NAFTA negotiations creating uncertainty in a time of growth

After years of stagnation, the world economy is finally growing. We should be rejoicing. We should be doing everything in our power to celebrate and harness this long-awaited period of real growth. Instead, we’re debating the future of the North American Free Trade Agreement (NAFTA).

Free trade agreements have proven time and again to be a platform for growth in a globalized world. The integration of economies and our interconnectivity through technology and globalization makes us resilient. But this tension, this not knowing if we’re on the road to NAFTA 2.0, is creating uncertainty.

The NAFTA talks are creating political uncertainty. We see that with Brexit and the upcoming elections in Mexico.

The NAFTA talks are creating business uncertainty. After years of corporations underinvesting in the economy, they’re finally ready to open their pockets. Except NAFTA negotiations are causing them to hesitate. Our fall survey of exporters found a good contingent of businesses holding up on investment plans for the future.

Across the world, we are seeing signs of growth:

  • The jobless rate in Western Europe and North America is closing in on all-time lows.
  • Consumer spending is growing.
  • New construction and infrastructure spending is on the rise.
  • The middle class in China, India, Brazil and other previously underdeveloped nations is increasing by tens of millions annually.
  • Trade is growing, and Canada has secured free trade agreements with many new partners that will open the doors to further growth.

At a time where everything is coming up roses on the external side, we have the greatest of existential threats internally – the renegotiation of NAFTA.

This is already hurting. Not only are we seeing businesses holding back when they should be confident to make capital investments, but we’re seeing duress inside of Canada in other ways because of the NAFTA talks. We expect that ending NAFTA would trigger a 1.2% hit to GDP, which wouldn’t be fun. If we have to we can withstand it. But we’re also anticipating a very large 4.5% hit to investment.

At a time when we should be celebrating and planning and pushing the economic engine forward, we are holding back because of uncertainty around the future of NAFTA.

It’s almost tragic, the juxtaposition of these two paths. But things are about to change.

In spite of NAFTA, history is on our side. We are at the beginning of the most significant growth we’ve seen in almost two decades. With globalization and multi-lateral trade agreements, those who previously were shut out of the global economy now see their place in it. And now with significant pent-up demand in the larger economies, emerging markets can look forward to a new wave of growth.

Positive economic outlook for 2018

Despite the uncertainty, many economists, including me, are feeling optimistic about the future of the global economy – near-term and even further out. Why? We don’t make forecasts without a solid understanding of where we have come from and where we are right now. We don’t guess at growth; we look at economic cycles, we look at key indicators and we look at history.

3 historic indicators that the economy is poised for growth despite NAFTA talks

There are some underlying forces at play that suggest our economies aren’t merely rebounding right now, they are about to boom. There are some key indicators – examined through the lens of history – that would suggest we are seeing the debut of an extended period of growth, perhaps three to four years.

Here’s what history has taught us.

1. We know free trade agreements are good for economies.

There was very little integration of economies in the 1970s and 1980s. When people started talking about free trade, there was a lot of doubt. Would integration mean fewer jobs? What would happen to domestic industries that now had tougher competition?

But then free trade agreements started to get signed – 1989 with Canada and the U.S., NAFTA in 1994 –and it was demonstrated that the world did not end after the signing of free trade agreements. In fact, we started to see that integration was a win-win.

During this time we saw the world, everybody, experience higher GDP rates than we ever hoped to expect previously. Integration lowered unemployment rates to a point where we economists said we should be seeing double digit growth in wages. It didn’t because of two converging forces – technology and globalization. Or has it merely been delayed? Canada’s commitment to new free trade agreements across the world are a positive sign.

2. Globalization and the exaggerated economic cycle

Here’s what we perhaps haven’t reconciled in our own minds. The economic cycles since globalization are now longer. Before globalization, we would see an uptick, followed by a downturn every eight or nine years. That was the business cycle. But globalization has exaggerated this cycle, doubling it to 16 years.

When the recession hit in 2008, it came after an unprecedented period of growth, exaggerated in length. Imagine what happens in 16 years – a huge chunk of someone’s career – if all you’ve experienced is growth and you’ve never experienced a downturn.

People started thinking maybe this was a new paradigm of growth because of globalization. “Maybe this will go on forever. Maybe I don’t have to be as careful. I can afford it, so I’m gonna buy it.” And everybody did that together and growth rates went up. And banks thought they were safe as well because of this growth that would seemingly go on forever.

But it didn’t. It was a bubble. And it burst. As we know, it ended terribly.

We have never seen the kind of global retraction that took place in 2008 and 2009. In Canada, we lost one quarter of all trade.

That brought governments to the table with the most significant delude of stimulus the world has ever seen. It was significant, swift and it was synchronized. The rebound it triggered was interpreted by many as a sign the economy was back on its feet. And everyone said, “aren’t we good? Let’s get onto the next growth cycle.”

What they missed was that we could live off those past excesses for a long time. And that clobbered growth, for a good seven years. Growth has been slow, interest rates low, and the sluggishness has left a lot of people on the sidelines. That’s why populism has been having a heyday in large parts of our world. The concurrent search for political answers is a big reason that countries like the U.S. and the big European nations started looking to protectionism.

On the surface, it may be hard to understand why, over the last few years, the American populace has been convinced that free trade means fewer jobs for Americans and that protectionism is the way to go. After all, unemployment rates, now at historically low levels, have been low for a couple of years. If it’s true that the unemployment rate is so low, why are so many people in the US angry? Why are they accusing Mexico of stealing their jobs? They’re all working, they don’t have time to complain, so where is all that acrimony and confusion coming from?

Behind this is actually a sad story. At the same time the unemployment rate has been coming down in the U.S., the rate of labour force participation was also declining. That’s not normal. It’s an indication that a lot of people have felt left out of the last decade, that they felt left out of the global economy, that growth has not been sufficient to include everybody.

But just as the populist activists are latching onto these trends, we’re seeing something positive: Labour force participation is now on the rise, at the same time unemployment is at historical lows. Yet again, history is on our side.

3. Pent-up demand is the driving force behind economic growth

Labour force participation has once again started to climb up, responding to labour market tightening. We’re seeing key signs that young people, who in large numbers and for a long time have been left on the sidelines of the economy, are now part of the global economy. Now they’re getting re-engaged. And not only to be part of it, but to drive it.

We hear a lot about the gig economy and the preferences of millennials. We hear a lot about how they haven’t wanted to buy property or settle down into jobs the same way as their parents before them. That’s starting to shift. Millennials the world over, according to a survey by HSBC, are now saying they do have economic aspirations like home ownership.

And again, history repeats itself. For much of the 1990s, Generation X in Canada faced low job prospects. They were sidelined by huge fiscal reforms at the federal and provincial levels. It’s not that they didn’t want to be there – it was a loss of hope, in much the same way many people who lost their hope after 2008. When the cutbacks were over, opportunities opened up for Generation X to get jobs, buy cars, build homes and so on. After such a long period of drought, they jumped into the economy in droves. The same thing is happening now. Today’s Millennials will drive growth.

Moreover, despite the stimulus money that came pouring out of government coffers post-2008, we saw sluggish growth in infrastructure spending and consumer spending. The boost we’re starting to see in these indicators is further evidence that people are tired of waiting around; there are things they need; they want to be part of the economy. This is pent-up demand, which will ultimately give our economy a big push in the next few years.

Technology, diversification, globalization suggest NAFTA is here to stay

I’ve outlined seven reasons NAFTA isn’t likely to fail. Perhaps the one that is most fitting here is the reality that technology and globalization will bypass a protectionist America. These forces of economic growth that rely on integration are so strong that they will survive, regardless of what happens in the current NAFTA talks.

Technology enabled globalization. Does tearing up the NAFTA deal tear up technology? No, and frankly that type of isolation will cut you off from a natural process that’s going to occur.

A failure to renegotiate NAFTA doesn’t halt us in our tracks. But we need to lift our eyes and look all around us to see the amazing opportunities. In Mexico, I noted how integrated Canadian and Mexican economies are and what we have achieved together. And Canada has many opportunities around the globe.

  • Consider a world economy that’s firing up again, not just a pre-recession growth, but for a longer stretch than we’re used to
  • Consider the rising middle class in Brazil, Indonesia, India and China – millions of people who are demanding high-value consumer goods
  • Consider the opportunities of diversifying into markets though new trade agreements such as the CETA, the CPTPP and the Pacific Alliance

We’re worried about NAFTA and what’s going on here. But regardless of the uncertainty that Canadian businesses are feeling around the NAFTA renegotiation, I’ve been touring the country with a message of confidence. I’m trying to get Canadians and Canadian business to focus on the world.

If we did turn our attention outward, we will be focusing on a very different future, one that shows there’s plenty of growth to go around all over this world.

With the buzz about the possibility of the U.S. pulling out of NAFTA, it’s the perfect time to sign up for our latest interactive webinar, NAFTA and Canada’s Trade Confidence Index.