The Trump administration's decision to drop a proposed border tax removes the threat of a trade war just as Canada, Mexico and the U.S. prepare to launch negotiations for a new North American Free Trade Agreement, relieved Canadian business leaders say.
But it also potentially reduces the pressure on Prime Minister Justin Trudeau to slash Canada's corporate tax rate to keep pace with a promised steep reduction in the United States.
The border adjustment tax was intended to offset the massive revenue hole President Donald Trump's planned comprehensive tax reform -- including cutting the corporate tax rate to 15 per cent -- will blow in the American budget.
"With this taken out of it, it will be interesting to see what this means for the overall package, what is the size of the corporate tax cut, for example, that's been discussed," said Brian Kingston, the Business Council of Canada's vice-president of policy, international and fiscal issues
Kingston added that a dramatic reduction in American corporate taxes, "does create competitiveness implications for Canada."
"So, if they went to 15 (per cent), which is very ambitious, you could see a situation where the Canadian government would have to start thinking about how we respond to make sure that we don't lose investment mandates to the south."
American officials said Thursday they're "confident" a tax on imports is no longer needed to pay for broader tax reform. But privately some Canadian business leaders believe the decision to scrap the border tax means the promised reductions in personal and corporate taxes will have to be scaled back.
Little wonder then that Trudeau, whose government is already awash in red ink and could ill-afford having to match a U.S. reduction in corporate taxes, expressed satisfaction Friday that the border tax has been scratched.
"There is no economic relationship anywhere in the world like the one between Canada and the United States and that needs to be protected," Trudeau said during a brief tour of cottage country in Kenora, Ont.
"The border adjustment tax would have been a serious impediment to trade with Canada and we're glad that it's not being moved forward with."
Perrin Beatty, president of the Canadian Chamber of Commerce, said unilateral imposition of a border tax "would have been a very destructive action to take that would have precipitated a trade war" just as negotiations to modernize NAFTA are set to begin on Aug. 16.
That the Trump administration has scrapped the idea bodes well for the NAFTA negotiations, suggesting that the U.S. is backing off some of the president's "extreme ideas" and that "common sense will prevail and that we will have a good and constructive free trade agreement after tough negotiations," he added.
"We see this as a definite good first sign even before the formal negotiation process has begun," agreed Ashley Ziai, senior policy analyst, national affairs, for the Canadian Federation of Independent Business.
"We believe that the border tax would have had a detrimental impact on trade and our relationship with the U.S."
While scrapping the border tax may mean dialling back the promised reduction in the U.S. corporate tax rate, Beatty said that doesn't necessarily diminish the pressure on Canada to relieve the tax and regulatory burden on business in order to stay competitive with American companies.
At 15 per cent, the federal corporate tax rate in Canada is currently lower than the U.S. rate but, as Beatty wrote in a letter to Trudeau earlier this week, there are other factors -- increases in minimum wages, escalating business fees, new carbon taxes and high electricity bills, among them -- that are already hurting Canadian companies' ability to compete.
"It's the cumulative impact of all of those things that are making our businesses less and less competitive in the global marketplace at a time when others are upping their game and when our most important trading partner just across the border is moving to dramatically decrease its taxes and regulatory burden," he said.
With the contentious border tax out of the way, Trudeau stressed that Canada will approach the NAFTA negotiations with the positive goal of improving the deal so that it benefits all three countries.
He later raised the trade talks while speaking to a few hundred people at a community barbecue, stressing the importance of "making sure we navigate carefully and well the relationship with our biggest neighbour to the south."
"It's really important that as we get into NAFTA renegotiations that we continue to demonstrate that Canada is engaged in a thoughtful, responsible way that stands up for Canada's interests but that recognizes that Canada's interests and Americans' interests align in many ways."
