Some thoughts on GM plant closures

General Motors has announced that it plans to close five facilities in North America, one in Oshawa, Ontario and four in the United States by the end of 2019. https://business.financialpost.com/transportation/consumer-demand-and-competitiveness-why-gm-closed-its-oshawa-plant  The company plans to reduce its employees by fifteen percent that includes a quarter of its executives. https://www.cnn.com/2018/11/26/business/gm-oshawa-plant/index.html The Oshawa plant will experience the largest loss of employment (2,973 of 6,700 production jobs) https://business.financialpost.com/transportation/consumer-demand-and-competitiveness-why-gm-closed-its-oshawa-plant The proposed closure of automotive plants and resultant loss of employment indicates the continuing trend in loss of traditional manufacturing and employment in Canada and the United States. This has important implications for both the countries. This article will explore the problem and suggest policies to mitigate the issue.

The global restructuring will save General Motors $6 billion annually by the end of 2019 that it will invest in electric vehicles and self-driving vehicles. https://business.financialpost.com/transportation/consumer-demand-and-competitiveness-why-gm-closed-its-oshawa-plant The Oshawa plant has been running at one-third of its capacity for the last several years while customers increasingly prefer SUVs and hatchbacks over sedans. https://www.cnn.com/2018/11/26/business/gm-oshawa-plant/index.html After topping out at 17.5 million auto sales in 2016, US production declined to 17.2 million in 2017 that is expected to decrease further this year according to BMO. The same trend is observed for Canada. In 2017, Canada produced 2.07 million cars in 2017 that is predicted to fall below two million this year. Like other traditional manufacturing industries, auto production is decreasing in Canada and the US due to the combined effects of automation, artificial intelligence and globalisation.

Globalisation has allowed and encouraged companies to move their production facilities from Canada and the US to low-wage destinations like Mexico and China. This has allowed companies to take advantage of lower wages of workers thereby boosting their profits. However, it has led to the decline of traditional manufacturing like auto production and loss of manufacturing employment in these two countries. This has contributed to the shrinking middle class in both these countries, like in other developed countries, which is deleterious economically, socially and politically. Also, manufacturing including auto production has become increasingly affected by automation and artificial intelligence. While General Motors plans to close plants and lay off thousands of workers, it opened a new Canadian Technology Centre (CTC) in Markham and is hiring software engineers and coders to work on developing vehicles of the future, electric and self-driving vehicles. https://www.cbc.ca/news/business/gm-canada-president-says-electric-vehicles-are-the-future-but-they-won-t-be-made-in-oshawa-1.4931107 It has hired 450 employees and plans to hire another five hundred by 2020. While investing in automation and artificial intelligence is important, they are often labour-replacing and leads to fewer workers being employed. Therefore, the increased introduction and incorporation of automation and artificial intelligence in manufacturing including auto production, leads to less manufacturing employment and increased unemployment among traditional manufacturing workers. This again leads to shrinking middle class in Canada and the US that is harmful economically, socially and politically.

The combined challenges of globalisation and technological innovation require appropriate response. The governments of Canada and the US help manufacturing companies operate in these two countries. They can expand on existing as well as introduce new financial and non-financial incentives to companies to manufacture in Canada and the US, and encourage those with foreign manufacturing plants to reshore manufacturing facilities back to these two countries. The governments can lower corporate tax rates, increase subsidies, allow companies to repatriate foreign-earned revenue at low tax rates, provide tax breaks to incentivize companies to manufacture in Canada and the US, and encourage them to bring back production facilities from abroad. These existing measures and expanding on them may increase the manufacturing base in Canada and the US while boosting manufacturing employment. However, it is important to realise that some types of manufacturing and their respective jobs are gone, and will never return to these two countries as it is financially not feasible to produce certain types of products and compete with low-wage foreign manufacturers. These include low-valued manufacturing like the manufacturing of basic clothing. These types of manufacturing and their consequent jobs will not return to Canada and the US irrespective of the level of financial and non-financial incentives that the governments provide to the relevant companies.

The skills and experience of the adversely affected workers sometimes become obsolete and are insufficient to secure employment. There are government programs to educate, retrain and reskill the adversely affected workers so that they can gain the education, skills and experience that the jobs available require. If the governments of Canada and the US expand on these programs and make them more user-friendly and financially possible for the adversely affected workers, it will be easier to rehabilitate these workers back into the labour market. This will be very beneficial for the adversely affected workers and their families, and help them to live a decent living. This will help to stem the shrinking middle class in both the countries and these workers will be able to make greater economic and non-economic contributions to these societies.

It is important to realise that the increasing use of automation and artificial intelligence in the manufacturing and service industries may lead to fewer jobs available as automation and artificial intelligence seem to labour-replacing. With the introduction of automation and artificial intelligence, companies seem to be able to produce the same level of manufacturing or service output while employing fewer workers, who are often highly skilled and trained to operate in workplaces that champion automation and artificial intelligence. It is possible, especially in the future, that with increased incorporation of automation and artificial intelligence in the workplace, there may not be enough jobs available to job seekers. This is especially true for jobs that require relatively low skill levels and are in danger of being replaced by machines. When significant number of people cannot find employment, it may lead to increasing poverty, less economic contribution and increased populism among the adversely affected group. This may threaten the economic, social and political stability of a country. The governments of Canada and the US may explore increased social programs, including the introduction of universal basic income (UBI), to mitigate the possible adverse impacts of increased adoption of automation and artificial intelligence in the workplace. A study by the Office of the Parliamentary Budget Officer (PBO) revealed that to offer guaranteed basic income (GBI) of $16,989 less 50 percent of any earned income to single individuals and $24,027 less 50 percent of any combined earned income to couples, will cost the government $76 billion approximately in 2018-2019. After subtracting $32 billion of federal support for low-income individuals and groups, the net cost to the federal government of implementing GBI would be $44 billion. https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2018/Basic%20Income/Basic_Income_Costing_EN.pdf  This is thirteen percent of projected total federal government expenditure of $338.5 billion for 2018-2019, which means that it is financially possible for the Canadian federal government to implement it. According to Karl Widerquist, the net cost of implementing universal basic income (UBI) in the United States with $12,000 per adult and $6,000 per child with a fifty percent marginal tax rate would be $549 billion per year. This net cost would amount to less than 25 percent of U.S. entitlement spending, less than fifteen percent of overall US federal spending and less than three percent of GDP. It indicates that implementing UBI is financially possible for the US government. https://works.bepress.com/widerquist/75

The traditional manufacturing industries and manufacturing employment have been declining in both Canada and the US. The planned closure of the GM plants is an indication of this continued trend. It has been due to the combined effects of automation, artificial intelligence and globalisation. Some service sector industries and employment are also increasingly vulnerable to automation and artificial intelligence. The governments of Canada and the US can expand and use new financial and non-financial incentives to attract companies to produce in these two countries and employ workers as well as reshore manufacturing. The two governments can increase investments in educating, retraining and reskilling of the affected workers. Also, it is important to realise that automation and artificial intelligence are replacing workers. Therefore, it is important to expand on existing social programs to support the affected citizens in these two countries. Both Canadian and US governments can explore the introduction of universal basic income as it will financially support the citizens of these two countries and eliminate poverty while it is financially possible for both governments to introduce the program in their respective countries.

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Can Cryptocurrencies Become Viable Currencies?

My write-up on whether cryptocurrencies can becomes viable currencies. https://www.huffingtonpost.ca/salman-sakir/can-cryptocurrencies-become-viable-currencies_a_23558850/

 

 

Pitfalls of Capitalism

Capitalism has been very effective in reducing poverty and ushering prosperity throughout the world. It has led to impressive economic growth in various parts of the world that has pulled people out of poverty and improved their quality of life. It has been correctly suggested in the book, Saving Capitalism from the Capitalists, that the free market system is the most potent form of economic organization to improve human condition and benefit human society. Even though capitalism or free market economy has an impressive record of improving human condition and fostering economic prosperity, it has drawbacks that need to be addressed.

Walmart is one of the largest companies and employers in the world. Also, members of the Walton family, who own a considerable portion of Walmart, are some of the wealthiest people in the world. However, a considerable number of Walmart employees have to access public assistance for their survival. According to Americans for Tax Fairness, Walmart’s low-wage workers, most of whom make above minimum wage, cost U.S. taxpayers an estimated annual $6.2 billion in public assistance that included food stamps, Medicaid and subsidized housing. https://www.forbes.com/sites/clareoconnor/2014/04/15/report-walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/#56d12b3a720b This indicates that even though the wages are above minimum wage, they are inadequate to provide the workers decent living standards, which force them to access public assistance. The study found that a Walmart Supercenter cost US taxpayers between $904,542 and $1.75 million per year, which is between $3,015 and $5,815 per worker. Also, the study estimated that Walmart accounted for $13.5 billion out of $76 billion in food stamp sales in 2013, which was 18 percent of the Supplemental Nutrition Assistance Program (SNAP) or food stamp market. However, the number of Walmart employees accessing Medicaid is similar to the US national average and other large retailers.

Walmart is a large company and employer that sells goods and services to consumers at affordable prices. However, it has social costs as well. Its low wage workers access various forms of public assistance and, consequently, Walmart imposes a social burden. Even though the business model of Walmart has been very successful for its shareholders and even consumers, it has come at a social cost as its low-wage workers are forced to rely on public assistance.

The same phenomenon is observed in the American fast food industry, which outsourced a combined $7 billion in annual labour costs to taxpayers. https://www.forbes.com/sites/clareoconnor/2014/04/15/report-walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/#56d12b3a720b McDonald’s accounted for $1.2 billion of this followed by Yam Brands whose workers accessed $648 million in public assistance each year. Therefore, the fast food industry, even though a profitable business model, imposes a social burden as its workers depend on social assistance for survival.

The founder and CEO of Amazon, Jeff Bezos, is the richest man in the world with a net worth of over US $130 billion. http://time.com/money/5262923/amazon-employee-median-salary-jeff-bezos/ The company has 560,000 full-time and part-time employees who had a median annual salary of $28,446 in 2017. It takes the CEO under nine seconds to earn the annual salary of Amazon’s median worker. This indicates the significant difference in earnings between the CEO and Amazon’s median worker. According to Policy Matters Ohio, 700 Amazon employees, which is more than one in ten Ohio-based employees of the organization, received SNAP benefits in August 2017. https://www.cnbc.com/2018/01/25/10-percent-of-amazons-ohio-employees-are-on-food-stamps-liberal-think-tank-says.html While Amazon warehouses receive considerable state and local subsidies, its workers depending on social assistance increases the total subsidies that Amazon receives. http://www.newsweek.com/jeff-bezos-amazon-employees-food-stamps-782714 This again indicates how a large organization which has many employees, has a very rich CEO and offers beneficial services to its customers, can have social costs when a considerable number of its employees seek food stamps.

On the other hand, the CEO of a technology company reduced his own salary to provide all his employees a minimum ‘living wage’ of $70,000. https://www.huffingtonpost.ca/entry/dan-price-minimum-wage_us_5afd3d8ee4b06a3fb50dcf28 Even though this is an extreme example, it shows how the introduction of higher salary may eliminate the social costs a company may impose when its employees don’t have to seek government assistance for sustaining.

According to the Center on Budget and Policy Priorities, 62 percent of food stamps-receiving households are employed in low-income and part-time employment. http://www.newsweek.com/jeff-bezos-amazon-employees-food-stamps-782714 This indicates a drawback of capitalism as the employed, even though they are low-income earners or part-time employed, seek social assistance to sustain. Also, around 66 percent of US jobs pay less than $20 an hour. http://money.cnn.com/2018/05/17/news/economy/us-middle-class-basics-study/index.html When jobs pay less than $20 an hour, a considerable number of people will be financially struggling. The three states, California, New Mexico and Hawaii each have 49 percent of struggling families, which are the largest among the states. According to a report by the United Way ALICE Project, 43 percent of households (51 million households) cannot afford a monthly budget which includes housing, food, child care, health care, transportation and a cell phone.

In conclusion, capitalism has drawbacks when some of the largest companies in the world, even though are major employers, provide customers with excellent goods and services, have gargantuan revenues and very rich owners and shareholders, have considerable number of employees who need to access government assistance including food stamps for survival. The business models of these companies are excellent and very profitable; however, they impose a social burden as well. When a considerable number of their employees depend on social assistance, these companies are being effectively subsidised by the societies in which they operate and, thus, create social costs. Policies that address the issue of low wages by increasing them so that employees don’t need to seek social assistance will be suitable as it will reduce or even eliminate the social costs that these companies incur. Then, the affected employees and their families will not financially struggle and can have higher standard of living as well as be more active economic participants in the society. When capitalism is inclusive so that it works for all members of the society and raises their welfare without incurring serious external costs is desirable and sustainable.

Are there any potential problems of rising stock prices?

The financial easing programs of central banks helped to alleviate the financial crisis that crippled the world. The liquidity generated by these programs did not lead to significant increase in wages or inflation. However, the programs led to substantial liquidity entering the financial markets that contributed to the rise in stock prices. The surge in stock prices may contribute to the creation of asset bubbles, which may lead to correction in stock prices and the emergence of a bear market. This may have spillover effects on the wider economy and contribute to the potential threat of a financial crisis.

The S&P 500 is above 2,700 while the Dow is over 24,500. The TSX is over 16,000. This shows that the major stock indices are very high. The cyclically adjusted price-to-earnings (CAPE) ratio in the US is over 30, which is quite high. While the average CAPE ratio between 1881 and the present has stood at 16.8, it went above 30 only twice, during the Great Depression of 1929 and 1997-2002. https://www.project-syndicate.org/commentary/us-stock-volatility-bear-market-by-robert-j–shiller-2017-09 According to Shiller, the average CAPE ratio was 22.1 in the peak time before past bear markets, which suggests that the bear market is preceded by an increase in CAPE ratio. Shiller states that a twenty percent decline in stock prices is widely accepted as an indication of a bear market. The high stock market indices and CAPE ratio indicate that stocks are quite highly priced and a bear market in the future is a possibility.

Various organizations and prominent individuals have also voiced concerns on high valuations of financial assets. Goldman Sachs suggests that there is 88 percent probability of a bear market happening based on the record of previous bear markets. http://uk.businessinsider.com/goldman-sachs-thinks-were-heading-into-a-bear-market-2017-10 ScoGen states that high valuations of stocks have been supported by low volatility and further decreases in volatility can be dangerous. http://www.zerohedge.com/news/2017-10-06/elephant-room-even-socgen-now-calling-it-bubble Germany’s Finance Minister, Wolfgang Schäuble, has voiced concern over rising global debt and liquidity created by trillions of dollars injected into financial markets by central banks which may lead to the creation of bubbles. https://www.ft.com/content/9de0533c-aab8-11e7-93c5-648314d2c72c. Professor Richard Sylla of NYU’s Stern School of Business said that similar issues like before the 2008 crisis are happening currently and he suggests that the probability of a financial crisis occuring in our lifetime is between 70 to 80 percent. https://www.sprottmoney.com/Blog/richard-sylla-70-to-80-chance-of-another-global-financial-crisis-peter-diekmeyer.html

Currently, the Chicago Board Options Exchange Volatility Index (VIX) is very low, even lower than before the financial crisis of 2007. Measuring the financial markets’ sensitivity to uncertainty, VIX is known as the fear index. However, Jeffrey Frankel suggests that there are risks which are bursting of a stock-market bubble given the high stock prices and CAPE ratio or an overvalued bond-market and geopolitical risks. https://www.project-syndicate.org/commentary/financial-markets-crisis-risk-by-jeffrey-frankel-2017-09 It is possible that investors are not taking these risks fully into consideration or underestimating them. This may lead to over-leveraging and the making of a stock market crash. Both Goldman Sachs and JP Morgan have investment products that offer clients a chance to bet on the next banking crisis. http://uk.businessinsider.com/goldman-sachs-and-jpmorgan-pitching-total-return-swaps-profit-from-the-next-financial-crisis-2017-10 When the majority of investors underestimate the risks of a surging stock market, they may continue to chase stocks at ever increasing prices that may lead to an asset bubble. Then, financial institutions may create products to benefit their clients in the event of a stock market collapse.

The Federal Reserve has hiked the interest rate. Also, it announced that it will decrease its $4.5 trillion holdings. However, the S&P 500 and Dow have been increasing. https://www.cnbc.com/2017/09/20/us-stocks-federal-reserve-announcement-balancesheet.html Besides excess liquidity in the financial markets and a clear cut path followed by the Federal Reserve, the rise can be partially explained by a growing economy as well as rising profits of companies. https://www.bloomberg.com/news/articles/2017-08-25/trillion-dollar-earnings-yield-keeping-s-p-500-out-of-fed-reach The election of Jerome Powell as the next Chairman of the Federal Reserve may lead to continuity in monetary policy as he is viewed as unafraid of reversing the policy of decreasing the Fed’s balance sheet. Coupled with tax cuts, this will lead to the continuation of the rise in stock prices.  http://www.reuters.com/article/us-usa-trump-fed-markets-analysis/powell-for-federal-reserve-chair-could-support-stocks-bull-market-idUSKBN1D20EY

A financial crisis may lead to contagion effects in the wider economy and set in motion ripple effects that lead to the creation of a recession. The effects of a recession are not only economic and financial but also sociopolitical and institutional, which may linger for a longer time than the first two effects. Also, the recovery fueled by low interest rates and injection of liquidity has contributed to increasing inequality while the gains of the recovery have gone mostly to the upper-income group. Therefore, the recovery and, consequent, economic growth has not been that inclusive. https://www.weforum.org/agenda/2017/08/the-lost-lesson-of-the-financial-crisis Increased investments in education, human capital and infrastructure while removing obstacles like making the tax system more efficient will lead to more inclusive and sustainable growth, and lower income inequality.

When the major economies of the world especially the United States, Eurozone, Japan and China enact structural reforms, it can increase economic growth while decreasing problems in the financial sector. https://www.project-syndicate.org/commentary/global-economic-outlook-reforms-by-nouriel-roubini-2017-10 Economic growth will be solid, assets prices will reflect strong fundamentals while inflation will remain at a decent level. On the other hand, without the implementation of major structural reforms and a focus on excess leverage, overcapacity and tax policy geared to favour the rich, asset prices may continue to increase leading to the creation and expansion of bubbles that may rupture and, possibly, lead to deleterious effects for the wider economy.

The injection of liquidity and low interest rate has contributed to rising asset prices and sometimes, real estate prices, as in the case for Canada. Governments have taken various steps to stem rising real estate prices as well as the spiraling prices of stocks. Increases in the interest rate, tough regulations to access mortgage and tax on foreigners purchasing property have been introduced to reduce rising real estate prices in Canada. Again, the Federal Reserve has taken positive steps like raising the interest rate and a plan to reduce its massive holdings to restrain excess liquidity in the financial markets. However, structural reforms like changes in the tax policy that help the low-income and middle-class while encouraging corporations to bring home their overseas profits are required. Again, higher investments in developing human capital, infrastructure, education, healthcare, etc. while incorporating new technology to alleviate the problems in the financial sector and the wider economy will have far reaching effects. It will reduce income inequality which has been a major concern for all countries and reduce prices of financial assets. Then, asset prices will more accurately reflect the fundamentals and the probabilities of the creation, expansion and bursting of stock market bubbles will be greatly reduced. This in turn will reduce the possibility of contagion effects on the wider economy and diminish the chance of a financial crisis.

Thoughts on the proposed US tariffs

Trade between China and the US seem to be in difficulty as the US President has proposed tariffs on $50 billion of Chinese exports to the US with the threat of tariffs on another $100 billion of Chinese exports. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 It has rattled the stock market and may lead to a possible trade war between the two largest economies in the world that may have both economic and non-economic effects on the US. This article will explore only the economic effects. Also, the proposed tariffs may have indirect effects on Canada’s international trade.

In 2017, the US had $5.2 trillion of international trade and ran a deficit of more than $560 billion. https://www.thebalance.com/u-s-imports-and-exports-components-and-statistics-3306270

The US imported $506 billion worth of Chinese goods and services (which is 20 percent of total Chinese exports) while it exported $130 billion worth of goods and services to China. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 The large trade deficit must have played a role in the proposition of tariffs.

Rapid growth in imports from China has allowed US consumers to benefit from low-priced consumer goods. However, these increased Chinese imports led to the destruction of US manufacturing that could not compete with low-cost imports. This contributed to increased US unemployment, which are often concentrated in specific industries and geographical locations. Also, not all the unemployed workers could necessarily get employment in alternative industries. It is estimated that between 1999 and 2011, Chinese imports contributed to unemployment of 2.4 million workers. https://www.ddorn.net/papers/Autor-Dorn-Hanson-ChinaShock.pdf Again, research has shown that increased competition led to reduction in innovation and new patent creation in the US. As 70 percent of research & development expenditure and patenting activity in the US is in manufacturing, it can be harmful for the country. https://www.vox.com/new-money/2017/3/29/15035498/autor-trump-china-trade-election  http://economics.mit.edu/files/11708.

Research has shown that Chinese companies benefit the most when they form joint ventures with US companies. https://blogs.wsj.com/economics/2018/04/12/study-shows-big-benefits-to-chinese-companies-from-joint-ventures-with-u-s-firms/ However, theft of technology, lack of intellectual property rights and coercion to transfer technology has prompted concerns by the US government. http://money.cnn.com/2018/04/05/news/trump-tariff-china-trade-war/index.html While it is very attractive to access the large Chinese market, when foreign companies manufacture and operate in China, they are forced to transfer technology to the country. As these companies invest significant time and money to develop technology, this is a loss for them. Also, foreign companies operating in China have to store data in China and allow the Chinese government to access it, which again leads to tech know-how moving from the US to China. https://www.wsj.com/video/three-ways-china-gets-its-hands-on-us-tech/18ED2367-40D3-4FBE-979B-83B08452B9A9.html

Tariffs for China and the US are quite disproportional. The tariffs that China imposes are quite high compared to the US. While the US imposes 2.5 percent tariffs on imported cars, China’s tariffs on imported cars is ten times at 25 percent. https://www.bloomberg.com/news/articles/2018-04-06/trump-trade-talk-earns-grudging-support-at-elite-lake-como-event This indicates that China needs to play its part in making trade fairer.

While there are compelling reasons for US concerns and the proposed tariffs, not bringing the trade dispute before WTO but trying to solve it bilaterally may set a bad precedence that is harmful for global trade. https://asia.nikkei.com/Economy/Trade-tensions/Trump-trade-policy-a-very-dangerous-precedent-says-Stiglitz The proposed tariffs will make the affected Chinese imports more expensive to US consumers, which will decrease the purchasing power of the US consumers. This will particularly impact low-income US consumers who are sometimes already struggling to make ends meet.

When Chinese imports become pricier in the US due to the proposed US tariffs, Canadian exports to the US will become relatively cheaper. The relatively cheaper Canadian goods and services may make them more appealing to US consumers which may prompt them to purchase more Canadian exports. Therefore, an indirect effect of the proposed US tariffs may be increased Canadian exports to the US, which will be beneficial for Canadian exporters, workers and the Canadian economy.

The proposed US tariffs may have repercussions like China’s threat of tariffs on $50 billion of US goods. China is the third largest and rapidly growing export market for the US. https://www.bloomberg.com/view/articles/2018-04-06/trump-s-tariffs-overlook-how-much-u-s-needs-china The proposed Chinese tariffs will adversely impact US agriculture including its farmers and winemakers. According to the Brookings Institution, it may affect 2.1 million US jobs. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 Therefore, the effect of the proposed Chinese tariffs on US employment is quite considerable. Also, the trade dispute could escalate and with China holding $1.3 trillion of US Treasury securities, sale of treasury securities by China will be deleterious for the US economy. Reduced Chinese interest to purchase US Treasury securities in the future will also be harmful for the US economy.

A full-scale trade war between the two largest economies in the world will have serious repercussions for global trade, including for the US economy. It may have ripple effects that can adversely affect trade-dependent countries like Canada. However, there are some signs that the trade dispute may be improving. The Chinese premier suggested proposals to increase imports, relax foreign-ownership rules for manufacturing and improve protection of intellectual property rights. https://www.bloomberg.com/news/articles/2018-04-09/xi-set-for-landmark-economic-speech-as-trump-trade-fight-simmers If these proposals are implemented, the trade dispute between the two countries may improve.

The US needs to improve its trade deficit as running large trade deficits for a long time may not be necessarily healthy for the economy. It has low domestic savings. In order to consumer more, it has to borrow from other countries. https://www.bloomberg.com/view/articles/2018-04-06/trump-s-tariffs-overlook-how-much-u-s-needs-china Therefore, policies to improve domestic savings will be helpful in reducing the need to borrow from abroad. Also, support for import-substituting and employment-generating industries can help to reduce the large trade deficit as well as improve the economy, generate employment and help the adversely affected middle-class and low-income workers. Again, increased collaboration with historical trading partners like Canada in terms of deep manufacturing and trade integration and collaboration may also help in augmenting the economy.

Concessions from China like increased market access, protection of intellectual property rights, stopping forced transfer of technology and data to joint-venture companies or the country, and relaxing foreign-ownership rules will help to improve the trade dispute. Also, issues like Chinese companies receiving state support and financing which allow them unfair advantages need to be addressed. While Canada may temporarily benefit from a trade dispute between the US and China, it will be adversely affected in the long run due to the shock global trade will suffer resulting from a trade dispute or trade war between them.

NAFTA Renegotiations and Canada

NAFTA is a 23 year old trade pact that is being recently explored for renegotiation, especially by the United States. There is even a possibility of termination of the treaty, which will affect the three countries differently and in varying degrees.

The US argument for renegotiation or even termination of NAFTA is that the treaty has led to the closure of US factories and the export of US jobs to Mexico. http://thehill.com/homenews/administration/348166-trump-mexico-and-canada-are-being-very-difficult-in-nafta. It is true that globalization coupled with other factors like automation has taken a toll on some industries particularly the manufacturing sector and employment in developed countries, including the US. https://www.brookings.edu/blog/up-front/2017/02/23/nafta-under-trump-the-myths-and-the-possibilities/ NAFTA, which allows free trade between the three countries, has benefited the three economies in varying degrees. However, the manufacturing sector and manufacturing employment decreased in both Canada and the US while the middle class has been under increasing strain in both countries. It must be mentioned that not all of this decrease can be attributed to the implementation of NAFTA as technological innovation, automation and trade with non-NAFTA countries contributed as well.

The US rhetoric of America First would make it a rule that government projects and large-scale enterprises would have to hire US workers and use US-made resources. The objective would be to maintain or increase US industrial activity and employment particularly in industries that have shrunk. The US had a combined goods and services trade deficit of US $55.6 billion with Mexico in 2016 (US$ 63.2 billion deficit in goods and US$ 7.6 billion surplus in services) and a US$ 12.5 billion combined goods and services surplus with Canada (US$ 12.1 billion deficit in goods and US$ 24.6 billion surplus in services). http://thehill.com/policy/finance/342432-us-trade-officials-outline-priorities-for-nafta  This shows that the US runs a relatively large trade deficit with Mexico. Combined with disappearing factory jobs, increasing economic constraint on the low-income and middle-class sections of the society, and rising income inequality https://www.cfr.org/backgrounder/naftas-economic-impact, it may have prompted the US to revisit NAFTA.

The auto industry is very important to the NAFTA countries. While the US auto sector lost a third of its jobs since 1994 (350,000), the Mexican auto sector gained more than four times, from 120,000 to 550,000 workers. https://www.cfr.org/backgrounder/naftas-economic-impact While not all US auto sector jobs were lost to Mexico, it shows the extent of losses in US auto sector employment. This has led some to blame trade deals for the job losses. https://www.nytimes.com/2016/03/20/business/economy/carrier-workers-see-costs-not-benefits-of-global-trade.html?_r=2 In the current NAFTA renegotiations, the US wants more US content in autos. https://www.reuters.com/article/us-trade-nafta/nafta-talks-intensify-u-s-seen-putting-off-key-demand-on-autos-idUSKCN1BY0MV  While the current rule of origin is 62.5 percent North American content for auto parts https://www.thestar.com/business/2017/08/16/auto-industry-might-drive-nafta-talks-early-indications-suggest.html, the US is suggesting at least 85 percent North American content and 50 percent US content for the vehicles to qualify for duty-free trade. https://beta.theglobeandmail.com/report-on-business/us-puts-contentious-nafta-auto-demands-on-the-table/article36583891/?ref=http://www.theglobeandmail.com& Also, in the current rule, the content can come from any of the member countries. Industry representatives like the Canadian Vehicle Manufacturers’ Association say that the proposed rule would reduce Canada’s and NAFTA’s competitiveness. Again, the proposed rule may force auto manufacturers to move their production facilities outside of NAFTA to remain competitive and pay tariff to sell in the US market. If auto makers become less competitive and move their production overseas, it will adversely affect the economies of the three countries, lead to increased unemployment in the auto industry and related industries. On the other hand, Canada’s suggestions of calculating value of vehicles that promote using North American steel http://business.financialpost.com/news/economy/chrystia-freeland-sees-hope-for-nafta-as-long-as-trump-remains-willing-to-negotiate and puts importance on driverless and electric cars, and research and development work is predicted to have positive effects on North American car manufacturing and employment creation. https://www.thestar.com/business/economy/2018/02/01/canada-pitches-more-credit-for-electric-driverless-car-production-in-nafta-talks.html

The US Trade Representative, Robert Lighthizer, mentioned stricter monitoring of companies’ compliance with rules of origin and stringent labour standards. Some have said that better working conditions and higher pay for Mexican workers will be beneficial for Canada and the US as it will make their production more cost effective and maintain their production levels. https://www.thestar.com/business/2017/08/16/auto-industry-might-drive-nafta-talks-early-indications-suggest.html There have also been suggestions that the renegotiations should incorporate wages, corruption and human rights as these problems confront Mexico.  https://www.project-syndicate.org/commentary/renegotiate-nafta-wages-corruption-human-rights-by-jorge-g–casta-eda-and-carlos-heredia-2017-09 When workers in Mexico have improved working conditions and higher pay, it will improve their quality of life as well as provide them higher standard of living. This will make trade between the three countries more equitable as workers in Canada and the US enjoy both high working conditions and pay. There has always been the argument that lower wages in Mexico have incentivized Canadian and US companies to ship their production processes to Mexico. Higher pay and improved working conditions in Mexico will reduce the incentive to move production to Mexico and increase the incentive to keep production facilities in Canada and the US. This will be beneficial for both Canadian and US economies and workers as there will be lower chance of them losing their jobs to their Mexican counterparts. Canada’s Minister of International Trade, Francois-Philippe Champagne, has said that the renegotiations should include chapters on environment, labour and gender equality. http://www.huffingtonpost.ca/2017/08/29/nafta-negotiations-francois-philippe-champagne-urges-calm-in-response-to-trumps-threats_a_23189418/ All of these will lead to improved human welfare and protection of the environment. As Canada and the US already maintain high standards, these chapters will be beneficial for their workers, citizens and economies.

Another sector that is exposed to NAFTA renegotiations is the Canadian dairy industry. The US may try to get concessions for easier entry into the protected Canadian dairy industry. https://beta.theglobeandmail.com/report-on-business/us-puts-contentious-nafta-auto-demands-on-the-table/article36583891/?ref=http://www.theglobeandmail.com& Also, the US proposed a ‘sunset clause’ that would automatically terminate NAFTA in five years unless it is approved by all three countries. It will adversely affect investments as businesses will be weary of long-term investments due to the uncertainty created by the clause. This has been opposed by both Canada and Mexico, and it is expected to make renegotiations more difficult.

There is always a possibility that NAFTA may be cancelled. As supply chain is deeply integrated among the three countries http://knowledge.wharton.upenn.edu/article/naftas-impact-u-s-economy-facts/, cancellation of NAFTA will hamper that chain and adversely affect Canadian and US manufacturers and workers. Jobs in Canada and the US that are dependent on exports to Mexico and job creation due to the treaty will also be adversely affected. https://www.cfr.org/backgrounder/naftas-economic-impact It is possible that Canada and the US may sign a new bilateral trade agreement while the US may impose tariffs on Mexico according to its WTO standard. http://www.huffingtonpost.ca/2017/08/24/what-happens-if-trump-cancels-nafta_a_23163682/ Also, there are talks that Canada and Mexico may remain in NAFTA even if the US leaves it. http://thehill.com/latino/356045-mexico-and-canada-to-stay-in-nafta-if-us-leaves-mexican-president  However, better working conditions and higher pay in Mexico, chapters on environment and gender equality will be beneficial not only for Mexico but also for Canada and the US for their workers, citizens, environment and the economy. Again, Canada and the US should address the challenges of increasing income inequality, increasing income constraint on the low-income and middle-class sections of the society, and workers adversely affected by globalization, trade deals, automation, etc. Finally, irrespective of the outcome of NAFTA renegotiations, Canada should explore new trading partners and deepen its trade with existing non-NAFTA trading partners while striving to expand its trade with the US and Mexico. http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20171014/RBCDNAFTAFEATURE

Some Possible Consequences Of Toronto’s Foreign Buyer Tax

A 15 per cent tax on foreign buyers of property in the Toronto region has been introduced. This is predicted to have some consequences for the real estate market in Toronto as well as possible effects for the real estate sector in other parts of Canada as well as the wider economy. Along with the tax, the province took additional measures like expanded rent controls and allowing cities, including Toronto, to tax vacant homes.

This has had some immediate effects on the real estate market in Toronto. Sales decreased by 37.3 per cent in June 2017 compared to June 2016. Similar effects were observed in Vancouver when British Columbia introduced a similar tax. Studies have found that the percentage of foreign buyers in the Toronto real estate market may not be that substantial. Analyzing data from April 24 to May 26, the government found that only 4.7 per cent of the properties in the Greater Golden Horseshoe region were purchased by foreigners. A study by the Toronto Real Estate Board revealed that foreign buyers accounted for 4.9 per cent of real estate purchases in the Greater Toronto Area.

Again, data analysis for the same period by the Globe and Mail indicate foreign ownership of residential properties was 9.1 per cent in the York Region while it was 7.2 per cent in the City of Toronto. These analysis portray that foreign buyers, even though present, are not a dominant part of buyers in the Toronto real estate market.

Last year, British Columbia implemented a 15 per cent foreign buyers’ tax for the Metro Vancouver area. Initially, it did have the desired effect and the number of real estate transactions decreased. Also, the price of real estate declined as well. However, both sales and prices have picked up in Vancouver. In March, sales of homes in the Metro Vancouver area increased by almost 50 per cent. This shows that the impact of the foreign buyers’ tax is decreasing and may not have been as effective in stemming real estate sales and prices in the Metro Vancouver area.

The imposition of foreign buyers’ tax in the two largest cities in Canada has made the relative price of real estate in other parts of Canada cheaper for foreigners. This means that foreign buyers may start purchasing real estate outside of Toronto and the Metro Vancouver area. Even though they are not a significant percentage of real estate buyers in Toronto, it is possible that they might increase the demand for real estate in smaller cities and drive up prices in those cities. Therefore, there is a possible downside of introducing foreign buyers’ tax in only the two largest cities. There may be a spillover effect in the real estate sector in other parts of Canada.

It is possible that like Vancouver, foreign buyers’ tax may not be able to stem the rising real estate prices in Toronto. Rather than solely focusing on foreign ownership, a more effective policy would be to analyze the impact of foreign earnings and wealth on the real estate sector. When new Canadians move to Canada, they bring wealth earned outside of Canada. A portion of this wealth goes to purchasing real estate in Canada, and contributes to real estate demand and prices. Therefore, any policy to alleviate high demand and prices in the real estate sector has to focus on the influence of foreign-earned money.

Also, if there is a slowdown in purchase of real estate and a decline in real estate prices in Toronto in the short run due to the imposition of foreign buyers’ tax, it may lead to a slowdown in the wider Toronto economy. However, as has been seen in the case of Vancouver, both the sale and price of real estate increased over time after the introduction of the foreign buyers’ tax. Therefore, it is expected that the same will happen in Toronto and the effect on the wider economy will be insignificant over time.

The foreign buyers’ tax is an important initiative in the correct direction of stemming the price of real estate, especially in large cities, and making housing affordable for the average Canadian. However, it does not seem to have the desired effect in the Metro Vancouver area as both demand and price of real estate are increasing there. A better policy initiative will be to monitor the influence of foreign-earned money on the real estate sector. New Canadians consist a substantial portion of the Canadian population and bring their wealth when they move to Canada, a part of which goes to the purchase of real estate. Appropriate policies that can monitor and control the impact of foreign-earned money on the real estate sector in Canada need to be formulated to make housing affordable for the average Canadian.