End of NAFTA could cost retailers billions
Further consequences for trade feared as U.S. risks return to protectionism
TORONTO An end to the North American Free Trade Agreement could cost Canadian retailers as much as $21 billion per year and siphon as much as $17 billion annually from the retail economy, according to a new analysis.
The report from A.T. Kearney and the Retail Council of Canada says eliminating the world’s second-largest free trade agreement would have a dramatic impact on the Canadian economy.
“As negotiations continue to flounder, the risks of a NAFTA termination have increased,” says the report The End of NAFTA: What it Means for the Canadian Retail Sector. “The retail sector is likely to be particularly hard hit, and retailers need to begin thinking about how to prepare for a future where U.S.-originating merchandise does not seamlessly move across the border.”
The fate of NAFTA is uncertain after five rounds of talks between Canada, the U.S. and Mexico. Currently, Canadians have tariff-free access to 94 per cent of goods imported from the United States, and goods originating in the U.S. were worth an estimated $108 billion in 2015.
The A.T. Kearney analysis examined possible outcomes of the NAFTA talks, including an end to North American free trade, and assumes tariffs on U.S. imports would be shifted to rates that are applied to other nations’ exports to Canada under World Trade Organization rules.
It also considers the consequences of a return to protectionism if the United States was to pull out of the WTO treaty and hike tariffs in order to protect its domestic industries.
“We are concerned that NAFTA may not be the last domino to fall,” said Karl Littler, vice-president at the Retail Council, in reference to the WTO. The industry association, like the National Retail Federation in the U.S., is pushing for a renewal of the NAFTA agreement and is concerned about the U.S. commitment to the WTO.
“If (the U.S.) is prepared to knock off NAFTA, the world’s second-largest trading relationship after U.S. and China, then what does that portend for their commitment to free trade on a global basis?” Littler said.
The A.T. Kearney analysis calculates the direct impact of rising tariffs will cost Canadian retailers an extra $4 billion to $21 billion for goods, and assumed a 20-per-cent tariff on all categories that are currently tariff-free. For every one-per-cent increase in tariffs, retailers would see their costs directly increase by at least $1 billion.
Indirectly, tariff increases could reduce retail sales by an estimated $2.6 billion to $17 billion with an expected slowdown in Canadian GDP due to its dependence on trade with the United States.
“There would be a direct effect, the increase in cost of goods,” Littler said. “Then there is the indirect effect of a declining consumer wallet as a consequence of changes in NAFTA, and apportioning that wallet between goods. You would have the consumer wallet declining and the cost of goods going up at the same time.”
Historically, when consumers have a lower disposable income and are faced with higher prices, they tend to cut back on purchases, and particularly on discretionary goods such as electronics and jewelry.
The news comes after the strongest third-quarter performance by Canadian retailers in a decade.
Retail sales were seven per cent higher in the first nine months of 2017 than last year.
“If this pace more or less keeps up for the last few months of the year, 2017 could turn out to be the best year for Canadian retail sales since 1997,” said Toronto-based retail analyst Ed Strapagiel in a report.
Sales growth in the $452-billion sector was led in the third quarter by building material and garden equipment dealers, up 14.2 per cent year-over-year; jewelry, luggage and leather goods stores, up 9.1 per cent and electronics and appliance stores, up 9.2 per cent.