An interview with David A. McLellan, Strategic Guidance Principal at Ridgeway Strategic Consulting.
In the lead up to the Oct 18th PJVA Luncheon next week, we had the pleasure of catching up with David A. McLellan, Strategic Guidance Principal at Ridgeway Strategic Consulting. With US and Canadian experience as a business strategist to the Energy Industry, David shares his insights on US Trade, Tax and Regulatory reform and how Canada & US global trade relationships impact the Energy Industry.
David, Let’s start by talking about the USMCA negotiations. Would you say it is fundamentally an attempt to re-assert U.S. power?
There are a couple of things that cross my mind that I think are critically important.
The first is that on a relative basis, US economic power has been diminishing as a global force since 1960. In 1960, US GDP was 40% of global GDP and today they are less than 25%, so no matter what the US does, their relative power – relative to the rest of the world, has been declining since 1960. You are seeing so much growth out of China, India and the emerging markets. Trump is trying to re-assert America’s power and while it alienates trading partners, it will not restore the US to 40% of the world’s GDP.
In signing the agreement, did Canada avoid damage or did we just get a small amount of protection from “Trump tariffs”?
It depends on which industry you are in. If you are in the Dairy Industry, you really took it on the chin. If you are in the Auto Industry, you may breathe a sigh of relief. The USMCA may be touted as a triumph by the US but in terms of moving the American economy forward it is marginal at best. However, – steel and aluminum tariffs are still in place.
Across the board in the US, US steel makers immediately raised their prices by 18 to 20 % on the news of the tariffs.
The United States isn’t the only player for Canada to trade with anymore and Canada is looking to develop Asian markets. Will clause 3210 , the clause that stipulates “entry by any party into a free trade agreement with a non-market country shall allow the other parties to terminate this agreement”, will that complicate Canadian trade and energy development, specifically with China? Some say this clause is specifically aimed at constraining trade with China.
The clause is not in terms of a specific deal as much as it is a broader trade arrangement. It does pose jeopardy to negotiating a free trade agreement with China . It allows the US more control, it erodes Canadian sovereignty in some ways. What we are seeing is that President Trump doesn’t like multilateral agreements and wanted to get bilateral agreements because the US would have much more control. Back in 1988 Brian Mulroney wanted to include Mexico in a trade agreement because it would ensure that Canada would get a greater share.
How do the Steel tariffs work for the Energy Industry which buys a large amount of steel pipe from China? Some say we are taking trade action against Chinese steel at the request of the Americans.
Their relevancy is in the bigger picture. The first consideration is those tariffs were imposed in the name of national security, but the Department of Defense has said there is no national security basis for the tariffs. The second consideration is that Canada and the US are the #1 and #2 suppliers of steel to the US. China is far down on the list.
Certainly China, South Korea and other Asian markets supply steel to Canadian Oil and Gas companies, particularly specialty steel pipe, and to the US as well. After the tariffs
were announced, subsequently over 22,000 US firms applied for exemptions to the tariffs saying their businesses couldn’t succeed and they needed to access exemptions. In the Oil and Gas sector, I saw it manifest itself in West Texas, where a friend of mine is a production engineer with a producer. He showed me a bill for an ESP submersible pump.
It was an $137,000 and I saw a line item for $11,000 steel tariff adjustment. The tariffs will impact every consumer of steel negatively.
Last week there was a burst of optimism as the first large-scale LNG export facility in Canada received a green light. Will Clause 3210 affect any deals Canada may want to make with the countries collaborating on a similar project?
Canada also had a new multi-billion-dollar Methanol plant announced this week in Grand Prairie and that product is to be exported to Asia -possible FID in 2019.
I think Industry in the US and in Canada is looking beyond Trump. We must think that more rational people will once again be in charge and we can have our own independence in making trade deals.
David McLellan will be speaking on the topic of “Leveling the Playing Field – A Discussion of USMCA/NAFTA Resolutions and the Impact of US Tax and Regulatory Reform on Canadian Competitiveness” Thursday October 18, 2018 at the Calgary Petroleum Club.