Canada: When your neighbor's house is on fire…

Morning sickness hit global markets this morning, as the world begins to digest the political earthquake that took place yesterday. Declines were recorded in major stock indices and currencies fluctuated as Republican candidate Donald Trump astounded pollsters and won the U.S. presidential election, after a divisive and controversial campaign. The result surprised the vast majority of our analysts, over 80% of whom had expected a victory for Democratic candidate Hillary Clinton, and has heightened global uncertainty dramatically. Our analysts saw Clinton as having a better economic plan, a better grasp of economics and assembling a better economic team than Trump, which combined would help fuel faster growth in the U.S. As a result, the surprise election of Trump has cast a cloud over the outlook of the world’s largest economy.  While Trump’s inconsistent and impractical campaign pledges make it difficult to decipher the impact his Presidency will have, major policy changes in the U.S. could have spillover affects felt across the globe.

One of the countries most tied to the United States economy is its northern neighbor, Canada. Over 75% of Canada’s exports are to the United States and the countries share close economic and political ties. Although at this point, it is hard to separate the policies that President Trump will pursue in office from the controversial election rhetoric spewed, below is a breakdown of some of his stated policy objectives and what it will mean for Canada’s economy, because when your neighbor’s house is on fire…your property is in danger.

Trade

Trump’s position: In a stance at odds with many mainstream Republicans, Trump advocated economic nationalism and protectionist sentiment. Statements of note include a renegotiation of NAFTA, repeal of the TPP and import tariffs on key trading partners as well as tougher border controls.

Implications for Canada: While Trump’s anti-trade rhetoric has been aimed at China and Mexico rather than Canada, protectionist policies could have major implications for the Canadian economy. Buy American policies would likely hurt Canadian exporters and the country could get caught in a cross-fire if the U.S. seeks to change NAFTA. In an extreme scenario where the U.S. pulls out of NAFTA all together, it is unlikely that the two countries could sign a free trade agreement in the 6-month withdrawal window meaning that Canadian exporters could be slapped with a tariff. Tighter border controls could also increase costs to trade for Canadian firms and prices for Canadian consumers.

Foreign Policy

Trump’s position: Trump has no experience in public office and is likely to be a more hawkish, less diplomatic head of state than his predecessor. He has advocated for increased military spending as well as promised to put more pressure on the U.S.’ NATO allies to up their contributions.  

Implications for Canada: More friction is expected between Prime Minister Justin Trudeau and Trump than Trudeau’s relationship with President Barak Obama as their views clash on almost all major issues. Trump will likely pressure Trudeau to increase Canada’s relatively small NATO contribution and take a more prominent stance in NATO issues as well as to push for greater military spending and involvement in NORAD. If Trudeau does adjust military spending, it could have positive effects on growth at the expense of government finances.

Energy Sector

Trump’s position: Trump has voiced support for the Keystone XL pipeline but stated that he wants part of the profits from it. He also has pledged to reduce U.S. energy dependence and remove barriers to production.

Implications for Canada: The Keystone XL pipeline could boost exports in the short-term and provide some support to the energy sector. However, any increase in U.S. oil and gas production would put downward pressure on energy prices and hurt demand as well as revenue for Canadian products.   

The Crux

The effects on Canada’s economy could be diluted notably in the likely event Trump’s bark is worse than his bite. Candidates’ stances during election campaigns are often more extreme than their eventual policies and with the U.S. system of checks and balances, Trump could run into roadblocks dealing with Congress even if he wanted to push some of his controversial policies.  Regarding trade, protectionist policies could backlash on the U.S. economy. Canada is the largest buyer of U.S. goods and highly integrated cross-border supply chains also mean that American businesses and consumers would be faced by higher prices for goods. The potential drawbacks to protectionist policies should encourage Trump to follow a more moderate course.

The next few months are key to evaluating how the Trump presidency will affect the Canadian economy. Ultimately, it will depend on the key players he puts in his cabinet and the main policy priorities. Hopefully, for Canada it will turn out that Trump’s bark was worse than his bite. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: November 9, 2016