You might remember recent reports outlining how the economy of Canada has slipped into a recession, posting two consecutive quarters with a negative GDP outcome. There are multiple reasons for this shrinkage, but the dominant factor is, well, quite frankly, Canadian politics and economic policy.
Meanwhile, in Mexico the opposite is happening. Mexico’s economic activity grew 1.2% in April from the prior month, the national statistics agency said, compared with a revised increase of 0.6% in March and beating a forecast of a 0.9% increase in a Reuters poll of analysts. {source}
It is not coincidental to see the Mexican economy performing well, while the Canadian economy is contracting. Despite their identical proximity to The United States, each nation is currently executing a fundamentally different set of economic policies.
The Canadian government has been exceptionally combative with the U.S.A, leading to friction, tariffs and economic back-and-forth measures between the two nations.
The Mexican government has expressly understood the nature of their dependency, admitted it, taken no action to diminish it, and purposefully set out to align itself with the interests of America.
Canada is combative. Mexico is collaborating.
It seems unlikely that the three nations can agree on major economic policies, as a trilateral partnership would need alignment in core areas like energy policy. Canada’s energy policy is fundamentally separate from those of the U.S. and Mexico, and this is an issue that can’t be resolved through a trade agreement alone.
A large part of Mexico’s economy relies on remittances from Mexican workers in the U.S. sending money back to their families. As long as the U.S. job market stays strong—and it’s only getting stronger in the industries where many Mexicans work—Mexico will continue to benefit from America’s economic growth.
One datapoint that points to the USA-Canada disconnect comes in the auto sector. The Center for Automotive Research (CAR) reports that Canadian vehicle production dropped 15 percent year-over-year through April. It’s understood that factories in Canada built approximately 64,000 fewer vehicles through April than the year prior, while US production rose by roughly 44,000 units, or 1.2 percent. {source}
Auto manufacturing companies in Canada operate there as part of the business plan to sell vehicles into the USA. As Canada increases friction with the USA, which is setting up a dynamic of U.S. withdrawal from the USMCA, those auto manufacturers will increasingly shift production from Canada to the U.S. market.
It appears that Prime Minister Mark Carney’s response to this predictable auto-sector outcome, is to flip those production facilities into venues for Chinese EV production (BYD and Geely). However, Democrats and Republicans are united in alignment with President Trump on this issue and Chinese EVs will not be permitted entry into the USA. This is a very big point of friction.
Right now, no company in their right mind would invest in Canada against the backdrop of a potential USMCA withdrawal by President Trump. This is creating a scenario where our old nemesis, the U.S Chamber of Commerce, is spending tens-of-millions in Washington DC to purchase the votes and support of congress to retain the trilateral deal.
Right now, every multinational corporation in the world is looking closely at the White House as the July 1st deadline approaches. Almost none of them can fathom what will happen if the U.S. announces the intention to fully exit the USMCA and triggers a six-month withdrawal process.
Despite what many have falsely claimed, it was specifically written into the original trade terms that if any of the three countries announce an exit to the trilateral agreement, they can fully exit six months later. If the USA makes this announcement -whenever they make this announcement- a literal economic doomsday countdown begins for Canada.
Mexico would not really be too disturbed by the announcement as both USTR Jamieson Greer and his Mexican counterpart have been negotiating on a bilateral basis for over a full year. However, for Canada the ramifications are so astronomical, it is almost impossible to fathom what might happen when 80% of their total exports face an unpredictable future.
The leverage President Trump carries are so formidable, the only thing that compares in scale is the ‘elbow’s up‘ ego of Prime Minister Carney. ‘Splodey heads is an understatement. Canadians are so unprepared it’s jaw dropping.
Make that exit announcement and as soon as reality sits-in, the Canadian dollar could collapse.
