End of NAFTA could lead to higher prices, lower profits, $20B in lost output: report
The shredding of the North American Free Trade Agreement would reduce Canadian GDP growth by one per cent over five to 10 years, a prospect that looks increasingly likely as the White House slaps hefty duties on some Canadian exports, a new report says.
Analysts at Royal Bank of Canada estimate that shredding the trade pact would result in a four per cent across-the-board increase in tariffs for Canadian exports to the U.S., primarily impacting the petroleum industry, auto manufacturers, primary and fabricated metal manufacturers, and the plastics industry.
“The implied annual impact of 0.1% to 0.2% might not appear all that large, but it adds up to a substantial amount of foregone production potential — about $20 billion (in today’s dollars) of annual output over time,” RBC economists Nathan Janzen and Mathias Hartpence said.
The absence of NAFTA could also lead to lower profits for companies and “probably higher prices for consumers,” apart from diminishing Canada’s competitiveness relative to offshore producers.
“Indeed, in the medium to longer run, limiting the tariff advantage for locating auto manufacturing activities within North America could, perversely, simply accelerate the movement of motor vehicle production offshore,” the analysts said.
Observers have speculated for months over which trade rules would replace NAFTA.
Initially it is expected to trigger a fall back to the earlier Canada-U.S. Free Trade Agreement or, more likely, to World Trade Organization rules.
The snap-back to WTO provisions would raise tariffs on many export- dependent industries, compared to the mostly tarifffree or low-tariff rules currently enjoyed under NAFTA. U.S. tariffs under WTO on textiles averaged 12 per cent in 2016, the RBC report said. The average tariff on agricultural products was 5.2 per cent over the year, while petroleum products averaged 6.5 per cent. Canadian and Mexican petroleum exports to the U.S. aren’t currently charged duties under NAFTA.
Even if Canada and the U.S. manage to sign their own trade deal, the analysts wrote, “a bilateral arrangement may not safeguard Canada from ongoing punitive trade actions — consider recent U.S. moves to levy tariffs against Canadian softwood lumber and Bombardier-manufactured jets.”
The U.S. Commerce Department has recently slapped a 20-per-cent tariff on some softwood lumber exports, as well as a 300-per-cent duty on Bombardier Inc.’s CSeries jets following a deal with European plane manufacturer Airbus SE.
The RBC report comes as NAFTA talks seem increasingly likely to implode, after the U.S. began introducing hard-nose demands to scrap a key dispute resolution mechanism and put an end to the Canadian dairy industry’s supply management system. The fifth round of NAFTA renegotiations will be held in Mexico City beginning Nov. 17.
The most vulnerable industry by share of GDP was oil and gas extraction, according to the report. Next most vulnerable was petroleum and coal manufacturing. Trump’s approval of the Keystone XL pipeline soon after taking over the White House implies that oil and gas exports could be exempt from higher tariffs.
“That support suggests energy trade isn’t high on the list of current grievances,” the report said. “But in the current environment, it is difficult to rule out any potential outcome entirely.”
Scrapping the NAFTA deal could also hurt labour mobility, RBC warns, noting that “it’s likely that a minority of the half-million Canadians working in highly trade-sensitive sectors would be affected.” “A more extreme scenario, in which the U.S. ignored WTO commitments and implemented larger tariff hikes, would be much worse for the Canadian economy.”