Say Trump kills NAFTA. Here’s what experts say will happen to Canada: Analysis
The auto industry, the agriculture industry, and a whole bunch of others would be harmed by a termination of the North American trade pact. But the Canadian economy would not be crippled, economists say.
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WASHINGTON—The end of NAFTA would be bad but far from devastating for the Canadian economy, reducing growth but not stopping it, several economists have concluded.
With a big dose of caution.
Experts are hesitant to make grand predictions because there are so many unknowns involved. One of them is that nobody knows what U.S. President Donald Trump would do after striking the death blow.
Once strictly hypothetical, the question of what termination would mean for Canada has taken on increasing urgency in boardrooms around the country as North American Free Trade Agreement negotiations have faltered on account of Trump’s protectionist demands. The fifth round of talks began Friday in Mexico City.
Trump could potentially terminate the deal, as he has repeatedly threatened to do, and simply move on to other matters. Or he might throw a “tariff tantrum,” in the words of economists at the Royal Bank of Canada, starting a trade war by slapping import duties on all sorts of Canadian goods.
The tantrum scenario is “remote,” RBC says and other experts agree, given the legal and political constraints Trump faces. There are two things that experts believe are far more likely.
The first possibility is that Trump allows the Canada-U.S. Free Trade Agreement, which NAFTA replaced in 1994, to come back into effect. Since that agreement is similar to NAFTA, though it excludes Mexico, the overall impact of NAFTA itself going away would likely be small.
The second possibility — the one that Canadian companies are planning and bracing for — is that Trump decides to kill the Canada-U.S. deal as well. In that case, long-abandoned tariffs could be brought back into force.
That’s where things would get difficult for Canada.
After shipping goods south without these added costs for a quarter-century, Canadian companies would suddenly have to figure out how to be profitable and globally competitive with them in place. And after being able to invest in Canada for a quarter-century with the certainty that they would have tariff-free access to the U.S. market, foreign companies would suddenly face more costs and more risks.
Companies doing everything from selling car parts to selling pig parts would be hurt, some of them badly. Jobs would be cut. Growth would slow. The average Canadian would likely experience some increase in prices on a variety of goods.
But it would probably not be a calamity.
In general, economists and analysts say, people outside of the most trade-sensitive sectors would be unlikely to immediately notice the impact of NAFTA vanishing. The effects would more likely be gradual, they say, as businesses decide not to make the investments in Canada they would have made if NAFTA were still around.
“It’s not like they come in and just shut down the auto industry in Ontario and move it wholesale,” said Philip Cross, a senior fellow at the Macdonald-Laurier Institute and former chief economic analyst for Statistics Canada. “These plants are worth something, these workers are trained. So they just gradually run it down. They don’t invest anymore. And then you wake up after 10 years and go, ‘Gee, we used to have a good auto industry in Ontario, what happened?’”
In the return-of-tariffs scenario, RBC predicts a loss of 1 per cent of Canada’s economic growth over 5 to 10 years, so 0.1 per cent or 0.2 per cent per year. The Conference Board of Canada forecasts a hit of 0.5 per cent in the first year, said director of economics Matthew Stewart.
Scotiabank expects growth to fall to 1.2 per cent in 2019 rather than the 1.5 per cent expected under NAFTA, then 1.3 per cent in 2020 rather than the 1.5 per cent expected under NAFTA, said deputy chief economist Brett House. There would be a 30 per cent chance of a short recession right after termination, he said, but he emphasized that this is unlikely.
Exports to the U.S. made up a fifth of Canada’s economic activity last year — more than $400 billion in total. If we’re so dependent on this trade, why would NAFTA dying not be crippling?
First, many of the tariffs would be relatively low. The U.S. tariffs that would be coming back into force, known as Most Favored Nation (MFN) rates, have fallen substantially since NAFTA came into effect, and they now average less than 4 per cent for goods entering the U.S. in 2017. For many Canadian companies, then, the MFN rates would be a difficult but surmountable obstacle.
Second, Canada’s dollar is widely expected to fall in response to a Trump termination. That would help make Canadian exports more competitive again — compensating, though probably not fully, for the return of the tariffs. House said he would also expect the Bank of Canada to cut interest rates, further stoking the economy.
Still, particular export-focused industries, which are disproportionately located in Ontario, would likely take significant hits.
The auto and auto parts industries are chief among those at risk. Even 2.5 per cent, the average MFN tariff on cars and parts, could make numerous Canadian parts companies uncompetitive, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association — their primary advantage, of being located in a tariff-free American “satellite,” suddenly gone.
“The vast majority of firms, the hundreds of firms that are in the small- and medium-sized volume space, would be hard pressed to be able to compete on price with an increasingly higher-quality Asian automotive sector,” Volpe said.
Other industry representatives, some of which are facing MFN tariffs much higher than the average, also warn of severe damage to their companies.
A return to U.S. tariffs on exports of Canadian beef would be so painful for Canadian cattle farmers that many might decide to give up and retire, possibly creating a “mass liquidation of cattle herds,” said Canadian Cattlemen’s Association executive John Masswohl.
Bob Kirke, executive director of the Canadian Apparel Federation, said the revival of U.S. clothing tariffs as high as 27 per cent would likely prompt bigger Canadian companies to shift the rest of their production to facilities offshore, smaller companies to shut down.
Ron Lemaire, president of the Canadian Produce Marketing Association, said any tariff at all could be calamitous to fruit and vegetable growers already operating on margins below 5 per cent. The end of NAFTA, he said, “could wipe out entire produce sectors in Canada.”
Karl Littler, a vice-president at the Retail Council of Canada, said the industry could conceivably lose roughly 40,000 to 50,000 of its two million employees.
“Your cost of goods is getting squeezed at the one end and consumer wallets are getting squeezed at the other. So you’ve got two effects happening,” Littler said.
The fourth round of talks, last month, ended with Canada and the U.S. trading public accusations. The fifth round started on a more conciliatory note, with Canada and Mexico signalling a willingness to at least talk about contentious U.S. proposals they had dismissed as non-starters.
Tariffs would not be the only concern in the event of a termination. Without NAFTA guarantees, companies would be plunged into an environment in which non-tariff rules of all kinds could be suddenly changed during the course of, say, a three-year manufacturing contract.
“Does the U.S. start putting extra inspections on Canadian imports? Do we get to the stage where they want more information on Canadian travellers coming in?” said Paul Ashworth, chief North American economist for Capital Economics.
Not everyone is terrified of a Trump withdrawal. Jerry Dias, president of the Unifor union that represents Canadian Auto Workers, said he would prefer a Trump termination to the status quo. “Overall, it’s been a colossal disaster,” Dias said, citing the increasing share of auto production being done in Mexico.
Industry representatives expressed optimism that termination could be avoided. Several noted that legal challenges would be sure to follow any Trump attempt to kill the deal, since it is not clear if he has the power to do so without congressional approval.
Between the unresolved questions of Trump’s desires and Trump’s powers, House said there is an “extremely low probability” that tariffs on Canada will actually end up being increased. He warned against a sensationalist panic over a future that probably will not be a whole lot different than the present.