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China as the World’s Largest Economy, “America First”, and Canadian Business.  

By Scott McAlpine, Posted August 23, 2018

At 10-year average growth rates, China’s GDP will surpass the GDP of the United States by 2023. This will be under US President Trump’s watch (assuming his re-election). The US will then become the world’s second largest economy and, symbolically at least, have less leverage on the world’s economy than it does now.

This is hardly new analysis, but it does offer a perspective on why the US is engaging in trade sanctions against China and seemingly becoming more protectionist in its dealings with the rest of the world. But, if China’s growth can be slowed, and US growth increased, the crossover of US and China’s GDP can be delayed. The logic is simple -- trade sanctions against China should reduce China’s exports to the US slowing China’s growth. Tariffs with the rest of the world (particularly those with free or nearly free trade agreements with the US) should lead to more investment in the US than would otherwise be the case. Investment in the US leads to US economic growth. Coupling this with reduced environmental regulations, favourable tax policy for investment, and a move toward greater energy self-sufficiency (albeit based on fossil fuels), the idea is, of course, to “make America great again”.

Assuming the above is more correct than not, for the present purposes this begs at least two questions. The first is will it work? The second is what are the implications for Canada? On the first question, we simply don’t know if it will work. But all policy at the US national level is focussed on “America First” and the American belief (or hope) that the strategy will work (or sell to the electorate) means the rest of the world should pay attention to its implications – even if the strategy doesn’t objectively “work” for the US economy. Such is the nature of US hegemony. This leaves us with the second question being the more important one because we have some influence over our capacity to address it. Thus, this economic component of “America First” has implications for Canada and those Canadians doing business with US including:

1. Look forward to continued and escalated trade disputes with Canada particularly in areas where US industry has either excess capacity (steel, some agricultural products, etc.) or the US is a large market with growth potential for domestic capacity and is therefore seemingly ripe for investment (computer manufacturing, automobile parts, uranium(?), etc.).

2. Expect the United States will continue to prefer bilateralism to multilateralism as the relative power of the US is always larger in bilateral “deals”.

3. Anticipate pressure to relax Canadian impediments to investment (corporate income taxation, capital gains taxes, general regulations, environmental regulations, carbon taxes, etc.). This pressure will come from both Canadian sources (corporate and government) as well as from the US and other foreign investors.

4. Plan for a lessening of US trained experts going abroad as the US tries to stem the outflow of its talent by reducing the prospect of US imports. The US will, conversely, wish to attract “foreign trained” expertise and introduce a points-based (economically motivated) immigration system.

5. Develop strategies for continued downward pressure on the Canadian dollar. While this may be a good thing for exports, it is not good for imports from the US and any benefit to exports may be lost to US tariff barriers.

6. Look to China, India, Europe, and the UK for markets. China and India are growing markets. The UK and Europe, by comparison, are not -- but they are large with positive historic ties to Canada. The “middle east” and other markets where Canada’s reputation is positive should also be explored.

7. US border security will continue to tighten. Reduced freedom of goods and persons to enter the US is a strong implication of the US “America First” strategy. It is possible that some signs of global animosity toward the US will also be taken as justification for heightened security.

8. Expect the US will continue its current policies regardless of the results of the upcoming midterm elections (November 2018) or the next Presidential election. US Republicans are not the only ones who notice the current growth of the US economy (at 4.1% in 2Q 2018) and the prospect of the China crossover.

Of course, things can change, and the above analysis may, in time, need revision. But the real question is if Canadian business and governments are prepared for a different relationship with US, China, Europe, and India than we have had before. Consider, for example, supply chains, export markets, talent strategy, intellectual property, risk mitigation, and investment strategies. At the end of the day, the status quo is not likely an option and Canada and Canadian businesses will have to make some decisions, wisely.

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