By Michael O’Neill

The Bank of Canada got “Trumped.”  The American President’s fixation on the state of trade between the US and Canada is an ongoing concern for the BoC and part of the reason why the BoC left interest rates unchanged at 1.5% on Wednesday.

The BoC statement noted that CPI inflation was at 3.0% in July which was higher than expected. They acknowledged that the US economy was robust with “strong business investment and consumer spending.” They said that Q2 GDP growth was as predicted and pointed out that “business investments and exports have been growing solidly for several quarters.”  Even better for the economy, the BoC noted that “activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies.  Continuing gains in employment and labour income are helping to support consumption.”

The statement paints a rather rosy picture of the Canadian outlook and would have easily justified a rate increase.  It didn’t happen.

The BoC Governing Council led by Governor Stephen Poloz were stymied by trade tensions, which were mentioned in three of the five paragraph statement.  The BoC cited “elevated trade tensions” as a key risk to the global outlook. Domestically, “uncertainty about trade policies continues to weigh on businesses.”  The BoC wrapped up the statement by saying they are “monitoring closely the course of NAFTA negotiations and other trade policy developments.”

The state of the Nafta negotiations took a turn for the worse on the last day in August.  President Trump’s deadline for a trade deal came and went. The following day the President tweeted:  “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.”

The tweet sent the Canadian dollar into a downward spiral at the beginning of the week although the three-month $0.75-$0.77 cent range is still intact.

Cooler heads prevailed.  On September 1, new trade talks were announced for September 5.  These talks may be more successful for the simple reason that Canada may have given concessions on dairy supply management.

Prime Minister Trudeau vigorously defended Canada’s supply management of dairy, eggs and poultry in British Columbia on August 4. He said the “US administration is targeting supply management.  They want us to eliminate supply management in Canada.  I can tell you here today, as I have been saying for months if not years, we will protect supply management.”  He went on to blame the US dairy industry for overproducing and said the “US subsidizes their farmers to the tune of hundreds of millions of dollars each year.”  He finished his comments by vowing to “continue to stand up for supply management at the Nafta table or anywhere else I need to.”

He made it crystal clear that Canada would not give in to US demands to open up the dairy industry.

Things aren’t always as they seem.

The new Nafta talks are ongoing in Washington.  On September 4th, the Prime Minister had this to say: “It is inconceivable to Canadians that an American network might buy Canadian media affiliates, whether it’s newspapers or TV stations or TV networks.  So we’ve made it very clear that defending that cultural exemption is something that is fundamental to Canadians.”   He also said “We’ve said from the very beginning that we need a dispute resolution mechanism like Chapter 19 and we will hold firm on that.  We will not sign a deal that is bad for Canadians and, quite frankly, not having a Chapter 19 to ensure that the rules are followed would be bad for Canadians.”

What, no milk?”

There is no way that Canada’s Prime Minister forgot about his vow to “protect supply management at the Nafta table.”  At the same time, negotiators never complained that Canada’s insistence about protecting Canadian culture was a stumbling block.

A cynic can be forgiven for believing that Trudeau’s focus on culture is a sleight of hand ploy.  If a Nafta accord is reached, the Liberals will be able trumpet their successful trade negotiation prowess by saying that they successfully protected “Canadian culture and Canadian values.”  If so, the Canadian dairy industry will be crying over spilled milk and the Bank of Canada won’t be the only Canadian institution that got “Trumped.”