Post-USMCA Business Conditions in North America
Author: Blake C. Goldring
October 23, 2018
Reduced uncertainty welcomed, but important non-tariff barriers must be addressed
Last week, I had the pleasure of speaking at the North American Forum in Ottawa. The Forum meets annually and brings together leaders from a variety of industries, governments and academia to discuss timely issues affecting our continent.
I participated in a CEO Roundtable on the topic of Doing Business in North America and offered my perspective on evolving business conditions and prospects following the announcement of the United States-Mexico-Canada Agreement (USMCA).
As someone running a global business that operates across borders, I welcomed the news that an agreement in principal was reached, largely ending the uncertainty Canada, the U.S. and Mexico have faced. Over the past year and a half, trade uncertainty has taken its toll, causing foreign direct investment in Canada to plummet and weighing on equity markets.
Reaching the elusive agreement allows our respective governments, regulatory authorities and business communities to turn their collective attention to the critical task of improving conditions to promote economic growth, job creation and business investment. And while reduced uncertainty is a great positive, important non-tariff barriers – namely, regulation and taxation – must be addressed, while also keeping a close eye on the implications of interest rate hikes.
Regulation
Particularly as it relates to financial services, regulation has been a hot topic of late. In the U.S., under the strong deregulatory focus of the current administration, we’ve seen potentially burdensome rules get walked back, including portions of the Dodd-Frank Act that would have disadvantaged small and mid-sized financial institutions and the Department of Labor’s Fiduciary Rule affecting how financial advisors would interact with their clients.
In Canada, regulatory change is afoot to change the nature of the client-advisor relationship, drawing considerable attention. The reforms contemplated by regulators in this country may result in far-reaching unintended consequences, including restricting investors’ access to their preferred advice model and resulting in delayed or eliminated access to advice for many Canadians.
For its part, Mexico instituted banking reforms in 2014 that strengthened the powers of its regulatory authorities.
Chapter 17 of the USMCA covers financial services and aims to ensure firms across North America can operate in each other’s markets on equal footing. As per Chapter 17, a Committee on Financial Services will be struck to oversee the USMCA’s implementation in this area and assess overall functioning.
The key questions regarding the Committee are how effective it will be in reconciling the various regulatory perspectives, and what implications its deliberations will carry for financial services across the continent. It remains to be seen, but the USMCA will hopefully make conducting cross-border business smoother for financial services firms, reducing the regulatory burden that firms face while affording similar protections for consumers of financial services across the various jurisdictions.
Taxation
The U.S. recently slashed its corporate income tax rate and now enjoys rates lower than both Canada and Mexico. What’s more, the U.S. also enabled the immediate write-off of capital expenditures for businesses, which only enhances the edge it holds over its neighbouring nations. Capital is fluid and can move quickly to seek out those markets where a higher return can be obtained. Such attractive conditions in the U.S. make it difficult for Mexico and Canada to maintain their competitiveness and attract business investment. Remedial efforts must be made.
Rate Hike Implications
The USMCA likely also sets the stage for additional rate hikes as the Bank of Canada had cited trade uncertainty as one of the primary factors preventing additional tightening. Higher rates, which signal continued economic growth, also carry implications for heavily indebted consumers and issuers, and our economy as a whole. Should rates climb too high, too fast, the cost of borrowing could become onerous for some to service their liabilities and growth could stagnate. At AGF, this is something we will be keeping a close eye on.
Overall, optimism is warranted with the USMCA deal reached, but to fully capitalize on this optimism, stronger and more balanced business conditions across all of North America are needed. Addressing the key non-tariff barriers standing in the way of trans-continental competitiveness must be the key policy priority going forward.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
Written by
Blake C. Goldring, C.M., M.S.M., CD, LL.D., CFA®
Executive Chairman
AGF Management Limited