Conflict, the economy and trade

by Christian Siviere

Conflicting winds are blowing over international trade. On the positive side, economic activity is brisk, as most countries are recovering from the pandemic. On the negative side, supply chain disruptions persist and have been worsened by the Russian invasion of Ukraine and resulting cost increases in energy, raw materials and commodities. Environmental issues are hitting us at the same time: droughts, forest fires and floods are affecting many parts of the world, impacting crops, and the availability and price of food.

Most Canadians may not realize our country is doing relatively well in these troubled times. The effects of inflation are felt by everyone, with higher prices for many consumables, but we’re doing better than other G7 countries. In July, inflation stood at 10.1 percent in the UK, 8.5 percent in the US and Germany, and 8.4 percent in Italy, but only 7.6 percent in Canada.

In August, the International Monetary Fund (IMF) compared GDP growth in the second quarter of 2022 to the pre-pandemic levels of the fourth quarter of 2019: the US came first at 2.6 percent and Canada was second at 1.7 percent, ahead of the Eurozone, UK and Japan. Canada ranked first in the Organization for Economic Cooperation and Development (OECD)’s growth forecast for 2022, at 3.8 percent.

The energy crisis triggered by the Russian invasion of Ukraine is affecting the whole world, particularly emerging countries. Europe – and especially Germany – has become dependent on Russian energy over the years.

The cost and availability of energy affect consumers and industries alike, hampering economic growth. Canada is relatively shielded from this, since we are an energy producer. However, an unusual situation is happening with our currency: As an important oil and gas producer, the Canadian dollar usually goes up when the price of energy increases, but it’s not happening this time. Instead, our dollar is at its lowest against the US dollar. I haven’t heard any banker or economist give a convincing explanation of this paradox so far. But whatever the reason, the low dollar increases the cost of our imports and fuels inflation.

On the plus side, a low dollar helps our exports, as it makes them more competitive. Canada is a small market, but we are a trading nation. To prosper, our businesses need to export and expand into foreign markets.

We recently got good news in this respect. Tariffs on solar panels from Canada were eliminated, and requirements for the US electric vehicle subsidy were modified from “Made in the USA” to “Made in North America”. Whether these measures will translate into tangible benefits for Canadian companies remains to be seen, but it’s good news, in contrast to what we experienced with the previous US administration.

Our exporters have to look beyond the US market to capitalize on opportunities around the globe, but this very much depends on a peaceful world and a rules-based international order. Russia’s invasion of Ukraine and rule breaking brings new challenges. Democracies have united around the US, Canada, Europe, Japan, Australia, and others, to impose economic sanctions on Russia, but many others, like China, India, Brazil, most African, Middle Eastern and South East Asian countries (except Singapore), are openly or tacitly supporting Russia. One question we must ask ourselves now is: can international trade be detached from geopolitics?

Is it in Canada’s long-term interest to negotiate Free Trade Agreements or give preferential treatment to countries that support Russia and help Putin bypass sanctions? India is a good example. Indian imports of Russian oil jumped more than tenfold, and deliveries of fertilizer increased more than eightfold in the second quarter of this year.

In another example from a different continent, Morocco’s imports from Russia have more than doubled in the first half of this year. And Morocco has opened its air space and its airports to Russian flights, helping Russia get around international sanctions.

Can we continue to develop trade wherever there are markets, without taking into account that those autocratic countries which don’t respect international rules and basic freedoms are a long-term threat to our way of life? My hope is that we become more conscious of this in the future.

Feeding oppressive regimes in Asia is not in our interest either. After years of “offshoring”, the pandemic made us realize the need for some “reshoring” and the current war in Eastern Europe should convince us that “friendshoring” is the new way to go.