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How Canada and the UK Could Work Together post-Brexit

by John Brian Shannon

Until the official Brexit date of March 29, 2019 the UK remains in the European Union — which means that Britain remains a party to the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.

And the CETA accord is a very fine agreement (as it should be, because it took 7-years to negotiate) but it may take another year or two to become fully implemented. At the moment CETA is only partially implemented, but eventually 98% of tariffs between Canada and the EU will be eliminated.

Once Brexit happens on March 29, 2019, the UK will cease to be a CETA signatory and something else (a ‘drop-in’ agreement) will need to replace it.

That is the topic of this blog post.

Enter the United States, Canada, and NAFTA.


Where’s Canada on the International Trade Map?

Canada is a surprisingly strong exporting country. With a population of only 36 million and a territory that measures 3.855 million square miles, it means the country is practically empty.

Across this huge landscape are fields of crops larger than the entire UK, but Canada’s few cities are large. In fact, the Greater Toronto Area (the GTA) is larger and has a greater population than the New York Metropolitan Area.

And it’s an exporting superstar; Making it the 11th highest exporting nation in the world.

“Canada is currently the fourth largest exporter of cars in the world and the ninth largest auto producer in the world, making 2.1 million cars a year. Trade with the U.S. is by far the most powerful driver for the automotive sector.”Export Development Canada


What if There’s No New NAFTA Agreement?

If the NAFTA agreement falters due to insufficient efforts between U.S. and Canadian negotiators Canada will end up producing cars for itself — which means it won’t be exporting 1.8 million cars to the United States annually once NAFTA is terminated (or) once President Trump slaps a 25% tariff on Canadian cars exported to the United States.

Which means a lot of Canadian autoworkers are going to become unemployed the day after that announcement.

Which means that Canada (insert drum roll here) needs a ‘Plan B’.


President Trump Isn’t ‘Being Evil to Canada’ He’s Protecting American Interests Because That’s His Job!

You can’t blame him for that. For goodness sake he’s the President of the United States, not of Canada.

But Canada can’t sit idly by and wait for the world to end. The country must pick itself up and get on with business.

And the best way to do that is to respectfully approach the UK and inform them that it’s likely NAFTA will be terminated or changed in ways that result in Canada having an excess auto manufacturing capacity of up to 1.8 million units per year.

Such manufacturing capacity could be very useful to the UK government and to UK industry.


How Canada and the UK can Work Together for Mutual Benefit

The cost of living in the UK is much higher than it is in Canada, therefore wages in the UK are higher than in Canada.

And it’s the reason why only premium car lines are built in the UK where the high labour cost for exceptional hand-built cars are reflected in the final price and nobody minds paying extra. See; Aston Martin, Jaguar, Land Rover, etc.

Even Rolls Royce and Bentley were forced to move to continental Europe because they couldn’t afford the high labour costs of UK workers and the costly land/building/business costs of manufacturing cars in the United Kingdom.

Post-NAFTA, huge opportunities exist for Canada to export lower-priced GM, Ford, and Fiat Chrysler (FCA) cars and trucks to the UK — freeing-up huge amounts of disposable income for Britons.

Which means that saved money will be spent elsewhere in the UK — whether on home renovations, tuition, school supplies, vacations or investments — because it isn’t going anywhere (it isn’t going to magically vanish!) it will simply be spent on other items.

Any Canadian-built vehicles that are exported to the UK over what the UK market can sustain can be forwarded to Commonwealth of Nations countries by UK re-exporters.

India alone has a population of 1.32 billion and its economy is rising fast to become the third-largest consumer economy in the world. There’s no lack of demand for cars and trucks in the Commonwealth.

A Must Read: India Poised To Be Third Largest Consumer Economy (Forbes)

All of which works to help the UK economy.


Trump Wins, Trudeau Wins and May Wins!

President Trump wins because he will have prevented Canada from exporting 1.8 million vehicles to the United States annually, and American factories (meaning American workers) will need to fill that demand gap, Prime Minister Trudeau wins because he will have saved the Canadian jobs associated with the manufacturing of those 1.8 million cars and trucks, and Prime Minister May wins because she will have ushered in three new lines of lower-priced vehicles for UK consumers and those savings will translate into higher levels of disposable income for British consumers that can be spent elsewhere in the UK economy.

It’s so easy when you know how...

What Would a WTO Brexit Look Like?

by John Brian Shannon

Assuming European politicians can’t get their act together enough to craft a reasonable Brexit deal that works for both sides by March 29, 2019 Europe will be faced with Brexit on WTO terms which is known colloquially as a ‘Hard Brexit’ where the UK would leave the European Single Market and Common Market mechanisms and other EU agreements and institutions without any subsequent deal in place.

Without further ado, and without boring you with statistics, let’s look at how a Hard Brexit would play-out in the months and years following a WTO-style Brexit.


Will There Be Famine in the Land?

Of all of the dubious claims by the Project Fear campaigners (and they’ve made many!) this must rank in first place.

No. There won’t be famine in the UK on account of Hard Brexit. However, you may notice your favorite brand of cheese may be unavailable for a time and you may find your prescription medications come from UK pharmaceutical companies or American pharmas instead of from continental Europe.

Saying the following words out loud will do you good, dear Britons — so repeat after me;

“The United States of America has come to Britain’s rescue in times past and will do so again in its hour of need.”

Regarding agriculture; The United States agricultural belt is unimaginably massive and its farmers and ranchers are just waiting to fulfill the UK’s orders. There are fields of crops in the United States larger than the entire United Kingdom. It takes 3-hours to overfly them in a jet aircraft flying at 500 miles per hour.

Regarding ranching; There are 93.5 million cattle in the United States (2017) and that number continues to rise at a little better than 1% per year, and significant capacity exists to raise it over a relatively short period of time.

Similar agricultural capacity is available in Canada for grains, corn, soybean, and other crops, and Canada boasts 4.6 million cattle at present (2018) and Canada has more arable land than the United States allowing it to exceed even the mighty U.S. in this regard if sufficient firm orders were placed.

To answer the question: “Where’s the beef?” It’s in the United States and Canada… Just pick up the phone and call us! North American farmers and ranchers would love to take your money — instead of the EU taking your money.

Britons might find their food costs plummet as the huge economies of scale that typify North American food production and the favorable growing conditions combine to produce bumper-crop after bumper-crop which lead inevitably to lower food prices.

Countries of origin for UK food consumption

Image courtesy of gov.uk | Figure 1: Origins of food consumed in the UK in 2016 — Department for Environment, Food and Rural Affairs, Agriculture in the United Kingdom data sets, Chapter 14 – the food chain (2017)


Aren’t All American Crops GMO?

Genetically Modified Organisms or GMO crops are grown on every continent, including Europe, which has about the same number of GMO crops as America.

Some Europeans fear that all crops grown in the United States are GMO crops, but except in the case of corn that isn’t true. All corn, no matter where it is grown in the world is GMO and that’s been true for a few decades now. Corn (and maize, which is a type of rough corn that is fed to cattle over the winter months) aren’t commercially viable crops unless the GMO component is added.

Some crops like ‘Yukon Gold’ potatoes, Canola (a seed grain) and every apple sold on the planet have been GMO for many decades.

To alleviate concerns about GMO foods being sold in the UK, Theresa May’s government could simply legislate that any produce or meat that *isn’t* GMO must be identified as non-GMO for UK consumers.

Explainer: Forcing producers to put GMO labels on their produce (if theirs is indeed a GMO variant) is seen as a negative by GMO food producers. But giving non-GMO farmers the right to advertise “Non-GMO produce” or “Non-GMO meat” on their labels would be seen as a positive for their non-GMO produce and meat.

See how easy it is?

Not only won’t there be famine in the land, UK consumers will enjoy a completely new supply chain from which to choose and sufficient labelling for them to make the best choices for their families.


What if the EU Decides to Punish the UK for Leaving?

If the EU wanted to drive the UK directly into America’s arms… the EU would ensure a Hard Brexit and not allow EU goods or produce to be shipped to the UK following Brexit, nor would it allow UK goods or produce to be sold into the EU following Brexit.

If that’s the EU plan, bring it on! Because that plan has a 100% chance of success should the EU choose to make it happen.

And Americans and Canadians are just waiting… “Please, oh God, please, cause the EU to drive the UK into our ever-loving arms!” said every North American farmer, rancher and manufacturer.

To say nothing about the even more fervent prayers being said by North American auto manufacturers in Detroit, U.S.A. and in Windsor, Canada.

For Britain, a WTO Brexit simply means changing suppliers — with a zero-tariff trade deal in effect with North America — combined with the opportunity to sell UK goods into the vast North American market.

The ball, as they say… is in your court, European Union!


Bonus Video

View the video where HM North American Trade Commissioner is interviewed by Bloomberg Television on March 26, 2018.

Clicking on the image takes you direct to the relevant Bloomberg webpage.

Brexit on WTO rules

Antony Phillipson, HM Trade Commissioner for North America on Bloomberg TV.

 

To Xi With Love, from Donald Trump

by John Brian Shannon

President Xi Jinping of China was awarded a second term in office by the Communist Central Committee of China just days ago (and doubly rewarded because term limits no longer apply to Mr. Jinping) has received communication from the Trump administration that steel exports to the United States will now face a 25 per cent tariff and aluminum exports to the United States from China will have a 10 per cent tariff added.

The tariffs against China and selected other countries are scheduled to go into effect March 24, 2018.

President Donald Trump of the United States says there is a huge and historic trade imbalance between the U.S. and China and is using tariffs to counter that imbalance which has been pegged between 374 billion and 511 billion dollars, depending upon how those figures are calculated.

Further, Mr. Trump has asked President Xi to submit a plan to lower the trade deficit with the United States by 100 billion dollars as soon as possible.


Which Countries are Exempt from the Tariffs that Begin on March 24, 2018?

China, U.S., steel tariffs - affected and non-affected countries March 24, 2018

Image courtesy of Quartz.com. Click on the image to visit the Quartz image and article.


China has Responded to Trump’s Tariffs with Tariffs Against U.S. Goods

In response to Mr. Trump’s tariffs, China’s leader Mr. Jinping has responded with some mild tariffs against the United States.

China’s ambassador to Washington, Cui Tiankai, said on Thursday that Beijing would retaliate against those tariffs on about $60 billion of Chinese goods.

“We do not want a trade war with the United States or with anybody else, but we are not afraid of it,” Mr. Cui said, according to Xinhua, the official news agency. “If somebody tries to impose a trade war upon us, we will fight. We will do whatever we can to defend the legitimate interests.”

The $3 billion worth of goods that Beijing plans to penalize represent just about 2 percent of U.S. exports to China, which amounted to $130 billion last year, according to Chad Bown, a senior fellow at the Peterson Institute for International Economics.

“It’s not devastating economically by any stretch, but it’s certainly going to hurt those interests in the United States that are trying to export,” Mr. Bown said. He pointed out that the retaliation by China sends “a negative signal, that they are not seeking to de-escalate things.” — excerpt from the New York Times


All in All, Not a Trade War

Except that two superpowers are involved (which makes for great theatre) it’s not much of a trade war.

In fact, the Trump tariffs against Chinese steel (China supplies only 2% of U.S. steel) and Chinese aluminum (supplying less than 1% of U.S. aluminum) won’t amount to mega-billions of dollars.

Still, Trump has set the tone that countries that export to, and run huge trade deficits with the United States, will be addressed at the tariff level. Back in the old days getting your way in trade disputes was done by so-called ‘Gunboat diplomacy’ instead of the much softer tariff approach.

Thank goodness we’ve matured as a species!

Further tariffs may be levied on China and other countries by the Trump White House as the president seeks to balance America’s huge trade deficit across many nations that export to the United States.

The reason China has been singled-out is that it runs triple digit trade imbalances with America — not because anyone in the Trump White House has any particular enthusiasm to embarrass or anger China.

And although Donald Trump did make the numbers known to the public and did spend some time justifying his new tariff policy, it looks like the president sincerely wants a solution to the existing problem and doesn’t want a situation that escalates without resolution. We know that because he chose his words and his tweets very carefully.


Light at the End of the Tunnel?

What’s really at stake here is the long-term relationship between America and her trading partners.

China, Canada, Mexico, and the European Union are America’s largest trading relationships and in order for the United States to succeed it can’t allow huge trade deficits with every country it does business with.

If every country in the world ran a microscopic trade deficit of only 10 billion dollars with America, the U.S. trade imbalance would total 2 trillion dollars!

“To put that in perspective, if you stacked 1.9 trillion $1 bills on top of each other, the pile would reach about half way to the Moon.” — CNN

Not even the mighty United States of America can survive trade deficits of that magnitude.

China’s trade imbalance of ($374 billion to $511 billion in 2017, depending how you calculate it) is simply unsustainable for America, as are the double-digit trade deficits of several other countries.


This chart (unfortunately, from 2016) shows only the countries that have double or triple-digit trade imbalances with the United States (in millions of dollars)

Trade imbalances with the United States

Note: The European Union trade imbalance with the United States is 146 billion dollars, but some of those EU nations are also listed separately in this chart.


The Best Case Scenario?

As the tariffs go into effect, the best we can hope is that cooler heads prevail and that both the American and Chinese tariffs are seen as simple corrections to segments of the economy long neglected by policymakers on both sides of the Pacific.

Several countries that export steel and aluminum to the U.S. are exempt from the tariffs so American consumers will see very little change in prices. Consumers in China may see small price increases in certain foods that are imported from the United States.

The entire situation is an example that we should be mindful of our free trade privileges with other countries, neither exploiting them too much nor allowing ourselves to be exploited by them. Triple and double-digit trade imbalances don’t ‘just happen’ overnight! And they should be mindful of their free trade privileges with us.

If this in any way presages a shift toward fair trading rules between all nations — as opposed to unrestricted free trade — it means that international trade will be much more sustainable, and frankly, more easily welcomed by every country in the future.

Let’s hope this marks the beginning of the ‘Trump Doctrine of Fair Trade’ between nations.