Trade Uncertainty Holding Back Growth, Says Bank of Canada's Poloz

Bank of Canada Gov. Stephen Poloz warned trade-policy uncertainty in Washington poses a significant headwind to growth because companies are hesitant to hire and invest without knowing what a revamped North American trade pact -- as championed by President Donald Trump -- would hold for their futures.

Mr. Poloz said Thursday in a speech in Mexico City that it was up to lawmakers in Canada and Mexico, along with chief executives and labor leaders, to persuade the White House and U.S. Congress of the benefits of liberalized trade, as structured under the North American Free Trade Agreement. He said the risk of wholesale changes to Nafta and new tariffs could thwart progress in the Canadian and Mexican economies at a time when both are shaking off the worst of the commodity-price decline.

"We know that with protectionism, everybody loses eventually, including the country that puts the policies in place," Mr. Poloz said to a crowd that included Mexico's central bank governor, Agustin Carstens. "The uncertainty around this threat of increased protectionism is holding back growth."

This marked the second time in just over a month Mr. Poloz has used public remarks to warn of the consequences from protectionism. His speech comes a week after the Trump administration imposed a new 20% tariff of Canadian lumber imports, in response to allegations that Canadian governments subsidize domestic production of wood used to build houses.

Mr. Trump's protectionist rhetoric has escalated, highlighted by a threat last week to formally withdraw from Nafta. He later said he decided against canceling Nafta after speaking to Canadian and Mexican leaders, who he said expressed a willingness to renegotiate the existing agreement. Mr. Trump has called the existing terms under Nafta a "disaster."

Mr. Poloz and other Canadian officials have said businesses in Canada -- in particular the nonenergy sector -- remain reluctant to increase their capital-spending plans until things settle down on the U.S. policy front. It is one reason why the Bank of Canada has opted to keep its main interest rate at 0.50% for the foreseeable future despite signs of stronger growth.

Roughly three-quarters of Canadian exports -- equivalent to 20% of the country's gross domestic product -- go to the U.S., making Canada one of the countries with the most to lose from higher trade barriers.

Mr. Poloz said potential changes to U.S. trade policy would have "real consequences for companies." He cited the central bank's recent survey of firms, which suggested companies would maintain or modestly increase their level of investment, with any additional outlays limited to maintenance -- which Mr. Poloz argued does little to support growth.

"When you consider that the painful memories of the global financial crisis are still fresh, it is not surprising that companies would continue to hesitate to expand in the face of this uncertainty," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

May 04, 2017 17:18 ET (21:18 GMT)