The Top Line
The Winter/Spring 2017 session of the federal Parliament will begin Monday, January 30. The return of Parliament is a good occasion to consider how, over the course of the coming months, the new United States (U.S.) President and his policies will be a primary consideration in a significant portion of the Government of Canada’s policymaking. During this Parliamentary session, expect issues that do not impact Canada-U.S. relations to take a backseat to those that do. Contrastingly, the Government will give particular attention to Canada-U.S. trade relations and to adjusting several other policy areas to the context of the new President. With that in mind, TSA suggests that stakeholders closely monitor the following policies and developing issues during the next few months.
The annual federal budget is typically tabled in late February or in March. Ahead of this year’s edition, the Government is dealing with an oil price of approximately $50 per barrel (along with long-term projections that that number will not rise above $100 before 2025), a sluggish economic growth rate of 1.3% in 2016, and uncertainty about how President Trump’s economic policies will impact Canada. In the long term, the federal budget is projected to be in deficit until 2050/51. In that light, while Budget 2016 was a ‘new spending’ fiscal plan, expect Budget 2017 to focus on raising federal revenues and implementing programs that the Government has already costed and consulted on.
Budget 2017 will include and be informed by the results of the Government’s review of tax expenditures (that is, targeted tax breaks), the Canadian Content in a Digital World Consultation, the Fundamental Science Review, and the Canada’s Innovation Agenda Consultation. Those consultations will influence the Government’s spending plans and offer avenues for raising revenue. In terms of spending, expect Government support for innovation and an implementation plan for Phase 2 of the Liberal Infrastructure Plan to be major elements of the Budget. On the revenue side of the equation, elimination of certain tax breaks and the privatization of federal assets, such as airports and marine ports, are strong possibilities for inclusion in the Budget.
Overall, how the Government addresses the combination of low revenue, slow growth, and global uncertainty will be the story of Budget 2017.
Canada-United States Relations
One of President Trump’s most consistent policy statements is that the U.S.’s trade relationships are disadvantageous to the U.S. and cost Americans jobs. With approximately 75% of Canada’s exports currently going to the U.S., Canada’s economy would suffer from any trade barriers that the Trump Administration erects. That dynamic is playing out in the bilateral and multilateral arenas.
To date, President Trump has proposed renegotiating or terminating the North American Free Trade Agreement (NAFTA), imposing a ‘border adjustment tax’ on goods produced abroad for sale in the U.S., and mandating a sweeping “buy American” policy. Any of those eventualities would create barriers to the operation of Canadian companies in the U.S. marketplace.
Many non-partisan sources project that the U.S. economy will exceed 2% growth in 2017 and 2018, so now is a particularly bad time for Canada to have reduced access to the U.S. marketplace. Absent barriers to trade, a strong U.S. economy benefits many sectors of the Canadian economy. As such, in 2017, expect the Trudeau Government to highly prioritize building bridges with the Trump Administration and to devote considerable resources to minimizing the extent to which President Trump’s economic reforms target Canada-U.S. trade.
There are promising early signs for Canadian stakeholders. On January 23, Stephen Schwarzman, the Blackstone CEO and economic adviser to President Trump, met with Prime Minister Trudeau and his Cabinet, and subsequently made positive statements about Canada-U.S. trade relations, suggesting that “there may be some modifications” but “things will go well for Canada”. However, the Prime Minister and his team will hope that President Trump, or one of his Secretaries of State or Commerce, visits Ottawa in the coming months, as a demonstration that the traditionally close Canada-U.S. relationship is valued by the Trump Administration.
Upon taking office, President Trump signed an Executive Order to withdraw from the Trans-Pacific Partnership (TPP) – which in any case was not yet ratified. Meanwhile, the ratification process for the Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA) will be ongoing throughout 2017, and ratification is far from a formality, with political uncertainty abounding in the EU. Moreover, the potential exit of Great Britain from the EU would make the negotiation of a bilateral free trade agreement with that country desirable.
In the short term, International Trade Minister François-Philippe Champagne has indicated that Canada has begun initial discussions about bilateral free trade agreements with various Asian countries, including China, India, and Japan. The Trudeau Government has consistently signalled its intention to pursue freer trade with China in particular.
In the coming months, making progress towards freer trade with Asian markets will be a high priority for Minister Champagne, because an increase in Canada-Asia free trade would help make up for the projected growth in economic output that is lost to the failure of the TPP, and would also cushion any negative impacts that President Trump’s policies have on Canada’s access to the U.S. marketplace. The Trudeau Government will also continue to promote foreign direct investment in Canada as an engine for economic growth.
Energy and the Environment
President Trump recently signed an Executive Order inviting TransCanada to resubmit its application for the Keystone XL oil pipeline. Prime Minister Trudeau has publicly backed that decision and the Government supports the pipeline. In the coming months, expect pipeline politics to be an increasingly contentious issue. Opponents of the Government’s energy policy, particularly the NDP, will criticize the Keystone XL project (as well as the pipeline proposals that the Government approved in 2016) as a severe barrier to reducing Canada’s greenhouse gas emissions.
President Trump has frequently suggested that the U.S.’s allies do not spend enough on security. If Canada responds to that rhetoric by dedicating more funding to military infrastructure, an envelope of funding would have to be created by drawing funds away from other Government expenses or borrowing money – and both those options would have spin-off effects for the federal budget and projected deficits.
In the short term, the Trudeau government is retrenching its military relationship with the U.S., rather than focussing on global military initiatives like a (now-indefinitely postponed) African peacekeeping mission. Over the next few months, expect the Government to explore avenues for greater military collaboration with the U.S. on security initiatives that are North-America focussed and a priority for the Trump administration.
Federal Leadership Races
The federal leadership contests, and their eventual winners, will change the dynamic of federal politics in the coming months. The Conservative Party leadership vote takes place May 27. Candidates in that race have put forward varying fiscally and socially conservative platforms, and may present themselves as more in tune with, and better able to deal with, the Trump Administration. Meanwhile, the NDP leadership vote will not occur until October 2017, but the next few months will see an increasing number of contestants enter that race. Expect NDP leadership candidates to articulate a leftist alternative to the Trudeau Government, which will now have to make some difficult spending decisions, as early as Budget 2017, due to revenue challenges and the policy priorities pushed by President Trump.
What This Means for You
In the coming months, Canada-U.S. relations could change significantly. In the short term, that has already impacted Canadian stakeholders. On January 10, as TSA analyzed in detail, Cabinet was shuffled, with Ministerial roles strategically altered to optimize Canada’s relationship with the U.S.
However, stakeholders should keep in mind that the Government’s guiding principles have not changed. The Government will continue to make policy based on what it believes will grow the middle class, stimulate innovation, create the conditions for sustainable growth, and encourage workplace skills development. The primary difference over the next few months is that, whereas before the Trudeau Government had a globalist vision, its priorities will now be examined more in light of how Canada can continue to enjoy a close bilateral relationship with the U.S.
With TSA’s in-depth understanding of the Federal Government and its decision makers, we are your ideal government relations service provider for the dynamic political environment. Please contact us if you have any questions about the coming Parliamentary session or other Government issues that may impact you and your business.