Bank of Canada Sees Trump's Tax Plan Trickling Across Border

(Bloomberg) -- President Donald Trump’s tax reform plan is a $600-billion boon for the American economy that primarily benefits U.S. businesses and high-income individuals -- and some of it will trickle down to Canada. Too bad about the trade policy.

In its quarterly monetary policy report Wednesday, the Bank of Canada judged the U.S. tax overhaul would be a marginal short- term positive for the nation’s economy because increased U.S. demand would boost exports.

At the same time, the tax move is a threat to domestic business development if it shifts investment south of the border, and worries about North American Free Trade Agreement renegotiations -- the top risk to the economy -- are growing.

“A notable shift toward protectionist global trade policies” remains the Bank of Canada’s chief risk to the outlook, according to the monetary policy report.

The central bank now estimates that uncertainty about the future of Nafta will subtract from the level capital spending by 2 percent by the end of 2019, a larger drag than seen in October.

The new U.S. tax measures are forecast to shave an additional 0.5 percent from the level of business investment.

Bank of Canada officials said that since Trump’s election win, foreign direct investment into Canada intended for new projects has ebbed, particularly from Europe but also from the U.S. -- a potential early warning sign that the cloudiness surrounding Canada’s trading relationship with its largest partner is already adversely affecting domestic activity.

The silver lining about Trump’s “America First” policy: It’s not bad being beside the champion on the podium. Despite upping its estimates for how much Nafta-related uncertainty will weigh on export growth, the bank anticipates that this negative effect will be dwarfed by the positive impact of stronger U.S. demand for Canadian goods and services over the projection horizon.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net.

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

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