The Grand Plan Unfolds...Slowly

  

The road ahead for Canada became better delineated this week with the announcement that the winning proposal to build Canada’s new submarine fleet was the German Norwegian TKMS bid which beat out the South Korean Hanwha proposal.  While the ultimate deal still must be finalized and Hanwha is the reserve bidder, in the world of defence contracts, being the reserve winner is not much of a consolation prize. In the end, the NATO relationship with Germany and Norway seemed to be the deciding factor even with the many industrial benefits both bids promised.  And in terms of regional effects, the TKMS bid will have major economic impacts on Nova Scotia (Halifax) and there are a small number of deals proposed with companies in British Columbia, Mississauga, Montréal and Trois-Rivières.Unfortunately, there will be no steel contract for Algoma in Sault Ste. Marie.

In my earlier thoughts on the plans to evolve Canada’s economy and international relationships, I ventured that Canada had come to a fork in the road: the path of continued integration with the United States versus establishing an east-west trade flow through Canada linking Europe with the Asia Pacific.  Canada’s defence policy purchases are part of this economic policy with the fighter jet project offering a choice between Europe and America and the submarine contract offering a choice between Asia-Pacific and Europe. I also ventured that for the time being, Canada was essentially dangling the prospects of both but needed to make some choices.  The choices are being made but the process is unfolding very slowly.

In terms of economic and political diversification with Europe and Asia, while Canada will continue to pursue opportunities with the Asia-Pacific, it is with Europe that Canada will increasingly try to link with both economically and with respect to defence and security especially when it comes to the Arctic.  In a sense, the Innisian line that the civilization of Canada settlement is essentially the civilization of Europe still holds and we look towards the Atlantic more than the Pacific.  Despite this, participating in Eurovision is not quite the same as being a member of the EU.  One hopes that despite not acquiring the Hanwha submarines, Canada will still make important defence purchases in South Korea and Japan if it is to be serious about having an east-west global economic vision.

However, going with the TKMS bid also means that the likelihood has grown that Canada will likely not go with the Swedish Gripen jets.  In the end, even if we maintain the current volume of trade with the United States and grow trade with all our other partners, the United States will still be our dominant trade partner for decades to come.  Given that we share the North American continent with them, we will also need to maintain defence and security arrangements with them which means the 88-plane F-35 purchases is a done deal.  It is only a matter of an official announcement.  The only question is whether we will go with a dual fleet and order additional planes from Sweden.  After all, in the early 1980s, Canada deployed nearly 140 fighter jets and there is room to do both.  In the world of federal deficit financing, what's a few more billion dollars?

Continuing the F-35 purchases also has its political dimension.  We are going to be hammering out the details of a new trade arrangement with the United States, and it is unlikely we will back out of the jet purchases and risk incurring additional Trumpian wrath.  We are also likely to give in on several other fronts including aspects of our supply management, digital services and increased North American content in manufacturing with integrated supply chains (auto production). And we will likely still face tariffs at some base level because that is the current state of U.S. trade policy and our relationship with them is not that special.  Not that it ever was really.  It has always been America first but previous administrations were more diplomatic regarding our junior status whereas the current one is simply more up front.

Of course, the Americans apparently seem keen on a “Fortress North America” approach but such an approach seems at odds with the east-west trade diversification strategy that we are demonstrating we are pursuing.  It also will likely lock us into a relationship where the U.S. will have preferential access to our natural resources limiting our ability to realize their maximum economic potential.  While we may think we are negotiating Fortress North America, the other side will interpret it as Fortress America. So, the key question is can we negotiate the best deal possible without locking ourselves into an even tighter economic straitjacket while we wait for growth in non-U.S. trade to gradually reduce our economic dependence of the United States? 

 

Takeaways from the US-Iran Conflict

  

It has now been nearly two weeks since the Americans began bombing Iran to bring about its desired regime change. As this mid-East conflict continues and expands, the economic, trade and travel disruption continues and if prolonged threatens to slow economic growth substantially and restoke inflation.  While all of this is serious in its own right, there are several takeaways that spring to mind because of what has transpired.

1.        Despite the post-pandemic talk of building national resilience and hardening supply chains, the global economy is obviously still quite interdependent, and the crucial lubricant is oil.  Indeed, despite the development of green energy alternatives, it would appear it that the world still runs on oil. As late as 2023, fossil fuels still comprised over 80 percent of the world’s energy mix and 20 percent of global oil consumption and the LNG trade goes through the now precarious Strait of Hormuz.  The countries most dependent on this flow include Japan, India, South Korea and China.  China is the most dependent on Middle East oil and  imports about 40 percent of its oil through the strait.  This leads one to speculate that the American intervention in Iran is seeking to hit two birds with one stone so to speak – taking out Iran while also sticking it to China.  On the other hand, this assumes the United States went into this with a strategy.  See next point.

2.        The current American leadership can generate policy ideas but seldom seem to be capable of thinking things through before action. It appears it did not anticipate that after decapitating the Iranian leadership, they would continue fighting.  Iran is not Venezuela and it is apparent that the thinking was to launch a quick strike to decapitate the regime through shock and awe and that it would naturally be followed by a rising up of the people and a new regime allowing President Trump to declare victory and depart.  It has turned out to be more complicated than that.  Indeed, no lessons were learned from the Ukraine which when initially invaded by Russia was expected to collapse quickly under the Russian onslaught, but it turns out they did not.   In addition, the attack on Iran represents yet another direct attempt to take out a foreign leader by the United States and is setting precedents that no doubt might disturb other world leaders – foes and allies alike.  One wonders if other countries may be inspired to deal with certain issues in this revamped American style. This would represent an important deterioration in international rules of etiquette with the next step up being knocking off international leaders at state dinners a la Medici or Borgia or perhaps even like the Black Dinner of 1440.  While the principles of the post 1648 Westphalian System regarding exclusive territorial sovereignty have been in retreat for some time, going back to a more medieval approach does not seem like progress to me.  In any event, while the United States in its history has tried to bring about regime changes around the world, the Americans need to reflect on where exactly they are going with this specific approach to international relations because the long run cycle of history suggests that what goes around eventually comes around.

3.       Despite all the talk of the rise of China and the declines of the West and the United States, the United States, with its string of global bases and aircraft carrier groups, is still able to project its power around the world in a way that China and Russia are not capable of.  While China has now acquired its third aircraft carrier and reports are that the number of ships the Chinese Navy has exceeds that of the U.S. Navy, the tonnage of the U.S. Navy is still substantially larger than China’s and it has more long-range vessels.  Most of China’s ships are still short-range patrol and coastal vessels which may be useful if they wish to invade Taiwan but not so much so when it comes to dispatching task forces to the other side of the globe. The U.S. Navy has more destroyers and frigates and 11 aircraft carriers. Their action in the Persian Gulf is only using a fraction of the fleet. America still rules the waves.

4.     Despite its written and living Constitution and several centuries of history, the Americans do not have a system of checks and balances after all. While there has been a long-term increase in the power of the American Presidency since World War II, under Donald Trump, the Imperial Presidency has reached new unabashed heights.  In the case of trade, Trump’s tariffs were struck down by the Supreme Court, but the President has already said that he will find a new way to carry out his plan and bypass Congress. And, in the recent action against Iran which amounts to a declaration of war against Iran, well according to the Constitution of the United States and the observations of the U.S. Supreme Court, only Congress has the power to declare war.  If this was the Star Wars universe, one might say  that Chancellor Palpatine has essentially declared himself emperor and ended the Republic. This however is reality and therefore much more serious if indeed the case.

5.      Finally, we come to realize that Canada’s failure to put more pipeline infrastructure in place or improve its national defences is even more glaring considering what has happened to world energy markets.  Ramping up oil production and export pipelines now as a better late than never strategy may not be enough given the length of time it takes to put the infrastructure in place.  We have probably made the same mistake with respect to our ramping up of defence spending as the arrival of new ships, submarines and jet fighters is still years away even if decisions are made today.  Indeed, we have still yet to decide who will build our new submarines or our new jets.  Pandemic notwithstanding, we spent the last decade ramping up the federal footprint largely in areas of income and social transfers. We have been caught with our pants down in so many ways and despite Prime Minister Carney’s flurry of travel activity to move us foreword on trade and defence, we are still moving slowly when it comes to getting things done.  God help us all.