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Canada Why Trump's threats could give Canada a trade advantage it never sought: Don Pittis

15:26  13 june  2018
15:26  13 june  2018 Source:   cbc.ca

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President's trade bravado puts Federal Reserve in awkward spot as U.S. dollar rises. Don Pittis · CBC News · Posted: Jun 13, 2018 4:00 If the Bank of Canada fears Trump ' s trade threat is real, it might be forced to reduce future interest rate hikes, effectively giving Canada an unwanted trade advantage .

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Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

a man wearing a suit and tie: If the Bank of Canada fears Trump's trade threat is real, it might be forced to reduce future interest rate hikes, effectively giving Canada an unwanted trade advantage.© Jonathan Ernst/Reuters If the Bank of Canada fears Trump's trade threat is real, it might be forced to reduce future interest rate hikes, effectively giving Canada an unwanted trade advantage.

The head of the U.S. Federal Reserve may be the world's most powerful central banker, but U.S. President Donald Trump has put him in an awkward position.

And contrary to the president's promise to increase U.S. exports, if Fed chair Jerome Powell raises interest rates today — and markets are making a 100 per cent bet that he will — odds are he will make it harder to sell his country's goods abroad.

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“The United States has been taken advantage of for many decades on trade ,” said Trump in a statement following Canada ’ s —@ don _ pittis . Rather than cowing China into submission with trade threats , experts who study international trade say

June 13, 2018 Admin ' could , advantage , Canada , give , never , Pittis , sought , threats , trade , Trump ' s . Follow Don on Twitter @ don _ pittis . Let’ s block ads! ( Why ?)

Meanwhile in Canada, Trump's latest tough trade talk is already giving us an international trade advantage as the U.S. dollar rises on world markets and the loonie falls.

Trade fears offer loonie advantage

There is every reason to think that if U.S. hostility continues, the spread between the two currencies could increase further.

But it's not the kind of advantage Canadians would have asked for. It would be a signal of an economy in trouble.

If our own central banker, Stephen Poloz, believes escalating threats of major trade disruption are more than talk, he would have every reason not to follow U.S. interest rates higher.

a man wearing a suit and tie: U.S Federal Reserve chair Jerome Powell must deal with an overstimulated U.S. economy, but every move he makes is likely to drive the greenback higher.© Ben Nelms/Reuters U.S Federal Reserve chair Jerome Powell must deal with an overstimulated U.S. economy, but every move he makes is likely to drive the greenback higher.

As international trade expert Patrick Leblond reminded us last week , a trade scrap between Canada and the U.S. — no matter how necessary as a response to U.S. bullying — will be far from painless for the Canadian economy.

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Why Trump ' s threats could give Canada a trade advantage it never sought : Don Pittis . Trump determined to hit China as tit-for-tat tariff war erupts. Analysis. Markets have farther to fall if Trump won't back down on trade : Don Pittis .

Why Trump ' s threats could give Canada a trade advantage it never sought : Don Pittis . Ottawa makes plans to retaliate if U.S. follows through on auto tariff threat . Tariff threat could be a 'death blow' in the heart of Canada 's auto industry.

Canada is not alone in being hurt by Trump's rising protectionist wall. If the U.S. actually follows through, trade flows for many countries will be disrupted.

But with more than 70 per cent of our trade crossing what has been the world's longest undefended border, a serious and protracted trade war with our American cousins will have real economic consequences, and Poloz will be forced to take that into account.

Mortgage relief?

The resulting slowdown in Bank of Canada rate hikes might come as a relief to Canadian homeowners. But the job losses that tag along with trade disruptions as significant as Trump's threatened 25 per cent tax on cars entering the U.S. would bring a different kind of misery.

And the U.S. would suffer, too.

Despite Trump's rants about Canadian milk, agricultural production is deeply integrated across the Canada-U.S. border. Fertilizer, feed and even livestock criss-cross borders because they come from the handiest source, with little consideration of their nationality. Parts, services and manufactured products do the same.

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Economists debunk Trump ' s Twitter trade 'facts' against Canada . Analysis. Trump ' s tearing into Canada 's agricultural policy. Why Trump ' s threats could give Canada a trade advantage it never sought : Don Pittis .

Why Trump ' s threats could give Canada a trade advantage it never sought : Don Pittis .

a person standing in front of a building: Canadian and U.S. industries are so deeply integrated that if U.S. trade threats are more than just talk, both economies will suffer.© Rebecca Cook/Reuters Canadian and U.S. industries are so deeply integrated that if U.S. trade threats are more than just talk, both economies will suffer.

Paying withering tariffs or finding new sources for those cross-border goods would be a long and expensive process not just for Canada, but for U.S. businesses all along the frontier.

Of course, while Trump thumbs obstreperous tweets, and minions escalate with comments of the "special place in hell" variety, there are many others in the U.S. and Canada trying to lower the tension. So far, stock markets seem to be discounting a worst-case trade breakdown.

But Canada-U.S. trade is not the only issue facing central bankers. Nor is it the only Trump-caused disruption Powell must address.

New figures out yesterday show the U.S. economy is on a tear, with inflation at a six-year high and unemployment at an 18-year low.

The economic stimulation caused by years of cheap money was expected to show a result eventually. But the added stimulus of Trump's tax cuts, paid for with international borrowing, was the icing on the cake.

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U.S. President Donald Trump ’ s impulsive policy pronouncements leave Federal Reserve chairman Jay Powell to straighten out the mess. And it might not be good for U.S. trade .

At the G-7 summit, Prime Minister Justin Trudeau of Canada expressed his opposition to President Trump ’ s trade policies and American tariffs on Canadian The other six leaders were defiant in the face of Mr. Trump ’ s threats . “Nobody knows that.” “We don ’t want to pay anything,” he said.

Time to stop stimulating

It is Powell's job to figure out how to rein in all that stimulus.

The Fed is selling a trillion dollars in treasuries on international markets to pay for the deficit. It is gradually removing the $4.5 trillion it injected into the economy in the years following the 2008 meltdown. All while it raises interest rates.

According to central bank watcher Scott Aquanno from the University of Ontario Institute of Technology, all three of those moves draw U.S. dollars out of the global system, creating an increasing shortage of capital.

Stephen Poloz wearing a suit and tie: In the past, Bank of Canada governor Stephen Poloz kept interest rates roughly in line with those of the U.S., but a damaging trade war with our largest trading partner could change that.© Christinne Muschi/Reuters In the past, Bank of Canada governor Stephen Poloz kept interest rates roughly in line with those of the U.S., but a damaging trade war with our largest trading partner could change that.

"All of this would not be important if the dollar wasn't the central currency of the global economy," Aquanno says.

But if the Fed continues on this path, he says, it will push the value of the dollar up in world markets, making U.S. exports more expensive, disrupting countries that have borrowed in U.S. dollars and creating a very long-term risk to the stability of the greenback.

These are some of the issues Powell will likely address later today.

So far, the overstimulated U.S. economy continues to do well and economic growth patches over a lot of ills.

But if the mayhem caused by Trump begins to damage the U.S. economy, the president could intervene again, writes University of Oregon Fed watcher Tim Duy , breaking the rule that U.S. central bankers can do whatever it takes to stabilize the U.S. currency.

"I very much doubt President Donald Trump would sit quietly and respect the Fed's independence if economic growth faltered."

Follow Don on Twitter @don_pittis

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