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Focus: Protectionist rhetoric could help Canadian companies

Focus on: Corporate and Commercial Law
Donald Trump has not been shy about expressing his views on a wide range of topics since he took office as president of the United States.

Relatively little has been said, however, about the business relationship with the largest trading partner of the United States, other than a comment last month about wishing to “tweak” the Canadian part of the North American Free Trade Agreement.

The election of Trump comes, though, as merger and acquisition activity is on the rise again in North America combined with steady improvements in stock markets.

Still, the unpredictability of the new U.S. president creates a measure of wariness in the M&A field, even if the overall outlook is positive.

For example, the global Economic Policy Uncertainty Index, calculated by three U.S.-based academics, has spiked since the election of Trump.

He has also raised the possibility of trade wars with other countries and promised to renegotiate existing trade deals that he does not believe are sufficiently beneficial to the U.S.

Cornell Wright, a partner at Torys LLP in Toronto, says that certainty and stability are what the business community in Canada and the U.S. are always seeking.

“It certainly is a volatile time south of the border,” says Wright, co-head of the M&A practice at Torys, in terms of the political situation.  

“At the same time, key drivers of deals such as the performance of the markets is quite bullish. On a macro level, all of the conditions are favourable,” he notes.

The U.S. economy under former president Barack Obama had six straight years of job growth.

Currently, unemployment and inflation rates are also relatively low.

A report issued earlier this year by Norton Rose Fulbright LLP indicated that cross-border M&A activity increased sharply last year with a greater volume of outbound transactions.

The largest was Enbridge’s $61-billion offer to acquire Spectra Energy, a Texas-based pipeline company.

As well, within a few days of taking office, Trump signed an executive order permitting TransCanada Corporation to resubmit its proposal for the Keystone XL pipeline.

“The M&A market has been good the past couple of years. I think there is still a significant amount of optimism,” says Wright.

Regardless of who is president, there are other factors that determine whether it is a favourable climate for commercial transactions, says Stephen Kerr, senior partner in the Financial Institutions and Mergers & Acquisitions groups at Fasken Martineau LLP in Toronto.

“What drives M&A in Canada are two things, commodity prices and foreign exchange,” says Kerr. Recoveries in the resource sector and more pipeline projects could create a lot of activity in terms of transactions, he suggests.

The uncertainty over the behaviour of Trump and his protectionist rhetoric is something that may actually benefit Canadian companies, says Kerr.  

“There may be companies that want to invest in North America and, instead of the U.S., it may direct more traffic here in terms of foreign investment,” he says. The oil and gas sector is an area that should benefit under a Trump presidency, agrees Wright.

“That sector was strengthening, even before the election. The conditions are favourable,” he adds. Trump and Canadian Prime Minister Justin Trudeau both made positive comments about the trading relationship between the two countries during the prime minister’s recent trip to Washington. Trudeau also declined to make any criticisms of some of Trump’s more controversial actions, such as the attempted travel ban.

Given the level of trade between the two countries, it is not surprising that the prime minister did not want to offend his U.S. counterpart.

Total goods and services trade was US$663 billion between the two countries in 2015, according to statistics issued by the Office of the United States Trade Representative. The U.S. had a slight goods and services trade surplus with Canada that year, in contrast to Mexico, where Trump has been critical of that part of NAFTA.

He has also threatened to punish U.S. companies that move jobs to Mexico.

The fact that much of the U.S. president’s trade comments have been directed at Mexico and other countries is a good thing for Canadian businesses, suggests Kerr.

“I think there will be increased cross-border opportunities. We are sufficiently below the radar,” he notes.

As well, the private equity sector is set to be more active soon after “hoarding” its funds in recent years, says Kerr.

“There will be more pressure to make deals,” he believes.

While the U.S. president has spoken about a focus on protecting the jobs of domestic workers, it is unlikely he can obtain the political support in Congress to make any dramatic changes to the trade relationship between the two countries, says Kerr.

The unpredictability of Trump, though, is still a wild card. Despite an overall optimism about the potential for an increase in M&A activity for Canadian companies, both lawyers agree that predictions are difficult.

“These are early days,” says Wright.  

Kerr echoes that view.

“The mood on Bay Street on M&A is let’s wait and see,” he says.

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