Foreign Investment Holds Steady in Canada Despite U.S. Tax Cuts

(Bloomberg) -- Fears of a mass investment exodus from Canada in the face of trade uncertainty and U.S. tax reforms aren’t materializing.

Foreign direct investment totaled C$8.9 billion ($6.9 billion) last quarter, according to Statistics Canada data released Wednesday in Ottawa. While down from a relatively strong first quarter, the overall picture in the first half of 2018 is an improvement on last year’s dismal numbers and a return to something more normal -- with the possible exception of a still-lagging energy industry.

The numbers call into question the extent to which Donald Trump’s corporate tax cuts have diminished Canada’s appeal as an investment destination, despite warnings from business groups and pressure on Prime Minister Justin Trudeau’s government to match them. The relatively stable investment figures also indicate companies have been brushing aside concerns that talks to update the North American Free Trade Agreement could collapse.

Trudeau’s finance minister plans to address the competitiveness challenges facing Canadian businesses in a budget update later this year.

Here are some other highlights from the foreign-investment figures:

• Including C$18 billion of inflows in the first three months of the year, FDI in the first half of the year totaled C$26.8 billion, up from C$11 billion in the first half of 2017. That’s hardly spectacular, but within average levels over the past decade for a six-month period
• Energy is still struggling. There was a net divestment of foreign capital from energy and mining between April and June of C$1.1 billion and the sector has lost a net C$8.6 billion in FDI over the past five quarters
• But there seems to be a revival of investment in manufacturing. Foreign companies have invested C$15 billion in the industry in the first half of 2018, the best six-month gain since 2013

Of course, it may be that trade uncertainty and competitiveness are real issues that are being eclipsed by other factors such as a strong U.S. economy. There is also plenty of evidence that companies -- after under-investing for years -- are now running up against capacity constraints and being forced into capital spending even in the face of all the headwinds.

Nor can anyone argue Canada is a haven for investment. Domestic companies continue to invest more abroad than foreign companies invest in Canada. In the second quarter, Canadian direct investment abroad totaled C$18.9 billion -- a full C$10 billion more than what came into the country. But that trend too is showing no signs of worsening.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Greg Quinn

©2018 Bloomberg L.P.