By Peter Sproule
Unreservedly, the airwaves this past week have been filled with news that Donald Trump will be the next President of the United States, but what does that mean for my business? We've gathered our thoughts on what the Trump presidency will mean for the US and Canadian economy, along with the day-to-day running of businesses. We also included our thoughts on other relevant current events. The freshness of the election results and the lack of Trump having clear policy positions has left us with the common theme of ambiguity.
A surge in fundamentalism, global economic stagnation, the rise of populism and the threat of a break-up of the EU - the world's largest economic and political union - have kept news junkies on the edge of their seat. To top it off, a upset-victory of Donald Trump in the US presidential election this week surprised most, but that doesn't mean it's time to panic.
What does this mean for the US economy?
Trump's anti-trade, anti-immigration, and deportation of illegals platform could prove devastating for the US. Many experts believe that such policies will shave several points off the US' economic growth, not to mention their purchasing power. The protectionist rhetoric has been widely recognized as a threat to America's middle class - closing the borders will lead to an increased cost of living. Depending on Trump's policy and spending priorities, the energy, financial, and defence sectors could see significant growth.
Environmental protections and lobbies, along with low oil prices have hurt the energy sector and slowed or stalled many large projects. Trump's assertion to reduce environmental initiatives and create jobs, along with technological development in shale-fracking and the stabilization of oil supplies would give US energy a lift.
The financial sector will be a more complex dynamic to manage - Trump proposed the lowering of consumer protection measures brought in by the Obama administration in the form of the Dodd-Frank Act and other regulatory changes. In Trump's '100 Days' release, he promised that every new regulation passed by Congress would mean the repeal of at least 2 existing regulations. Historically, big-business growth has favoured de-regulation andfreer markets.
Defence will be another sector of interest - it currently makes up the 3rd largest line item on the Federal Budget, at over $600 billion in 2016. Trump's rhetoric has been isolationist throughout the campaign, but his focus on terrorist threats, the Middle East, and the growing power of China begs the question as to if he is willing to shrink the defence expenditure. If Trump maintains or increases spending on military as he's proposed, this will be welcome news to the manufacturing and materials sectors.
What does this mean for the Canadian economy?
While a developed country, Canada's economy is akin to an emerging market - the bulk of our GDP can be attributed to our energy and financial sectors.
Let's start with energy - Trump's campaign released a notice on his intentions for his first '100 days' in office on Oct. 24. In the release, Trump proclaimed that he would be pushing the Keystone XL Pipeline project forward and lifting environmental restrictions to generate jobs and growth for the economy. Trump believes that increasing US energy output will fill the void of job losses in the manufacturing sector. By that same token, the Trudeau government is also a proponent of the Keystone XL Pipeline as a job creator and a means to boosting Canadian economic growth and the oil sands.
The financial sector will be a more complex dynamic to manage - Trump's proposed de-regulation will almost certainly be favourable for the US financial sector. Canada's financial sector is one of the most highly regulated of the G8 countries, and we do not expect any level of de-regulation from either internal pressures nor external. In fact, the regulatory environment continues to tighten, especially as household debt creeps up. One thing to keep an eye on is the US Federal Reserve meeting in early December. Expectations are that there will be a rate increase in at this meeting, but by Chairperson Yellen's measure, the US economy will need to see consistent job and GDP growth in Q4 to warrant the increase.
What does this mean for cross-border trade?
Trump campaigned on the promise of re-negotiating the North American Free Trade Agreement, saying that he would tackle the trade bloc in his first 100 days in office. Both the Canadian Prime Minister and the Mexican President responded this week, striking different tones - Trudeau saying that he was open to a renegotiation and Nieto stating that he would talk about it with the president-elect, stopping there. Completely scrapping the agreement would have significant negative affects for all countries involved as all member countries have benefitted from increased jobs, foreign-direct investment and trade under NAFTA. Under the agreement, a member country also has to give 6 months notice of its intent to withdraw, not to mention the amount of time it would take to renegotiate complex trade deals and tariffs.
What about the Trans-Pacific Partnership? At the very least, Trump has promised to put the TPP on hold, at the very worst, he has threatened a full withdrawal from the agreement. As it stands, NAFTA is the default agreement that would govern trade relations amongst the North American members. For the US, leaving the TPP would mean it's trade obligations fall on NAFTA, in whichever form it evolves to. For Canada, remaining a member of the TPP means honouring the agreement first over NAFTA. Leaving the TPP would leave the US out of the most significant trade deal since the free-trade in the EU. While there are arguments to be made against the TPP, it will undoubtedly be raising the costs of importing goods into the US, along with potentially slowing the customs process.
Speculating that the US pulls out of NAFTA or raises tariffs on imports, Mexico certainly has the most to lose. By the numbers, Canada recipient of most amount of US exports, totalling over USD $200 billion year-to-date, with Mexico close behind at USD $172 billion. While 73% of Canadian exports are bound for the US this year, Canada's trade relationship wasn't the focus of Trump's rhetoric. The loss of manufacturing (especially automotive) jobs to Mexico was Trump's biggest argument for protectionism. Meanwhile, his openness to oil pipeline development through federal lands and the desire for foreign direct investment in the US (of which Canada provided USD $261.2 billion compared to Mexico's $17.1 billion in 2014) bodes more favourable for the Canada-US trade relationship.
How does this affect e-commerce?
The most immediate concern for cross-border transactions is currency risk. Currency risk is the risk that a fluctuation in one currency relative to another currency involved in a transaction could negatively affect the margins of an investor's return. In English, this means that purchasing goods across borders using different currencies could expose a company to increased costs if their local currency weakens against the currency in which they are purchasing the goods. With CDN trading $0.74 as of publishing, American companies are experiencing a 26% discount when converting USD to CDN. Conversely, Canadian companies converting CDN to USD are paying a 26% premium for goods and services paid for in USD. However, this could change.
Companies regularly converting currencies should maintain accounts with foreign currencies that they are commonly transacting in to minimize their currency risk. Holding foreign currencies helps manage costs and avoid time-consuming analysis of cost-of-goods every time they need to purchase or sell. Additionally, companies may be able to optimize their margins if currency conversions can be timed to purchase when their local currency is strong and sell when their currency is weak.
In theory, having a weaker Canadian currency attracts investment and purchases from the US' stronger currency, and Canadian companies have seen greater investment and exports as a result. In reality, the FDI in-flows haven't been significant enough to have a major impact, and if Trump is trying to keep investment dollars in the US, we could see this dry up. Additionally, Trump is hoping to improve the prospect of investing in the US by lowering the corporate tax rate from 35% to 15%.
What does this mean for my business?
As an US based business transacting with Canadian businesses, the dollar is on your side - for now. If you are frequently transacting in Canadian dollars and do not have a CDN account, it's time to set one up. While it is beneficial to convert USD to CDN at the moment, Trump protectionist policies along with rising oil prices and the stabilization of supply and demand can create a downward pressure on the US dollar and a definite upward pressure on the Canadian dollar.
If you are a Canadian company that is transacting frequently in US dollars and does not have a USD account, it's time to set one up. While timing conversions can be a fool's game, having American customers pay you in USD and having the ability to pay American suppliers in USD without converting from CDN will reduce your exposure to currency fluctuations and could save you thousands in the long run.
Now may also be the time to look at your client base and your supplier list too. If your goods or services are part of the 73% of Canadian exports headed to the US this year, if may be time to look for ways to diversify your target markets in the event the US begins slapping trade tariffs on us. If Canada in turn decides to place tariffs on US imports, it may be time to find additional suppliers outside of the US, preferably a country that has a trade agreement with Canada (remember the TPP from earlier?). If you are sourcing goods from China into the US, expect the relationship to change and make contingency plans now.
On the note of supply, now is the time to review your supply chain process. If protectionism is the flavour of the day, slower customs processing means slower turn-around, and just-in-time shipping could be just-wait-your-turn at the border. Finding inefficiencies in your process on either side of the border can cut lag times down in spite of the Trump administration's agenda. It would also be a good idea to review your inventory requirements - sitting on inventory can constrain cash flow, but not getting product to customers will eliminate cash flow.
Plans of a new warehouse or office in the US? If you are planning on making capital investments in the US, it may be worth waiting - at least until there is a clear plan put forth by the Trump administration for attracting corporate and foreign investment as it could provide greater incentives for you.
In the short-term, little change is likely to occur. Trump's anti-trade and anti-immigration aside, the populist win in the Brexit vote has proved little pain for the U.K. economy. Long-term, a trade war with Mexico and China could be lethal, with some experts saying it could reduce the US' GDP by as much as 4%. While the president wields significant power in foreign policy, Congress still exacts taxes, approves budgets, and requires cooperation from the highest office.
There remains a lot to be seen. With significant elections coming due in Europe this year and next, it would be foolish to discount the populist movement against trade and immigration as just an anomaly. Canada has just signed a new trade agreement with the EU, however, uncertainty of the EU's future threatens this deal. Additionally, there are expectations of an interest rate increase by the Federal Reserve in December that we are keeping an eye on.
If Trump does push an anti-trade and anti-immigration agenda, the results will be negative for all parties involved. As the new administration's policy agenda develops, we will have a better understanding of what to expect of the US economy and in turn, its affect on the global economy.
Peter Sproule has his mutual fund and life insurance license with a BA (Honours) in Politics and Economics from Queen's University. Peter is the 5th Fastest Growing Sun Life Wealth Advisor in Canada, is being recognized as one of twenty lead advisors at the 2016 Wealth Summit in Washington, D.C. Growing up in a family business, Peter understands the financial challenges small business owners and professionals face and the need to build long-lasting relationships on trust and excellent personal service.
Peter is a guest financial writer with iTMG who provides us with business background and insight into how the world of international finance might affect digital business globally.
Peter can be reached at Peter.Sproule@sunlife.com