- April 28, 2018
As uncertainty continues to loom amidst ongoing NAFTA negotiations between Canada and the US, many have begun to imagine what the manufacturing environment in North America could look like with a different kind of trade relationship.
By most accounts, the likelihood of dismantling NAFTA completely remains slim and what we may see instead is a revamped agreement. If, however, the US decided to kill NAFTA, what would happen to Canada’s economy? Despite the Canadian government’s initiatives to build free trade agreements with other countries, the US remains Canada’s biggest trading partner with exports to the US reaching a value of close to $400 billion in 2016.
Canada sans NAFTA–or a revamped agreement–wouldn’t devastate the economy, although it would reduce growth for many of Canada’s key manufacturing sectors, such as automotive and aerospace, according to economists interviewed by the Toronto Star’s Washington bureau chief Daniel Dale quoted in a November 17, 2017 article.
For instance, in the “return-of-tariffs scenario” Scotiabank’s deputy chief economist Brett House notes in the Toronto Star story that the bank would expect growth to fall 1.2 per cent in 2019 rather than 1.5 per cent expected under NAFTA, and 1.3 per cent in 2020 rather than the 1.5 per cent expected under NAFTA.
“It’s not like they come in and just shut down the auto industry in Ontario and move it wholesale,” states Philip Cross, a senior fellow at the Macdonald-Laurier Institute and former chief economic analyst for Statistics Canada in the Toronto Star article. “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?’”
One US demand that could be a glimmer of a future scenario is the US demand to introduce a sunset clause that could terminate NAFTA every five years. While this could create long-term uncertainty for manufacturers, a January 2018 report by RBC “What Canada Needs to Consider to Save NAFTA” notes that there could be an opportunity for “creative, politically face-saving alternatives. One would be to include a clause that ensures periodic, targeted reviews every five years, or periodic improvements to the agreement (provided all sides agree) as the economy evolves, but with a ratchet that ensures existing NAFTA market access gains are not rolled back.”
Canada and the US have a long trading history beyond NAFTA. Thousands of businesses in both countries have built their companies through trade and people on both sides of the border recognize the benefits. Trade agreements may change but they won’t disappear. SMT