Is NAFTA 2.0 a Boon to Rural and Small-town Economies?

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Now that we have had time to detox from the NAFTA 2.0 political spin over Thanksgiving, it’s time to consider what it really means for real estate.

(Disclosure: I just can’t bring myself to call this new deal by its acronym without suffering the terrifying image of POTUS in costume dancing to the Village People’s YMCA, so NAFTA 2.0 it is.)

The arrival of a new NAFTA has taken a lot of uncertainty off the table. The uncertainty that had left Canada’s economic outlook under a cloud, which kept interest and bond rates low, which helped to keep mortgage rates low.

Now that the uncertainty is gone and Canada’s economic outlook is cautiously brighter, interest rates may be overdue to track up. The media has already focused on the obvious consequence — higher costs of borrowing. Individuals struggling to qualify for a mortgage may now face a tougher road. Those with high household debt do, too.

But what about commercial real estate?

That’s a harder question to answer. Business owners who need to borrow for their businesses will face the same issues with higher borrowing costs as homeowners, regardless of whether those dollars are being borrowed to acquire real estate or equipment.

On the other hand, the end of uncertainty may encourage investment. This may be a good thing for SMEs and for Small Town Canada.

Trials and tribulations

As I’ve written before, Small Town Canada has taken quite an economic beating in recent decades. The 2016 census data shows the number of us living in rural areas or communities with less than 30,000 residents (which makes up the vast majority of Canada’s sprawling geography) has dwindled to about 31 percent of the population.

These areas have also suffered the loss of anchor employers, as manufacturing or processing concerns close shop, move or consolidate due to competitive pressures from abroad.

While these parts of the country also proportionally represent about 31 percent of Canada’s GDP, they do have an unemployment rate that’s about three percentage points lower than average, meaning these remain hard-working and productive areas of the country.

These stats were summed up by the CBC over the summer, as part of a series it ran profiling the economic challenges of various small and rural communities.

Down, but far from out

There is obviously a will to maintain the muscle of Canada’s heartlands. Last month, Vicki-May Hamm, president of the Federation of Canadian Municipalities and the mayor of Magog, Que., wrote a rebuttal piece in MacLean’s to argue the death of rural areas and small towns has been exaggerated.

She contends that many have figured out ways, not only to adapt but to thrive. This despite the oft-cited challenges of ageing populations, the loss of anchor employers and issues with modern communications infrastructure.

All of which means it’s fair to say that Small Town and Rural Canada is not just fading away. It’s fighting against the socio-economic winds that have been buffeting it about.

That means there is an investment opportunity to be had. The mitigating effect that a new North American trade deal has on economic uncertainty can only benefit these parts of the country.

Look at the example of Canopy Growth (WEED-T), in Smiths Falls, Ont. This business set itself up in what has been for many years an underperforming town. There were really good reasons to do this, including lower-priced real estate and a nearby workforce.

When the cost of living in Canada’s largest cities is becoming overwhelming for many people (and likely to become more so if interest rates are sure to rise) the appeal of a small town and rural living grows.

A virtuous circle

This creates a virtuous circle. Rural communities are eager to court new residents and new employers. People are eager to escape the high cost and congestion of city living. An influx of new residents means more people spending more money in local shops and businesses.

This, in turn, spurs spin-off job creation or the need for investments in the communications infrastructure that supports the remote worker, because many people who want the small-town lifestyle don’t want to lose that big-city job.

The prospect of opportunity, jobs and industry returning to small towns must also be considered in the broader global context. Some pundits are warning of a possible meltdown in a couple of years, as the debt situation among many third-world economies could lead to more defaults. American debt is no small thing, either.

That means we, as a country, must also be focused on where to place our bets in terms of export markets for Canadian-made goods. If the painful and hyperbolic road to NAFTA 2.0 has taught us anything, it’s that we cannot afford to continue relying on the U.S. as the biggest buyer of our goods.

An expansionary industrial strategy

This is something the government has to address, but it’s not the only thing. As Hamm wrote in Maclean’s, the government must also step in with the right kind of support for needed infrastructure investments in smaller communities, whether that is roads and transit (consider the recent Greyhound route closures in Western Canada) or digital connectivity that really is high speed.

Now more than ever, Canada needs an expansionary industrial strategy outside the big 15 cities. We should consider NAFTA 2.0, even if indirectly, a wakeup call to get on it.

Originally published on RENX.ca on October 9, 2018