction, will force a reduction in the federal
budget, complemented by directed
government cost cutting.
Another critical constraint is the federal debt
accumulated from past deficit financing, and
both the interest cost of the federal debt and a
ceiling on the level of federal debt.
Tariffs will raise public revenue, which will
act to counteract the reduction in income tax.
If the tariffs are successful in persuading industries bring production back to the U,S, it will eventually
increase gross domestic product.
The combination of reduction in workforce
and the tariffs will be inflationary. This could
force the Fed to increase interest rates,
strengthening the U.S. dollar. This will tend to
cool gross domestic product.
Increases in interest rates make the U.S. federal
debt more expensive to manage, and interest
costs will consume more of the federal budget.
A weakening U.S. treasury bill market has a
similar effect.
Retaliation against the U.S. tariffs will
counteract the increase in U.S. gross domestic product from
reshoring, and a stronger U.S. dollar will
exacerbate that effect, they write.
They said the U.S. seems poised to seek increases in
efficiency through deregulation. The
prospects for this from fiscal perspective are
unknown- either directly in savings to
government, or indirectly through savings to
the private sector and increased gross domestic product and tax
revenue.
“There are reasonable worries that
deregulation could be carried out in an
indiscriminate manner filled with missteps,
overreach, and unforeseen effects.”
They say food inspection staff has been so reduced that the states will likely take over, but that raises questions about import inspections.
Measures about Chinese ships entering U.S. ports may prompt them to use Canadian and Mexican ports instead with implications for export traffic for Canadian agriculture commodities.
It also “suggestsnthat Canada and Mexico could be coerced into
aligning with the U.S. on its policy against
Chinese vessels- a worrisome precedent.”
The obvious threat to Canadian agriculture is the tariffs.
But if the economic chaos leads to hikes in U.S. interest rates, the Canadian dollar will decline making imports more expensive.
The inspection issue could force U.S. importers to pay for inspections to ensure that imports meet federal standards, but U.S. competitors would not have to meet those standards and pay those costs and would probably find state-level inspection more to their liking.
Whatever deregulation occurs in the .U.S, it is likely to
form the regulatory baseline that the U.S. brings to
international trade discussions, in the sense that
variances from U.S. regulations become viewed as
additional or discriminatory costs placed on exports
of U.S. product, Hedley and Mussell wrote.
“In turn, it suggests that pressure will be brought on
U.S. trading partners to harmonize regulatory
standards with the U.S.”
They wrote fFinally, it is evident that the situation in the U.S. is
entirely dynamic, and will be steadily and
unpredictably changing going forward.
“Canada will necessarily be drawn into both responding to the U.S.
evolving demands, as well as Canada maintaining a
relationship with the rest of the world independently
rest of the world independently from the arrangements with the US. This may prove not an easy task.”
