End of NAFTA could lead to $20 billion in lost output: RBC report
The shredding of the OTTAWA 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.