A sharp escalation in U.S.-China trade tensions will likely dampen commodity prices and keep Canadian capital investments in a tight holding pattern when they ought to be taking off, analysts say.

A range of factors, including a softening Canadian dollar, Ottawa’s introduction of immediate writeoffs of capital investments last fall and a long run of global expansion should have set the stage for a spike in business spending by now, said Doug Porter, chief economist at BMO Financial Markets.

Instead, economists such as Porter are calling for business investment to be close to flat this year despite a brief bounce in the first quarter.

“We are 10 years into a cycle and normally this is the natural point where capital spending starts to pick up in a meaningful way,” Porter said. “But it’s not happening. That’s partly due to concerns about pipeline capacity but also trade uncertainty. It’s that indirect channel that’s of greatest risk to Canada at this point.”

U.S. President Donald Trump announced plans last week to pin a 10% tariff on a further US$300 billion in Chinese imports — effectively extending U.S. levies to cover all US$500 billion in goods shipped into the country from the Asian superpower. Tensions deepened on when Chinese authorities suspended purchases of U.S. agricultural products and allowed the yuan to depreciate above 7 to the dollar for the first time in a decade, a move the U.S. Treasury labelled as currency manipulation.

Analysts were less concerned, indicating the tussle over currency manipulation is expected to have few practical implications. 

Similarly, with about 40% of the latest U.S. tariffs affecting consumer goods such as cell phones, toys and clothing, according to an analysis by CIBC World Markets, U.S. shoppers are expected to feel the most pain from Trump’s latest salvo in the trade wars — though cross-border supply chains that depend on Chinese imports could also be disrupted.

The escalation in trade tensions between the world two biggest superpowers is far from good news for Canada.

“Canada is a trading nation and the rules of trade are changing because the biggest economy in the world says it doesn’t like how things are going,” said Ian de Verteuil of CIBC World Markets. 

A recent poll from the Pew Research Center found the proportion of Americans who believe China is either an adversary or a serious threat is the highest in a decade and at the same level as before China started opening its market and was allowed into the World Trade Organization (WTO) in 2001. 

Trade represents a quarter of the Canadian economy, more than double that of the U.S. at 12%. What’s more, Canada has been directly caught in the tensions between the U.S. and China following the arrest of Huawei chief financial officer Meng Wanzhou in Vancouver on Dec. 1. The arrest, made on a U.S. extradition request, was followed by the detentions of Canadian citizens in China in apparent retaliation and restrictions on purchases of Canadian canola and other commodities.

Those issues make it unlikely Canada might find an opportunity to sell more agricultural goods to China as it seeks new suppliers outside the U.S., said Avery Shenfeld, chief economist at CIBC World Markets. Meantime, commodity prices are expected to be dragged down as surpluses of unsold crops accumulate.

“Even if there are things we don’t sell to China or the U.S. the pricing will be impacted by global demand and the trade war is one factor weighing on global economic sentiment,” said Shenfeld, adding the biggest concern remains the impact on business investment, particularly in the manufacturing sector.

Later in a global expansion you’d be at a stage where plants are running full tilt and you’d need more. But manufacturing has softened and that’s typically where a lot of spending takes place. The pressure to add capacity in the last six months or so is diminishing. That’s linked to slowing global trade.”

Source: Financial Post