Trade wars and the Yukon

Tariffs won’t hurt us in the short run, but the storm clouds are gathering

The Yukon is far from the geopolitical frontlines. But that doesn’t necessarily mean we are sheltered from the international economic mayhem covering the front pages recently. In a globalized world, bad news and unintended side-effects can travel fast and far.

We escaped the global financial crisis a decade ago with little direct damage. We didn’t suffer a wave of house foreclosures. None of our banks went bust. Our government wasn’t pummeled by the bond market.

The biggest impact here may have been something most people don’t even talk about: the impact of low interest rates on savers. Central banks around the world kept interest rates well below traditional ranges for years following the crisis. This was great for people borrowing to buy houses or snowmobiles, but terrible news for First Nations trust funds, charity endowment funds and people on fixed incomes.

So will the Yukon be sideswiped this time by President Trump’s trade wars and the swirling uncertainties around international trade and investment?

It’s impossible to say for sure. But let’s look at some of what economists call the “transmission mechanisms” that could channel pain from Washington, D.C. to us.

First, a quick recap of the latest economic news. The U.S. is currently enjoying one of the longest prolonged periods of economic growth in its history. The current surge dates from June 2009, roughly matching the expansion in the 1960s under Presidents Kennedy and Johnson. Interest rates are starting to creep up as the prospect of inflation looms.

With the economy firing on almost all cylinders, the Trump administration is administering a jolt of adrenaline via tax cuts and deficit spending. At the same time, the headlines warn of Trump-induced trade wars with Europe, China, Canada and Mexico. There may be steep new tariffs in various countries on a baffling array of products, from steel to motorcycles to bourbon.

In the near term, the impact may be muted for the Yukon. We don’t manufacture much, so will escape U.S. tariffs. When Canada retaliates on U.S. exports, we will likely have to pay more for some items. However, the Canadian government is trying to choose products where there are domestic or international alternatives. Trade policy cognoscenti have noted that Europe plans to hit U.S. bourbon with tariffs. Not only does this hit the constituency of certain Trump-supporting politicians, but it is also not too much of a hardship for Europeans to drink scotch instead of bourbon for the duration.

The global ructions may even hold some benefits for the Yukon. If U.S. interest rates rise due to loose American fiscal policy, that could drive the U.S. dollar up. This would be good for tourism in the Yukon, as well as for mineral prices. The latter are often denominated in U.S. dollars.

In the longer term, however, there could be a bigger downside for the Yukon. There are three key risks: slower global growth, higher U.S. interest rates and the indirect impact of higher tariffs.

Economists from the OECD warned in March that global trade wars could “threaten the recovery” and be “fairly damaging” to global growth. If global growth slows, that usually flows quickly into lower demand for industrial metals such as copper and lead. Lower demand usually means lower mineral prices. That’s bad for Yukon mining, although precious metals such as gold may react differently.

Higher U.S. interest rates could also be bad news for the Yukon.

Higher rates might spark an end to that long U.S. expansion. A U.S. recession would kick the supports out from under mineral prices. Higher U.S. interest rates could also provoke a flow of capital from emerging markets to higher-yield U.S. investments. The economies of big emerging markets such as Argentina and Turkey are already showing signs of stress. Financial crises and economic slowdowns in big emerging markets will also have a negative impact on commodity demand and prices.

Also, higher U.S. interest rates could also flow through into Canada. The Bank of Canada may need to raise rates as it manages inflation and the value of the Canadian dollar. In a reverse of the last decade, this would be bad for Yukon borrowers but good for savers. If the Canadian dollar falls too low, that will result in higher prices for internationally produced goods from iPhones to avocados.

Finally, the indirect effects of higher U.S. tariffs on Canadian manufactured goods could also affect us. If output falls in the manufacturing heartlands of Ontario and Quebec, that will hurt federal and provincial government revenues. The provincial shortfalls will eventually feed into the formula that determines our transfer payment, and not in a good way. A federal government with less cash is less likely to provide big transfers on top of the formula, as ours has done in the past in areas such as healthcare or infrastructure.

No two global economic crises are the same, and we don’t know how this one is going to turn out. And while the Yukon doesn’t look like it will be hit directly in the near term, you should probably consider the recent headlines as an economic storm warning.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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