Shifts in trade policy and rising interest rates in the U.S. are likely to be the primary sources of impact of Donald Trump’s presidency on Canada’s finances, according to a new Fitch Ratings Inc. report examining the impact of the new U.S. administration on Canada’s sovereign credit profile.
On trade, Trump’s pledge to renegotiate NAFTA “would have direct consequences for Canada,” the Fitch report says.
It’s not clear whether Trump views Canada as he does Mexico, which is as a U.S. job killer, the Fitch report notes, adding that trade between Canada and the U.S. was broadly balanced in 2015.
“Nevertheless, lengthy renegotiation would create uncertainty and may delay investment in new export capacity that would improve Canada’s export performance,” the report says. “Partial reversal of U.S.-Canadian trade liberalization or disruption to supply chains in areas such as agriculture and auto manufacturing could be negative for Canadian exports and growth.”
However, energy exports, which represent about one-quarter of Canadian exports to the U.S., “would be less directly vulnerable to trade restrictions” given that Trump has promised to authorize the Keystone XL pipeline project, which would increase Canada’s export capacity to the U.S., the Fitch report notes.
The other major potential impact is if the U.S. Federal Reserve Board starts raising interest rates. Although higher interest rates would only have a modest impact on the federal budget in Canada, they “could make Canada’s high household debt burden less sustainable,” the Fitch report says.