FidelityConnects: Canada's moment part 3: The real investment story behind CUSMA

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<b>Subtitles are AI Generated</b>

 

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Hello, Heather, welcome. Great to see you.

 

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Nice to see you, Pamela.

 

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Thanks for joining us here today.

 

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We'll begin, I think, just a little bit with we're all reading

 

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and we know that trade negotiations are taking

 

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place in certain ways.

 

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We know that there's a deadline that may not be made and all those

 

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bits and pieces.

 

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I wonder if you can just sort of begin with letting us know how

 

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serious it's all going to be sort of after July 1st.

 

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Is this a bit of a drop dead date or how does this work?

 

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First, I think it's important for us to understand that

 

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CUSMA is a process. I don't see

 

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the approaching July 1st as a rupture date.

 

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The reason for that is because North American

 

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trade is deeply integrated with over one and a half trillion

 

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of annual trade flows.

 

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A sudden breakdown is highly unlikely.

 

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We've kind of seen how this has played out before with the

 

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NAFTA negotiation uncertainty where despite volatility

 

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trade flows continued and the system ultimately adapted.

 

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What we're seeing happening now is just another phase of that evolution

 

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where trade is expanding beyond tariffs.

 

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We're seeing it taking place today into

 

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investment decisions, into supply chain configurations

 

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and also into strategic sectors.

 

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It's fascinating to have your take on that.

 

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Just remind us a little bit, you'll be looking around the world at

 

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opportunities where trade is a

 

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huge part of countries relationship and ultimately the investment

 

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opportunities that are there. Just tell us a bit about your background.

 

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What lens do you look at Canada, for instance, through?

 

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I'm a sovereign debt analyst. What that means is I evaluate

 

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governments as credit issuers.

 

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I'm looking at growth, fiscal sustainability and risk and

 

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how policy translates into long term economic performance.

 

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In that role I've been meeting with government officials in Washington,

 

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in Mexico City and Ottawa ahead of the CUSMA review.

 

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What I'm finding is that this is more than trade but

 

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it's rather how North America organizes investment,

 

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supply chain and growth.

 

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What's important is how Canada fits within that system.

 

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That's absolutely fascinating.

 

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To the extent that you've had conversations, you're taking a look at sovereign

 

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debt, I mean, ultimately it's as an investor taking a looks at these things.

 

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Can you just ... if you'll share with us a little bit of the inside baseball.

 

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How long have some of these conversations been circulating?

 

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One would think it's an ongoing process but to the extent that we're

 

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approaching a date that we knew was coming have things

 

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heated up in the last few weeks, have you had more meetings recently than you

 

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did six months ago? Can you just give us a little bit of what you're seeing?

 

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Sure, of course. I was in

 

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Mexico City back in February. I came at the same

 

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time that actually the Canadian delegation was in town.

 

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Those were the first meetings that took place.

 

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Meeting with the constituents both

 

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from US, from Canada and from Mexico I think things were evolving

 

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as expected.

 

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One thing that was very clear from my meetings is that the current framework

 

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is still very much intact. The

 

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cross border trade between the three nations remains around 3

 

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billion per day which underscores just how operational

 

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and embedded the North American system is.

 

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As you mentioned in terms of just it heating up, I think it's really important

 

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to be reminded that the near term risk that we're speaking about is

 

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primarily sentiment driven. Markets are reacting to

 

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headlines and they're reacting to political developments

 

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or even just the negotiation dynamics.

 

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The underlying economic integration has not changed.

 

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What we're seeing right now in the market is really a volatility in

 

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perception rather than any disruption in fundamentals.

 

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That distinction is critical when thinking about risk.

 

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It's critical and we really don't know that.

 

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I mean, I guess you do know that if you're under CUSMA and you are trading

 

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you know exactly as a business what is working and what isn't working.

 

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Layer on top of that discussion of how things are going right now

 

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a bit about how the world is either different or going to shift to

 

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take into consideration new types of supply chains for

 

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new types of stuff, data, digital, everything that the world is

 

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today that it wasn't, for instance, a few years back.

 

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What needs to not collapse but shift?

 

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Well, we're increasingly moving towards a next generation

 

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framework. I think this is where the story becomes particularly

 

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compelling. I believe that we're likely at the early

 

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stage of a new capital investment cycle.

 

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Global FDI...

 

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Really? Feels like so much has been spent but we're at the beginning.

 

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Absolutely.

 

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Global FDI exceeding 1 trillion annually.

 

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An increasing share is being directed towards North

 

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America. This is because companies are regionalizing

 

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supply chains.

 

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That shift is being driven by policy clarity

 

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and confidence in long term market access.

 

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We're already seeing early signals

 

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of this through increased investment in energy,

 

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EV manufacturing and also infrastructure.

 

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What I have found in studying countries over time is

 

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that once that cycle begins it tends to persist over multiple

 

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years, making this not just a policy story but

 

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really a capital formation story.

 

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That is fascinating and exciting, actually, to think that we're sort of at the

 

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beginning of this.

 

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In broad strokes, again, as we look at Canada's

 

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sovereign position, its indebtedness and so on,

 

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often people will say it's okay if the government's spending as long as they're

 

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spending on the right types of things.

 

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We don't know exactly how all of this is gonna work out.

 

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We have a list of major projects, for instance, but we don't know everything.

 

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Are you happy with the direction of the way the Canadian government has aligned

 

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itself to spend, to engage?

 

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Yes. The reason for that is because I think that the policy

 

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is aligning in the key areas where the opportunity is

 

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most clear for Canada.

 

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First, energy remains foundational

 

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to Canada's economy and it will continue

 

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to play a central role both in the traditional and transformational

 

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pathways. Second is EV supply chains

 

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and critical minerals. They represent a

 

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major structural shift with global EV related

 

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supply chains expected to exceed over 1 trillion by 2030.

 

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I think Canada is well positioned in key inputs such

 

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as lithium, cobalt, nickel.

 

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Lastly is digital trade and AI.

 

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These are areas that Canada has structural advantages because of the public

 

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support.

 

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Canada produces roughly 5 to 10% of

 

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global AI talent relative to its population.

 

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That significantly expands the commercial potential of

 

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Canada's talent base because firms under CUSMA's digital

 

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provisions can operate across North America.

 

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When you think about those three key advantages,

 

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EV, supply chains, energy and digital, these are pillars of opportunity for

 

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Canada.

 

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To the extent that there are irritants and that we'll hear things about

 

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tariffs that are a global story, actually tariffs have

 

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been around forever, there's nothing new to them being around, as

 

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you speak to investors how should they be thinking about what has been sort

 

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of a difficult moment to digest a

 

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new tariff regime as we think of trading partners.

 

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How do you think investors should look at the tariff structure right now?

 

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First, the risks are real but

 

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they're manageable and they're familiar.

 

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These include the legacy issues that you mentioned.

 

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It also includes even a slower negotiation timeline

 

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which you began with but also the political constraints.

 

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It's important to keep in mind that despite the political

 

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tensions the incentives to maintain the agreement

 

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are strong across all three nations.

 

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The reason for that is because of just North American

 

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trade exceeding 1.5

 

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trillion annually, the economic incentives are there, but also because

 

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it supports millions of jobs across all three countries.

 

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What this will do is create pressure from businesses, from

 

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workers and local governments to maintain stability even in a

 

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more polarized political environment.

 

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That's fascinating. How do you see the world shifting

 

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in that way? I mean, as we talk about supply chains shifting, a

 

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deglobalization, what it also means is a retooling, which is

 

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kind of what we're talking about here, of trade closer to home.

 

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That includes North America and the way that's going to work.

 

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It is a more localized vision of the world for all

 

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the reasons that we've mentioned.

 

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I just wonder, almost societally what

 

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that might mean. It might mean something good and cozy

 

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and I'm just curious how you see that layering

 

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on top, some new trade realities.

 

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What will life look like to an extent?

 

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Well, first it's important to keep in mind that markets tend

 

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to move ahead of fundamentals. The sentiment

 

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can shift very quickly even when trade

 

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flows remain stable.

 

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What this does is it creates really a gap between perception and

 

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reality. That gap can create opportunity,

 

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especially for investors, for businesses and for governments

 

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who position early.

 

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Canada is in a strong position but there's an opportunity

 

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with this trade review for Canada to be more proactive.

 

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We've seen some of that happen.

 

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We've heard certainly leaders and people engage

 

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while there is a war going on in the Middle East.

 

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The story of oil making its way around the world has been constrained.

 

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Canada is ultimately a net beneficiary of that.

 

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Take us a few months, even a few years, sort of the structural shift that we're

 

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actually watching it looks like the beginnings of right now on the energy

 

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front.

 

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Well, first, as you point out, Canada has strong fundamentals.

 

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I think what we're starting

 

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to see now with the new government in place, having alignment of

 

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policy support not just from Ottawa but also from

 

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D.C. and also from Mexico City in the energy sector.

 

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I think it's creating, again,

 

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these opportunities to capture investment, to build upon the North

 

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American infrastructure buildout.

 

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There is a need and a desire to build out capacity and we're seeing

 

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that both at the federal level and the local level.

 

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Do you expect, again, in terms of your investment

 

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horizon and how you're looking at it, for Canada to do a fair amount of

 

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tightening up its economy on its own and also

 

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integrating in new ways, it looks like, through new trade policy with

 

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the United States and Mexico. Do you see Canada itself sort of developing

 

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as its own nation state building efforts  go forward?

 

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We're starting to see the first projects

 

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become announcing, coming underway. We had the Shell announcement

 

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which I think was very important because what

 

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that Shell announcement [indecipherable, huge change and a huge change because

 

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Canada is a central focal point of the company's strategy.

 

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Now it's not just about talk and

 

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planning but we're actually seeing action.

 

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Then just looking at the calendar and going forward the global investment

 

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summit that Prime Minister Carney has announced in September also

 

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presents an enormous opportunity to be able to kind of see this come to

 

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fruition.

 

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That's fascinating. If things take a little longer, July 1st

 

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is sort of flapping in the wind there, probably not gonna happen, if

 

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things take little longer to get the building blocks of this together

 

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is that good for investment?

 

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Should we worry about that if it takes a while?

 

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There's no cliff risk. It's very important

 

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to understand that this is a process of evolution and not disruption.

 

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This is long term investment story.

 

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The key question, or even the risk, if

 

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you were to ask me in terms of where I see the risk for Canada is just whether

 

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or not it becomes a missed opportunity.

 

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Canada has the opportunity to capture

 

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a larger share of investment with this negotiation.

 

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Canada offers strong institutional

 

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stability, resource ability, direct integration with

 

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US markets. Even with a more modest share of

 

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new supply chain investment it could translate into tens of

 

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billions of dollars in capital inflows.

 

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Okay, fascinating. Just give us one more look

 

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at sort of Canada's position relative to Mexico, US,

 

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Canada, sort of within the agreement itself.

 

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Is that different from, say, investors who are looking at it from another

 

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corner of the globe, for instance?

 

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Well, I think what's important to understand is that we've seen how

 

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this has played out before with the NAFTA

 

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negotiation from 2017 to '19.

 

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Bringing it forth to today what we are is just another phase

 

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in that evolution. This is not something that is different, it's

 

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just evolving. What we're seeing is trade expanding beyond

 

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tariffs. It's going into investment decisions that we

 

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just spoke about with Shell, looking at it through supply chain

 

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reconfigurations, and then also in the building out of strategic sectors.

 

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The key question

 

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is not just whether or not the system holds but how it

 

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evolves and how Canada can capture the most value from within it.

 

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Is there anything you'd just like to add as a final thought?

 

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I would just kind of reiterate Canada's strengths and that strong

 

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institutional stability. Getting back to what I do,

 

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what does a sovereign analyst do?

 

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Well, a sovereign analyst analyzes institutional strengths

 

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and also real economic growth prospects.

 

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Canada does that and does that in spades against its competitors.

 

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It offers strong institutional stability.

 

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It offers that resource availability and it also offers

 

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the direct integration into  an almost $600 million

 

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consumer market.

 

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This is one that is going to potentially be able to

 

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kind of boost Canada's potential growth

 

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long term economic prospects and lead into even stronger

 

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debt sustainability going forward.

 

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Heather Hagerty, it's such a treat to be able to hear your perspective

 

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and learn from you. Thank you for joining us.

 

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Thank you.

 

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