Analysis

Why the USMCA likely won't unleash a wave of pent-up business investment

Experts have said we should expect plenty of new business investment now that NAFTA has been renegotiated. But the numbers actually show Canadian businesses didn't hold back as much as expected during the nerve-racking trade talks.

Uncertainty about trade relationship with the U.S. didn't hold Canadian companies back as much as expected

One of the main concerns surrounding the lengthy and nerve-racking NAFTA talks was that Canadian businesses were holding off on buying big, expensive machinery. (Chris Young/Canadian Press)
With a trade deal (whatever name you want to call it) now reached between Canada, Mexico and the United States, a giant cloud of uncertainty has finally lifted. For more than a year, nervous businesses had to balance all the unknowns on the one hand and the demands of a booming economy on the other.

"The single biggest win here is the elimination of uncertainty," said Brian Kingston, vice-president of policy at the Business Council of Canada, an advocacy group representing 150 companies.

The concern is well-known by now. Many stakeholders and experts warned that Canadian businesses were holding off buying new equipment and machinery until there was some confidence about Canada's trade relationship with the U.S.

After all, who wants to invest all that money with a cloud hanging over their head?

So now that a deal has been reached, complete with a rebranding  from NAFTA to the USMCA, should we brace ourselves for a wave of new business investment?

Well, not so fast. The numbers actually paint a slightly different picture.

"The dent from uncertainty has likely been smaller than expected, so the rebound now may not be as big as some suppose," said Brett House, deputy chief economist at the Bank of Nova Scotia.

As the economy booms, businesses have to invest to keep up with demand or risk leaving orders unfilled. (Susana González/Bloomberg)

Remember, fear and uncertainty have been constant factors in the economy since the financial crisis of 2008. As the recovery dragged on, businesses worried it wasn't durable. In 2014, the price of oil fell off a cliff, causing concern throughout every sector of the Canadian economy. By 2016-17, it was NAFTA negotiations that began to rattle nerves.

By then though, the economy was chugging along. The Trump administration's tax cuts seemed to spark even faster growth and stronger corporate earnings. As the U.S. economy boomed, Canada benefited, too. U.S. demand for Canadian goods and services surged. With that, came a critical moment for Canadian businesses.

Orders started to pour in. It became hard to keep up. In an ideal world, businesses would invest at this point in the cycle, adding factory space or buying new equipment to make their facilities more productive. But all that uncertainty weighed on businesses.

Reluctant to spend big money until they had some certainty, companies tried to substitute labour for capital investment. But that was only ever going to work so well.

"Firms added extra shifts, added weekend shifts, worked through nights," House said. "They couldn't squeeze any more output out of existing plants and equipment."

Invest or else

At that point, he said, the choice was either "invest or leave orders on the table."

And sure enough, by the end of 2017, spending on "non-residential structures, machinery and equipment" began to shoot up — by 8.7 per cent in the fourth quarter compared to the same period a year earlier, and by 8.2 per cent in the first quarter of 2018.

So the notion that uncertainty over NAFTA prevented companies from spending just isn't borne out by the facts, House said.

"We don't see evidence [investment] has been dented by some kind of chilling effect in the way most folks supposed it would be."

You need to balance out the positive impact from the Trump administration's tax cuts against the negatives that came with all that NAFTA uncertainty, he said.

"If anything, the effect of the U.S. on Canada has been a wash or a bit positive."

Prime Minister Justin Trudeau, left, and U.S. President Donald Trump have had a rocky relationship so far. But the most divisive issue between them, agreeing on a new North American trade deal, is now out of the way. (Getty Images)

The popular argument has been there is a wave of pent-up investment that's been waiting for some certainty around trade to be unleashed. But if the uncertainty cost less than we imagined, won't the expected surge be slightly less as well?

"I don't want to sound like I'm pouring cold water on the notion that concluding USMCA should lead to a bump up in investment and business activity — it should," House said.

It just might not be as big as many seem to expect.

About the Author

Peter Armstrong

Senior Business reporter for CBC News. A former host of On the Money and World Report on CBC Radio, Peter Armstrong has been a foreign correspondent and parliamentary reporter for CBC. Twitter: @armstrongcbc

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